Kazakhstan is not dropping its claim for back taxes from the operators of Karachaganak. (PA)
This week’s Kazenergy forum in Astana was a reminder of Kazakhstan’s growing assertiveness over its natural resources. This more hands-on approach has been ongoing over the last decade, but has accelerated this past year. While this will boost government coffers in the short term, there could be longer-lasting damage to investor confidence in the country.
Kazakhstan’s oil and gas minister Sauat Mynbayev gave a clear indication of the government’s stance when he said that Kazakhstan would not drop its claim for back taxes from the operators of the Karachaganak project in return for a stake in the lucrative oil and gas field. “There will be no write-offs of taxes in return for a stake in Karachaganak,” Mynbayev told Interfax on the sidelines of the annual Kazenergy conference on Tuesday.
Only days before Mynbayev’s announcement, Chris Finlayson, BG Group’s executive vice-president and managing director for Europe and Central Asia, attempted to allay fears by saying: “We are in good and co-operative negotiations with the government of Kazakhstan and we expect those to reach a conclusion before the end of this year.”
The government has long expressed a desire to join the international consortium that operates the Karachaganak field in north-west Kazakhstan, which contributes 49% of the gas produced by the country and 18% of its crude oil. BG Group and Italian energy major Eni are the largest shareholders in Karachaganak, each holding 32.5%, while Chevron has 20% and Lukoil holds 15%.
Timur Kulibayev, chief executive of the Samruk-Kazyna fund, said this week that Kazakhstan would be willing to pay up to $1.1 billion to enter the international consortium.
The government, which is seeking to acquire a 10% stake in the field, says it wants to exercise control over costs for the Phase Three development of Karachaganak. It has brought several cases against the operators, accusing them of overstating costs and violating tax and ecological laws. These have included the preparation of tax claims worth $1.2 billion against Karachaganak Petroleum Operating (KPO) Group relating to the 2005-2008 period.
“The Kazakhstan government’s eyeing up of a stake in Karachaganak should come as no surprise, particularly for investors in the region who have been aware of the government’s strategy of gradually moving away from PSAs [production sharing agreements],” Lilit Gevorgyan, IHS Global Insight Russia and CIS analyst told Interfax.
Karachaganak was one of three oilfields Kazakhstan handed to foreign oil majors for development in the 1990s when crude prices were low and the country was battling an economic slump.
As oil prices rose during the past decade, the country tightened investment conditions amid complaints that foreign majors had exploited the country’s past weakness to win advantageous contracts. In 2004, a new PSA law was introduced which required Kazmunaigaz to have at least a 50% share in new PSAs, although this legislative change exempted those agreements previously signed.
In June 2010, Kazakhstan’s passed a law, On Subsoil Assets and Their Use, which prohibited new PSAs from being signed. While it left existing ones in place, the government has been reviewing their legality and is seeking to persuade consortiums to abandon their stable tax regimes. And then, in May this year, the government acquired powers to unilaterally abrogate contracts from oil and gas companies operating in the country.
“At the time, the government made no secret of the fact that the legislation was designed to allow it to gain a firmer grip over the energy sector. The law also allowed it to seize assets deemed vital to industrial security and place them in trusteeship until a new operator is found,” Adnan Vatansever, Senior Associate for Energy at Carnegie Endowment told Interfax.
The government has also increased its holding in the Kashagan oilfield. State oil and gas company KazMunaiGas entered that project in 2005 and later doubled its stake to 16.8%. Commercial production at the first phase of Kashagan is scheduled to begin by the end of 2012 or early 2013.
However, Kazakhstan’s push to acquire stakes in lucrative projects such as Kashagan and Karachaganak could curb much-needed future foreign investment.
“The government wants to increase its involvement in oil and gas projects, such as Karachaganak. At the same time, it emphasises the need for stability in long-term contracts, Tulegen Askarov, Kazakhstan’s Institute of Management, Economics and Strategic Research told Interfax.
However, in the end, Kazakhstan will continue needing foreign investment, especially since Kazmunaigaz, does not have adequate financial resources and technological background to develop the geologically sophisticated Caspian hydrocarbon fields by itself, he added.
“This need for international investment will especially become apparent as Kazakhstan seeks to boost its oil and gas output in the next 10 to 15 years,” Askarov said.
Earlier this week, Mynbayev said that Kazakhstan plans to raise annual crude exports to 110 million tons by 2020 from the 72 million tons forecast for this year. Mynbayev said Kazakhstan would produce 80.4 million tons in 2011, which would increase to 132.1 million tons by 2020.
Earlier this year, Kazakhstan’s Oil and Gas Ministry announced plans to step up output to 42 billion cubic metres of gas this year, from 37.4 billion cubic metres in 2010. According to government estimates, Kazakh natural gas output is estimated to be 59 bcm/y by 2015 and 92 bcm/y by 2020.
“While Kazakhstan will largely focus its gas production on domestic needs, it is attempting to squeeze the international energy majors into developing Kazmunaigaz,” Caspian analyst Matthew Shaw with consultancy Wood Mackenzie told Interfax. The long-term strategy of the Kazakh government is to build up the national oil company’s expertise by exercising greater involvement in foreign-led projects, he explained.
An indication of Kazakhstan’s reorganisation of Kazmunaigaz’s priorities came in March this year when Nursultan Nazarbayev, the country’s president, founded a new oil ministry to bolster the state’s interests in the industry. The new ministry was put into place to enforce greater regulation over Kazakhstan’s energy sector, a function previously exercised by KazMunaiGas.
“The ministry will relieve KazMunaiGas of inappropriate functions that create a conflict of commercial and state interests. The activities of KazMunaiGas should be purely commercial,” Nazarbayev said.
While in September, Kazmunaigaz boosted its first-half net profits by 14% year-on-year to 114 billion tenge ($783 million), largely as a result of high oil prices, analysts have raised questions over the future role of the national oil company.
“An important question for Kazakhstan’s oil and gas sector is what happens once these PSAs expire [in 2037 for Kashagan and 2041 for Karachaganak] and the steps taken by the government which could very possibly rattle investor confidence,” Shaw said.
As the country prepares to celebrate its twentieth anniversary of independence, its assertive approach with international energy majors will certainly prove a corrective to Kazakhstan’s more inviting approach in the early 1990s. However, given the country’s need for investment, this policy is in danger of derailing its ambitious future energy strategy.
A tighter grip
Kazakhstan is not dropping its claim for back taxes from the operators of Karachaganak. (PA)
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This week’s Kazenergy forum in Astana was a reminder of Kazakhstan’s growing assertiveness over its natural resources. This more hands-on approach has been ongoing over the last decade, but has accelerated this past year. While this will boost government coffers in the short term, there could be longer-lasting damage to investor confidence in the country.
Kazakhstan’s oil and gas minister Sauat Mynbayev gave a clear indication of the government’s stance when he said that Kazakhstan would not drop its claim for back taxes from the operators of the Karachaganak project in return for a stake in the lucrative oil and gas field. “There will be no write-offs of taxes in return for a stake in Karachaganak,” Mynbayev told Interfax on the sidelines of the annual Kazenergy conference on Tuesday.
Only days before Mynbayev’s announcement, Chris Finlayson, BG Group’s executive vice-president and managing director for Europe and Central Asia, attempted to allay fears by saying: “We are in good and co-operative negotiations with the government of Kazakhstan and we expect those to reach a conclusion before the end of this year.”
The government has long expressed a desire to join the international consortium that operates the Karachaganak field in north-west Kazakhstan, which contributes 49% of the gas produced by the country and 18% of its crude oil. BG Group and Italian energy major Eni are the largest shareholders in Karachaganak, each holding 32.5%, while Chevron has 20% and Lukoil holds 15%.
Timur Kulibayev, chief executive of the Samruk-Kazyna fund, said this week that Kazakhstan would be willing to pay up to $1.1 billion to enter the international consortium.
The government, which is seeking to acquire a 10% stake in the field, says it wants to exercise control over costs for the Phase Three development of Karachaganak. It has brought several cases against the operators, accusing them of overstating costs and violating tax and ecological laws. These have included the preparation of tax claims worth $1.2 billion against Karachaganak Petroleum Operating (KPO) Group relating to the 2005-2008 period.
“The Kazakhstan government’s eyeing up of a stake in Karachaganak should come as no surprise, particularly for investors in the region who have been aware of the government’s strategy of gradually moving away from PSAs [production sharing agreements],” Lilit Gevorgyan, IHS Global Insight Russia and CIS analyst told Interfax.
Karachaganak was one of three oilfields Kazakhstan handed to foreign oil majors for development in the 1990s when crude prices were low and the country was battling an economic slump.
As oil prices rose during the past decade, the country tightened investment conditions amid complaints that foreign majors had exploited the country’s past weakness to win advantageous contracts. In 2004, a new PSA law was introduced which required Kazmunaigaz to have at least a 50% share in new PSAs, although this legislative change exempted those agreements previously signed.
In June 2010, Kazakhstan’s passed a law, On Subsoil Assets and Their Use, which prohibited new PSAs from being signed. While it left existing ones in place, the government has been reviewing their legality and is seeking to persuade consortiums to abandon their stable tax regimes. And then, in May this year, the government acquired powers to unilaterally abrogate contracts from oil and gas companies operating in the country.
“At the time, the government made no secret of the fact that the legislation was designed to allow it to gain a firmer grip over the energy sector. The law also allowed it to seize assets deemed vital to industrial security and place them in trusteeship until a new operator is found,” Adnan Vatansever, Senior Associate for Energy at Carnegie Endowment told Interfax.
The government has also increased its holding in the Kashagan oilfield. State oil and gas company KazMunaiGas entered that project in 2005 and later doubled its stake to 16.8%. Commercial production at the first phase of Kashagan is scheduled to begin by the end of 2012 or early 2013.
However, Kazakhstan’s push to acquire stakes in lucrative projects such as Kashagan and Karachaganak could curb much-needed future foreign investment.
“The government wants to increase its involvement in oil and gas projects, such as Karachaganak. At the same time, it emphasises the need for stability in long-term contracts, Tulegen Askarov, Kazakhstan’s Institute of Management, Economics and Strategic Research told Interfax.
However, in the end, Kazakhstan will continue needing foreign investment, especially since Kazmunaigaz, does not have adequate financial resources and technological background to develop the geologically sophisticated Caspian hydrocarbon fields by itself, he added.
“This need for international investment will especially become apparent as Kazakhstan seeks to boost its oil and gas output in the next 10 to 15 years,” Askarov said.
Earlier this week, Mynbayev said that Kazakhstan plans to raise annual crude exports to 110 million tons by 2020 from the 72 million tons forecast for this year. Mynbayev said Kazakhstan would produce 80.4 million tons in 2011, which would increase to 132.1 million tons by 2020.
Earlier this year, Kazakhstan’s Oil and Gas Ministry announced plans to step up output to 42 billion cubic metres of gas this year, from 37.4 billion cubic metres in 2010. According to government estimates, Kazakh natural gas output is estimated to be 59 bcm/y by 2015 and 92 bcm/y by 2020.
“While Kazakhstan will largely focus its gas production on domestic needs, it is attempting to squeeze the international energy majors into developing Kazmunaigaz,” Caspian analyst Matthew Shaw with consultancy Wood Mackenzie told Interfax. The long-term strategy of the Kazakh government is to build up the national oil company’s expertise by exercising greater involvement in foreign-led projects, he explained.
An indication of Kazakhstan’s reorganisation of Kazmunaigaz’s priorities came in March this year when Nursultan Nazarbayev, the country’s president, founded a new oil ministry to bolster the state’s interests in the industry. The new ministry was put into place to enforce greater regulation over Kazakhstan’s energy sector, a function previously exercised by KazMunaiGas.
“The ministry will relieve KazMunaiGas of inappropriate functions that create a conflict of commercial and state interests. The activities of KazMunaiGas should be purely commercial,” Nazarbayev said.
While in September, Kazmunaigaz boosted its first-half net profits by 14% year-on-year to 114 billion tenge ($783 million), largely as a result of high oil prices, analysts have raised questions over the future role of the national oil company.
“An important question for Kazakhstan’s oil and gas sector is what happens once these PSAs expire [in 2037 for Kashagan and 2041 for Karachaganak] and the steps taken by the government which could very possibly rattle investor confidence,” Shaw said.
As the country prepares to celebrate its twentieth anniversary of independence, its assertive approach with international energy majors will certainly prove a corrective to Kazakhstan’s more inviting approach in the early 1990s. However, given the country’s need for investment, this policy is in danger of derailing its ambitious future energy strategy.