Robert M. Cutler

Two weeks after successful renegotiation of Kazakhstan's participation in the Kashagan offshore project, the country's energy minister stated on January 29 that Kazakhstan may impose a duty on nearly half of all exports of crude and oil products beginning in 2009.  The Italian company Eni will cease to be operator of the Kashagan consortium, but the Kazakhstan state company KazMunaiGaz will not gain that status, which it coveted.

BACKGROUND: When the Kashagan oil strike was first confirmed in 2000, the original start-up date for production was set for 2005; it was then delayed by the consortium dominated by Western companies to 2008, and then again to 2010. Kazakhstan holds the Western partners responsible for the failure of the Kashagan field to enter into production. While it is true that there are significant technical obstacles to the development of the field, means exist to overcome them. For example, Kazakhstani environmental law requires that the associated gas be captured and not flared. This gas, as well as the underlying oil, has high sulfur content and is under extremely high pressure under its overlying dome. The companies also cite to the difficulties of extracting resources in shallow water with drifting ice during the winter. However, all of these conditions were known when the strike was confirmed in 2000.

In early November 2007, President Nursultan Nazarbayev of Kazakhstan signed a bill passed by Parliament that would allow the government to change or revoke natural resource contracts deemed to threaten national security. At the time, this was assumed to be merely a means to put pressure upon the consortium of mainly Western oil companies developing the Kashagan deposit in the Caspian offshore. Indeed, following his approval of the bill, negotiations between the government and the consortium members accelerated.

On January 13, the Kashagan consortium agreed on a new deal with Kazakhstan. In particular, the current Kashagan exploration consortium (Agip KCO) will be converted in 2011 into a new entity for developing the field, and the Kazakhstan state company KazMunaiGaz (KMG) will hold a plurality stake of 16.81 percent in the new consortium while the share held by each of the largest Western shareholders (Eni, ExxonMobil, Royal Dutch Shell, and Total) will fall to 16.66 percent. Two other, more minor investors (ConocoPhillips and Inpex) will also see their shares reduced.  The new agreement also reset the start-up date from 2010 to 2011.

IMPLICATIONS: It appears that this new distribution of shares will enter into effect respecting the present Agip KCO consortium, but that KMG will actually hand over the (rather low) sum of US$1.78 billion in payment for shares from the Western partners only after the current exploration consortium disappears on schedule in 2011 in favor of the newly agreed production consortium. The new agreement maintains the year 2041 as the end date for the project, rejecting the insistence of one of the Western partners for an extension, but gives the consortium the right of first refusal of extension at that time as well as the right to meet competing offers.  The new agreement means that KMG will not become co-operator of the project, as Kazakhstan appeared strongly to have desired during negotiations up until the end of last year, but also Eni will lose its status as operator, as the project operator will be a new operating company owned by all the participants in Agip KCO.  In addition, the investors will pay $5 billion additional compensation to Kazakhstan either immediately or over the life of project (which could therefore grow to $20 billion taking inflation into account).

In a new development on January 29, Kazakhstan's energy minister Sauat Mynbaev has stated that Kazakhstan may impose a duty on exports of crude and oil products as from 2009.  It is estimated that this new measure would apply to about two-fifths of 2007 production volumes. It is officially stated that one motive for this development is that Kazakhstan will not receive significant revenue from Kashagan until production starts, yet it has promised its citizenry better social and economic infrastructure. Kazakhstani officials have also suggested that Kazakhstan is introducing the new oil export duties in order to help stabilize the price and quantities of oil supplied to the domestic market, inasmuch as KMG's larger stake gives it control of proportional output. However, the country’s energy minister also hinted at an ancillary motive, that this is being done because it can be done. He acknowledged that it could represent a risk to Kazakhstan's negotiations for accession to the World Trade Organization, “but if we do not do it now, we will never do it.”

CONCLUSIONS: The provisions announced by energy minister Mynbaev at the end of January would apply only to PSAs having variable rather than fixed taxation schemes, thus excluding Kashagan and most other major ventures. Only for political reasons would they not be applied across the board to all hydrocarbon development projects. It is unclear whether they would apply to state or para-statal companies such as CNPC, which has important operations around Aqtobe and already exports oil to China from the Kumkol field that it owns jointly with KMG in central Kazakhstan. According to Mynbaev, there would not be a blanket imposition of such duties, but rather the government would hold discussions with individual companies having PSAs, in order to establish the final list of those affected. It is not immediately clear how the newly announced duties would be integrated with the “rent tax” introduced in January 2004, according to which the tax on oil income rises progressively with the world price of oil, or the excess profit tax introduced at the same time.

Recent developments in applicable Kazakhstani law are part of a general trend of “resource nationalism” in the country's foreign economic policy. At the end of 2007, the government proposed and then abandoned as unworkable the idea to abolish the PSA regime altogether and turn existing PSAs essentially into concessions. (By coincidence or not, this proposal was floated as a trial balloon during a particularly difficult late stage of the Kashagan negotiations.)  At the same time, they may be seen as part of an trend in Kazakhstan, not necessary contradicting the one just mentioned, to increase transparency of consortium budgets and resource inventories, in line with the government's participation in the Extractive Industries Transparency Initiative (set up following the July 2005 G-8 Summit in Gleneagles upon the proposal of former British prime minister Tony Blair) and its own official adoption in May 2007 of a programmatic Concept of Sustainable Development to guide national economic development through 2024.

AUTHOR'S BIO: Robert M. Cutler http://www.robertcutler.org is Senior Research Fellow, Institute of European, Russian and Eurasian Studies, Carleton University, Canada.