Nicholas Watson in Prague -

Even as state oil company KazMunaiGaz becomes more acquisitive abroad, Kazakhstan is acting in an increasingly protectionist way at home.

In February, both Kazakhstan's president and then the prime minister made belligerent-sounding speeches in which resource nationalism - that bugbear of international firms everywhere - loomed large.

On February 6, President Nursultan Nazarbayev said he wanted to increase the influence of the state over the country's booming energy sector. "In the oil and gas sector, it is necessary to strengthen the positions of the government through national involvement in energy markets," Nazarbayev said in a "state of the union" address before both chambers of the country's parliament.

These hawkish comments were followed the next day by similar-sounding remarks from the prime minister, Karim Masimov, who warned the oil and gas operators in the country that if they do not fulfil their contractual obligations, the government would cancel their licenses to develop the Central Asian state's huge hydrocarbon resources. "On all licenses in the subsoil sector where contract obligations have not been fulfilled... it is necessary to cancel these contracts and return [the licenses] back to the government," Masimov was reported to have said during a meeting at the Ministry of Energy and Mineral Resources.

The government has already made good on its promise. In January, after months of wrangling, the Eni-led consortium developing the huge, offshore Kashagan oilfield finally caved in to the Kazakh government's demands to eventually give up its role as operator of the project and allow KazMunaiGaz to double its stake in the project.

The saga began back in August when Environmental Protection Minister Nurlan Isakov announced that his ministry had gathered evidence of environmental violations by the AgipKCO consortium developing the oilfield, and a possible link between the consortium's operations and the deaths of hundreds of Caspian seals. A week later, the government-ordered a halt to work at the field for three months, followed by news that the Finance Ministry had launched a criminal investigation into a subsidiary of AgipKCO for alleged customs violations. Then in mid-September, news emerged that Kazakh MPs were working on a new law that would enable the government to cancel or review its subsoil contracts with oil companies.

The moves by the Kazakh government undoubtedly reflected genuine irritation with Eni over the delays in getting the world's biggest undeveloped oilfield into production. In June, the Italian oil major suddenly asked the Kazakh authorities to change the terms of the project development, seeking an increase in the budget and a postponement in the deadline for starting commercial production. Kashagan was originally expected to come on stream in 2005, but this start date has since been postponed a number of times. The latest forecast is for 2011 at the earliest, forcing Astana to lower its long-term oil production forecast from 3m barrels per day to 2.6m by 2015.

The settlement agreed in January strips Eni of the operatorship once the project's first phase is complete, giving the role to a new operating company representing the partners. At the same time, KazMuniagaz's stake will increase from 8.33% to 16.81%, with each of the other partners ceding a proportionate percentage to increase KazMuniagaz's holding. KMG will pay them $1.78bn in oil as compensation. The restructured shareholdings are now: 16.81% for Eni, Total, ExxonMobil, Shell and KMG; ConocoPhillips, 8.5%; and Japan's Inpex, 7.4%. But the companies will also pay compensation of up to $4.8bn to the government for the late start-up of the field and its increased costs.

KazMunaiGaz says the deal would give the company parity with the other foreign firms in the consortium and allow it to "prove itself equal to everyone else." That phrase is important, say analysts, and investors need to understand its context in order to see where the country is headed.

Horses for courses

Critics of the Kazakh government portray the dispute as bullying in order to gain more control of the project, likening the government's actions to Gazprom's takeover of control of Sakhalin Energy at the end of 2006. Indeed, the Russian authorities also used environmental violations as a pretext to launch its attack on the foreign operator, in that case Shell.

In the wider context, Kazakhstan is trying to regain some of its pride by reversing the humiliating production sharing agreements (PSAs) deals its bankrupt oil sector were forced to strike with international oil majors during the early 1990s. These PSAs, in theory, mean the state begins to make money on the field only after the developers have paid off their costs. With Eni announcing massive cost overruns and delays, it would have been years before the state would begin to make money on the Kashagan development. In February, the government announced there would be no more PSAs agreed with foreign oil firms, following the lead of Russia.

Ariel Cohen, senior fellow for International Energy Security at Washington's Heritage Foundation, warns that the moves by the Kazakh government reflect a wider theme from Venezuela to Vladivostok, where governments see energy and natural resources "as the proverbial goose that lays the golden egg, and they want to grab the goose."

Indeed, Farkhad Sharip, a commentator for the rightwing think-tank Jamestown Foundation, points out that the rise of Nurlan Balgimbayev, a former prime minister of the country and now Nazarbayev's adviser on energy, has coincided with the increase in state control. Balgimbayev, argues Sharip, is "an ardent advocate of nationalising Kazakhstan's oil sector," who was instrumental in creating KazMunaiGaz in 2002, giving the company a mandate to control no less than 50% of the shares in all future oil projects to be developed with foreign companies.

Furthermore, draft changes made to the country's law governing subsoil users last November enables the energy ministry to change the terms of oil contracts or abrogate them altogether without the consent of the parties developing the project. Lawyers claim the amended law, if implemented, is contrary to several international investment treaties signed by Kazakhstan.

Prime Minister Masimov insists that all contracts agreed with foreign companies would be upheld, "if the investor adheres to all the terms of the contract." And there's the rub.

The Energy and Mineral Resources Ministry has drawn up a list of licenses under development in Kazakhstan. The licenses are ranked in order of compliance to contract obligations, with 100% representing full compliance of terms and 0% representing complete non-compliance, sources in the oil industry told Platts.

The fear is that the government will now turn its attention to the Tengiz and Karachaganak developments, under development by Chevron- and BG-led consortia. Though Energy and Mineral Resources Minister Sauat Mynbayev said in January that these projects are different from Kashagan and there are no plans to re-evaluate them, he added ominously that the government would not accept "an unjustified cost increase and delays."

Environmental issues also loom over Chevron's Tengiz field. The oil there is rich in hydrogen sulphide gas, which is processed into blocks of inert yellow sulphur and stored near the field. The government has accused TengizChevrOil (TCO), the consortium developing the oilfield, of flouting its responsibilities for managing these sulphur stocks - a charge TCO denies, claiming it has been selling the by-product on new markets. A court in Kazakhstan imposed a $609m fine on TCO in 2007 - an amount that was later halved and may be appealed by TCO.

Even so, Heritage's Cohen cautions against seeing the Kashagan dispute as a sign that Kazakhstan is heading down the same path as Russia of harassing non-state energy firms and expropriating their assets. "I believe that Kazakhstan remains more liberal in its business approach than Russia," says Cohen.

He says contrary to what's happening in Russia, where competing Siloviki factions (Kremlin groups with ties to the security services) are making a lot of the decisions on what assets to seize and to whom to sell them on to, in Kazakhstan it's a more orderly and pro-business environment. "Once you cut deals with the people in Kazakhstan who are the decision-makers, you're pretty much on the right track," Cohen argues.

Less strident voices also note that the Kazakh state has not taken over control of the Kashagan project, but merely claimed parity with the other shareholders. And it has compensated them for their reduced shareholding - albeit at below market rates, say analysts.

What about KazMunaiGaz itself? Balgimbayev's creation is merrily turning itself into an energy giant to be reckoned with on the international stage.

In August 2007, Romanian businessman Dinu Patriciu announced he had agreed to sell a 75% stake in The Rompetrol Group to KazMunaiGaz. The estimated $2.7bn deal came as a surprise to the market and is something of a coup for the Kazakh firm, which doubles its refining capacity and gives it access to 630 petrol stations held by Rompetrol across seven European countries, from Georgia to France. Rompetrol is the majority shareholder of the Romanian-listed entity Rompetrol Rafinare, which includes a majority stake in the Petromidia refinery located strategically on the Black Sea Coast and its smaller Vega refinery in southern Romania.

The snaring of Rompetrol is part of a much larger acquisition strategy of KazMunaiGaz. "Our ambitions are quite big, we're aiming to become a national champion," CEO chief executive Askar Balzhanov told the media in July.

He said KazMunaiGaz had built up a cash pile of $7bn to finance this acquisition spree - $2.3bn of that from a London share offering in December 2006 of its subsidiary KazMunaiGaz EP.

While the company is still very much a work in progress, Martha Olcott, a Central Asian expert at the Carnegie Endowment for International Peace think-tank, says KazMunaiGaz will ultimately devolve into a largely publicly-held corporation, with the government insuring the protection of its interests through the voting of its shares held in a larger holding company Samruk - which in Kazakh means "golden phoenix" - that was created in 2006. "KazMunaiGaz is more likely to become a model for other post-Soviet National oil companies than any other company, in large part because of its development strategy is both more forward looking and better articulated than that of its counterparts," says Olcott.

Olcott says the Kazakh government has defined a much more aggressive mission for KazMunaiGaz than the Azerbaijani government has for Socar or the previous regime in Turkmenistan had for its various national oil and gas interests. She says KazMunaiGaz resembles in some ways Russia's two main state energy firms, Gazprom and Rosneft: the Kazakh firm's degree of vertical integration resembles that of Gazprom and it's also seeking to introduce Western-style management to create international investor confidence. However, a big difference is that the Kazakh firm, unlike the Russian firms, has not benefited from the controversial and legally-suspect expropriation of assets, but rather has built itself up "in a pretty straight forward fashion," either by the purchase or the transfer of a state-held license to the company, directly or by the consolidation of smaller state-owned companies.

Send comments to The Editor