State oil and gas company KazMunaiGas will borrow $1 billion from the consortium led by Britain's BG Group and Italy's Eni in order to pay for its stake in a project that contributes nearly half of Kazakhstan's gas output. 

"KMG will service and repay this debt with the cash flow that its 10 percent stake will generate," Oil and Gas Minister Sauat Mynbayev told reporters. He said the three-year loan would carry a rate of LIBOR plus 3 percent.

A more assertive Kazakhstan, home to more than 3 percent of the world's recoverable oil reserves and the largest economy in Central Asia, has sought in recent years to revise deals struck with foreign energy companies in the lean post-Soviet years.

The Karachaganak deal mirrors its acquisition of a stake in the Kashagan oil field in the Caspian Sea, the world's biggest oil discovery since the 1960s. After entering the Kashagan field in 2005, the state later doubled its stake to 16.8 percent.

The agreement, signed two days before the 20th anniversary of Kazakhstan's independence from the Soviet Union, ends more than two years of wrangling over the state's participation in the second-largest operating oilfield in the country.

The deal will also allow the consortium to proceed with the technically challenging but lucrative third phase of the project and allow the partners additional volumes in the Caspian Pipeline Consortium that links Kazakh fields to the Black Sea.

"Completion of today's deal should allow both sides to move forward on developing a joint plan for the Phase Three expansion after years of stalling," said Dominic Lewenz, director of oil and gas research at Visor Capital in Almaty.

Kazakhstan will pay $1.5 billion in cash to the consortium partners, before tax, in exchange for a 5 percent interest, BG said in a statement explaining the breakdown of the agreement.

To earn a further 5 percent, the state will pay a second pretax consideration of $1.5 billion, split into a $500 million cash portion and a $1 billion non-cash consideration.

"The non-cash consideration includes final and irrevocable settlement of cost recovery and other related claims," BG said in the statement. The state had brought a series of tax, customs and environmental claims against the operators in recent years.

The consortium partners, which also include Chevron and Lukoil, will pay $1 billion tax on the total consideration, giving a final deal that represents $1 billion net in cash and a further $1 billion in non-cash considerations.

BG and Eni said the Karachaganak consortium would also secure up to 2 million tons per year of additional volumes through the Caspian Pipeline Consortium (CPC) export pipeline.

Mynbayev said the extra volumes would initially be set at 500,000 tons, rising to 1.5 million tons and finally 2 million tons in line with the expansion of the CPC pipeline.

CPC, owned by the Russian and Kazakh states and a group of international oil companies, is undertaking a $5.4 billion expansion to raise annual capacity of the pipeline to 67 million tons by 2014. It pumped 34.9 million tons last year.

BG and Eni also said the consortium partners would transfer a portion of their stakes to KMG on a pro-rata basis.

When the deal is completed by June 30, 2012, BG and Eni will each reduce their stakes to 29.25 percent from 32.5 percent. Chevron will hold 18 percent and LUKOIL, Russia's largest non-state oil company, will hold 13.5 percent. 

Karachaganak, located in northwestern Kazakhstan near the Russian border, has trebled production since 1999. As well as producing 49 percent of Kazakhstan's gas, the field contributes 18 percent of liquid hydrocarbon production.

"Karachaganak is estimated to have hydrocarbons initially in place of 9 billion barrels of condensate and 48 trillion cubic feet of gas — to date less than 10 percent of that resource has been produced," said BG executive Vice-President Ashley Almanza. 

The protracted ownership squabble has stalled plans for a lucrative third phase of development. The Oil and Gas Ministry said the deal would allow it to achieve its goal of exercising greater cost control over "large-scale investment projects".

Kairgeldy Kabyldin, chief executive of KazMunaiGas until October this year, said in January 2010 that the third phase of the Karachaganak project would need investment of $14.5 billion.

"This is a subject for further discussion, agreement and confirmation," Mynbayev said of the expansion. "We are counting on significant investment and on the growth of this project."

Visor Capital's Lewenz said: "Although the technical details of Phase Three are not part of this deal, it would surprise me if the negotiations hadn't also involved reaching a consensus on the principal terms."

Karachaganak produced 133.7 million barrels of oil equivalent in 2010. Output included stable and unstable liquids, sour gas and sweet gas for use as fuel.