The Kashagan Production Sharing Agreement Harvard Case Solution & Analysis

The Kashagan Production Sharing Agreement

Introduction

Kazakhstan was the state of Soviet Union and became an independent state in the year 1991. It has excessive oil and gas resources and is considered as the second largest oil resources in the world. It is expected that economy of Kazakhstan isdependent on its oil and gas resources. There are no other substantial economic drivers are except oil fields.

Problem Identification

It is expected that the project is still under construction at the start of the year 2007.

Delay in the project and increased in cost raise question about the efficiency of the company and The Prime Minister of the Kazakhstan responded to the announcement that further delay in the project will create a discontent in the society about the project and further he warned the oil companies that more adjustment in the time frame of Kashagan will result in the adjustments in the contract, which would create an alarming situation for the management of the oil companies. In addition, they are considering that how should they respond to the statement of the Prime Minister of Kazakhstan.

Project related Risks

It is expected the Kashagan is a new and complex field for International oil companies.The management of these companies do not have experience of similar complex projects, which could be the reason of delayed in the construction of the project and it raises the question about the efficiency of international oil companies.

In addition to this, the geographical location of the Kashagan field is very complex, as there is a difficult political condition in the Kazakhstan State, which creates further problem for international oil companies.It is expected that exporting oil to the Western markets will be a great challenge.

Moreover, the expectancy of presence of oil is also very low as compared to other oil fields as oil is expected to be 4000 meters below the seabed, which would create drilling problem for the project sponsors. In addition to this, severe weather conditions are also a major constraint in drilling the oil fields, which would result in increased in cost and delayed in the construction of the project.

The project is also facing many operational risks as reserve risk. The management of the international oil companies do not have any idea about the covered area, quality and quantity of the crude oil, which could create further problems for the company if the quantity and quality of crude oil is low.

Throughput risk for the project is also high as the management do not have idea about the refining and transportation cost, which is again a concern for the management of the AGIP KCO. Increase in the duration of the project also creates certain economic risk for the international oil companies as interest rate and inflation rate is varying greatly in this region. Moreover, the oil prices are also decreasing due to the financial crisis, therefore international companies are at greater economic risk, which could affect the profit margins of sponsor companies of this project.

Decrease in oil price and financial crisis results in the adverse exchange rate fluctuation with respect to the international companies regarding this project, which creates a further economic risk for AGIP KCO. In addition to this, the project includes many environmental and social risks.

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