Common Sense Required in Kazakhstan Dispute
Posted January 27, 2010 at 8:05 am 
Filed in: The Financial Times reported yesterday that Kazakhstan is threatening to extract higher taxes from western oil majors. Contracts on the country’s three largest oil projects (led by ChevronTexaco, BG/Eni and Eni respectively) were signed in the 1990s and have provisions that protect investors from adverse changes in legislation. By law, these contracts can only be annulled if they are deemed harmful to the national interest.
In a separate, but related dispute, BG/Eni has already complained of being unfairly charged taxes at the Karachaganak field project. Conflicting reports were gathered from the Kazakhstan governments, one of which suggests that this could be a negotiating position (the government would like to obtain a stake in the project). Whatever the reason, taken as a whole these developments are cause for some concern reminding us that uncertainty can exist and disruption can occur in any oil and gas producing nation.
Investors in the Karachaganak project field have postponed the planned expansion. This expansion was expected to be completed by 2013 and raise production by over 600,000 barrels per day. (Today, Kazakhstan supplies 1.6 million barrels of oil per day to the world market). Higher taxes and/or greater government involvement in oil projects will raise costs and the level of risk. As evidenced by the postponed expansion, this uncertainty could result in the deferral of oil and gas developments in the region.
The economy of Kazakhstan is very reliant on the oil and gas industry: Since 1993, the extractive industries have attracted $30.7 billion in foreign investment (representing almost 76 percent of the total foreign direct investment for that period). Much of this investment is, of course, the technology required to develop oil and gas reserves. Oil and oil products account for 59 percent of Kazakhstan’s exports.
The production outlook for Kazakhstan is among the most bullish worldwide: Industry analysts believe that planned expansion of oil production, coupled with the development of new fields, will enable the country to produce as much as 3 million barrels per day by 2015 (note that the Karachaganak expansion is a substantial part of this), lifting Kazakhstan into the ranks of the world’s top 10 oil-producing nations.
We should hope that all groups look carefully at the benefits of avoiding a standoff over taxes and/or project ownership with respect to their long term interests (partnerships, income streams, technology development, economic growth etc.) before allowing the situation to deteriorate further.
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