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After years of pressure, the Kazakh government looks set to finally get its hands on a stake in Karachaganak, the last mega oil and gas project in the country still being developed solely by international oil companies. Deputy Energy Minister Lyazzat Kiinov announced on December 6 that a tax claim against the Karachaganak operating consortium is being withdrawn, paving the way for a deal to be signed this month that will give the government a 10% stake in the project.

Speaking at a conference in Doha, Kiinov said the government has withdrawn a claim for back taxes - believed to be worth over $1bn - against Karachaganak Petroleum Operating (KPO), which is led by the UK's BG Group and Italy's Eni, after reaching an agreement to take a stake in the consortium. "Our taxmen raised some questions, but through negotiations all the issues were taken off the table," Kiinov told the World Petroleum Congress without a hint or irony.

Kiinov told delegates that, "we have reached agreement in principle" on the acquisition of a 10% stake in KPO, and that the deal is expected to be signed before the end of the year. After the acquisition, the government's stake would be held through National Company KazMunaiGas, which is controlled by state holding company Samruk-Kazyna.

Kiinov did not comment on the terms of the deal. However, in recent months several Kazakh ministers and oil industry officials have indicated that KMG is likely to buy a 5% stake in KPO, and be given a further 5%. Speaking at the Kazenergy conference in Astana in October, Samruk-Kazyna's chairman, Timur Kulibayev, said that the government might pay between $700m to $1.1bn for a stake.

The size of the tax claim against KPO has also not been disclosed, but Reuters reported that Kazakhstan's tax office had prepared a claim for $1.2bn of unpaid taxes dating from 2005 to 2008. A series of other claims have been made against KPO in the last few years, including both tax claims and fines for breaking environmental laws as Astana has upped the pressure on the consortium members to cede a stake to KMG.

If it goes ahead as planned, the deal will bring to an end the long-standing dispute between the Kazakh, whish is comprised of BG Group (32.5%), ENI (32.5%), Chevron (20%) and Lukoil (15%). "In our view this is positive, as the news gives fairly strong confidence that the deal over the state's entry to Karachaganak is finally set to be completed by year end 2011, and that all tax-related claims will be resolved," says an analyst note from Visor Capital. "This also means that the third phase expansion plan of the Karachaganak project is more likely to be approved."

In 2010, Karachaganak produced approximately 360,000 barrels of oil equivalent a day. The consortium has been planning a $14.5bn third phase development of the field, which would further boost production. The deal with the government will remove some of the uncertainty surrounding that development.

Karachaganak, which is located in Kazakhstan's north western corner near the Russian border, is one of the world's largest gas condensate fields with estimated reserves of around 1.2 trillion cubic metres of gas and 1bn tonnes of oil and liquid gas condensate. AGIP (now ENI) and British Gas (now BG Group) were given negotiating rights in 1992. Five years later, they signed a 40-year production sharing agreement with the government and two other companies: Lukoil and Texaco (now Chevron Corp.). BG and ENI each hold 32.5% in KPO, Chevron holds 20% and Lukoil 15%.

Until now, Karachaganak has been the only mega-project in Kazakhstan in which the Kazakh government did not hold a stake. In recent years, Astana has tried to reassert control over Kazakhstan's oil and gas sector, and in particular the country's large fields. It has already taken a stake in the huge offshore Kashagan field. KMG bought shares from BG Group in 2004, and further increased its stake in 2008 to 16.81%. KMG also has a 20% share in TengizChevroil, the consortium developing the Tengiz field.

The early years of independence saw the Kazakh government sign a series of deals with international investors, as at the time it was in urgent need of both funding and hi-tech expertise to develop the resources. Today, Kazakhstan is in a very different position: financially it is much stronger and the oil majors face growing competition from investors from other parts of the world including China, India, Korea and the Middle East.