December 14, 2011 6:50 PM

Curtis Mallet Helps Kazakhstan Clinch $1 Billion Deal for Stake in Oil Consortium

Posted by Brian Baxter

Seeking to gain a stake in the country's second-largest oil field, the Republic of Kazakhstan has turned to its longtime outside counsel at Curtis, Mallet-Prevost, Colt & Mosle for advice amid a two-year dispute with an international consortium of energy giants over what is known as the Karachaganak Petroleum Operating project.

British oil major BG Group and Italian energy giant Eni each own 32.5 percent stakes in the operations of the Karachaganak field, which produces gas condensate and is located in northwestern Kazakhstan near the former Soviet Republic's border with Russia. Chevron owns a 20 percent stake in the project, and Russia's Lukoil holds the remaining 15 percent.

Bloomberg reports that under the terms of a deal announced Wednesday, Kazakh state-owned oil and gas producer KazMunayGas will borrow a total of $1 billion from the Karachaganak consortium to take a 10 percent stake in the project.

Kazakh oil and gas minister Sauat Mynbayev told reporters in the country's sparkling new capital of Astana on Wednesday that as part of the agreement, all parties have withdrawn their respective lawsuits and arbitration claims against one another.

A team of Curtis Mallet lawyers led by corporate M&A partners Eric Gilioli and Askar Moukhitdinov, private equity and capital markets partner Peter Stewart, and infrastructure development partner Anthony Smith advised Kazakhstan on the Karachaganak negotiations. (Smith joined the firm in June.) Curtis Mallet chairman George Kahale III, international arbitration chair and Paris office managing partner Peter Wolrich, and partner Geoffroy Lyonnet have been representing Kazakhstan in related international arbitration proceedings against the Karachaganak consortium that are being withdrawn.

Kazakhstan, which boasts the strongest economy in energy-rich Central Asia, has in recent years become more active in revising agreements it struck with foreign companies after the country declared its independence from the Soviet Union almost two decades ago.

No longer short on cash, Kazakhstan can now afford high-priced lawyers, and the country has increasingly turned to Curtis Mallet to help it reassert some semblance of control over its natural resources. The firm's work for the country—including handling renegotiations to increase KazMunayGas’s stake from 8.33 percent to 16.8 percent in the coveted Kashagan oil field in the Caspian Sea—was the subject of a June 2008 feature story on the firm by The American Lawyer.

Reuters reports that the Karachaganak field provides Kazakhstan with 49 percent of its natural gas and 18 percent of its liquid hydrocarbon production. The country's agreement with the international consortium calls for both BG and Eni to trim their stakes in Karachaganak to 29.25 percent, while Chevron cuts back its holdings to 18 percent, and Lukoil shaves its stake to 13.5 percent.

"This was a highly complex negotiation, involving commercial, tax, and international arbitration matters, which was conducted simultaneously in English and Russian with four of the largest oil companies in the world," lead Curtis Mallet partner Gilioli said in a statement. "Curtis has been privileged to represent Kazakhstan in the negotiated resolution of disputes regarding two of the biggest oil fields in the world."

The 10 percent stake in Karachaganak now owned by KazMunayGas is being funded by a complex series of transactions detailed by BG in a press release. The Reading, England–based company states that KazMunayGas will pay $1.5 billion in cash to the consortium partners, pre-tax, in exchange for a 5 percent stake.

The next step calls for the consortium to "receive a further $1.5 billion pre-tax consideration" composed  of $500 million in cash and a $1 billion non-cash consideration in exchange for "transferring a second 5 percent interest" in the project to KazMunayGas through the settlement of two arbitrations pending between Kazakhstan and the Karachaganak consortium members. (The American Lawyer's 2011 Arbitration Scorecard has more on the Karachaganak arbitration proceedings.)

In the end, Kazakhstan will own a stake in every major energy project within its borders. Mynbayev, the Kazakh oil minister, did indicate that concerns over alleged unpaid back taxes by members of the Karachaganak consortium could face further probes, according to The Associated Press.

Freshfields Bruckhaus Deringer represented the international consortium in negotiations with KazMunayGas. Dispute resolution partners Constantine Partasides and Noah Rubins, and corporate partners James Wood and Graham Watson led the team from the Magic Circle firm working on the matter.

Diplomatic cables uncovered by WikiLeaks show that Astana Law Partners, a Kazakh firm whose managing partner once worked as an adviser for the owners of the Karachaganak field, believed some of the Kazakh government's arbitration claims to be dubious.

Kazakhstan isn't the only major oil producer to recently turn to an Am Law 200 firm for counsel in the international energy arena.

As previously reported by The Am Law Daily, Vinson & Elkins and Cleary Gottlieb Steen & Hamilton advised Iraq's oil ministry last month on a $17 billion agreement for a project with Royal Dutch Shell to develop natural gas from the country's oil fields over the next 25 years.

Wiley Rein, meanwhile, has been representing KUSH, a nonprofit dedicated to U.S. and African cooperation, in securing an exemption for South Sudan from U.S. sanctions targeting the Sudanese oil industry.

South Sudan declared its independence from Sudan in July, and Luka Biong Deng, a senior member of South Sudan's ruling Sudan People's Liberation Movement and executive director of KUSH, credited Wiley Rein this week for its pro bono services in helping the new nation obtain a much-needed exemption from U.S. sanctions targeting Sudan, which has endured more than 50 years of civil war.

The Am Law Daily reported in July that Skadden, Arps, Slate, Meagher & Flom was advising South Sudan on transactional work tied to agreements with international oil companies seeking contracts for oil production.

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