The Kazakhs' Crush on Eni

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Italian oil company Eni (NYSE: E) and its partners have finally reached an agreement with government officials in Kazakhstan that will permit a continuation of efforts to start the flow of oil production from that country's huge Kashagan field.

The field, which was discovered in 2000, is being developed by a group of Western oil companies led by Eni and also including Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), ExxonMobil (NYSE: XOM), France's Total (NYSE: TOT), and ConocoPhillips (NYSE: COP). It likely contains about 13 billion barrels of recoverable oil, which was initially expected to begin being produced as early as 2005. But delays have pushed the expected date back to 2011 and boosted the estimated development price tag from about $57 billion to the latest estimate of $137 billion.

Months ago, Kazakh officials, blaming bad decisions by Eni on the production pushback and cost increases, demanded that the company be removed as operator. Now, the parties have finally reached an agreement that essentially has two moving parts:

• Eni will share the role of operator with Exxon, Shell, and Total. No biggie there, since companies frequently share the operator position on major projects. At the same time, the consortium will pay Kazakhstan an additional amount between $2.5 billion and $4.5 billion, with the amount determined by the price of oil.

• For a payment of $1.78 billion, the country's state oil company, JSC NC KazMunaiGaz, will see its participation in the project doubled to 16.6%, a change that will occur at the expense of the other participants. I wouldn't be displaying analytical brilliance and you wouldn't be surprised if I told you that that payment is well below market for the increased stake.

But the real key to these events and their ultimate resolution, it seems to me, is that they demonstrate once again the willingness of governments in certain producing countries to apply headlocks to even the biggest Western companies. Russia, for instance, has squeezed both Shell and BP (NYSE: BP), Venezuela has acted roughly with a half-dozen integrated companies, and the Kazakhs remain at odds with another group led by Chevron (NYSE: CVX).

And for Fools with a taste for energy investments, while 2008 will likely require far more dexterity than did 2007, the Kazakh crusher should only serve to highlight the importance of remaining attentive to this vital and changing sector.

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