Clare Nuttall in Almaty -
Hard on the heels of news that state-owned KazMunaiGas has signed off on the deal to increase its stake in the giant Kashagan oil project, comes reports the Kazakh government is close to striking a deal over the Karachaganak gas project, under which the international consortium developing it would avoid export duties in return for handing over a stake.
On August 12, KazMunaiGas' chairman, Kairgeldy Kabyldin, announced the company had finally signed a deal to increase its stake in the operating company for the offshore Kashagan oilfield. Kabyldin also said that KazMunaiGas would invest $8bn in Kashagan by 2014, but there would be further delays to the second phase of the project, which is now due to start in 2018 or 2019.
A few days later, unconfirmed newswire reports were saying the international oil companies developing the Karachaganak gas condensate field in northwestern Kazakhstan are willing to hand over a 10% stake in the Karachaganak Petroleum Operating (KPO) consortium to the Kazakh government. The four KPO members - Eni, BG Group, Chevron and Lukoil - will transfer a 5% stake in the consortium to the Kazakh government provided it either gives up plans to levy export duties from Karachaganak or drops a $1bn lawsuit against the consortium, Reuters quoted a source close to the negotiations as saying. The Kazakh government plans to pay cash for an additional 5% stake in Karachaganak, which currently is the only mega field being developed without KazMunaiGas' participation.
After a hiatus during the crisis, when oil prices fell below $40 in 2009, the Kazakh government formally re-introduced export duties on August 16. The Kazakh government has set the duty at $20 per tonne of crude oil, also announcing that the Tengizchevroil and KPO consortia would no longer be exempt.
Negotiations between the Kazakh government and KPO, which believes it should not be subject to the duty, took place in mid-July, but no final agreement was reached, and further discussions are due to take place in the autumn. KPO members have declined to comment on the negotiations.
If a deal is reached, it could spell the end of an ongoing dispute between the consortium and the government over the country's second-largest energy project. At present, KPO faces a series of claims from the Kazakh government worth around $2.5bn. In addition to the $1bn lawsuit, which concerns an alleged overstating of costs, they also include tax claims, environmental claims, and claims relating to alleged violations of environmental regulations. From its side, KPO has an outstanding case against Kazakh government to recover over $1bn in export duties.
KPO members say they should not have to pay export duties. On an investor call on July 28, Ashley Almanza, CFO of BG Group, which holds a 32.5% stake in KPO, said the consortium and government were meeting regularly and that discussions were "constructive". "All parties, all the partners and the Republic continue to look for and prefer an amicable negotiated resolution of our disputes outside of the arbitration process," he told investors.
The re-introduction of oil export duties is one of a series of events recently that have impacted on oil and gas companies operating in Kazakhstan, and strained their relations with the government.
There are also problems at Tengizchevroil. Kazakhstan's financial police said on July 17 - four days after the government's announcement on export duties - that it had launched criminal proceedings against the consortium. The financial police claims that Tengizchevroil over-produced oil at the field, resulting in illegal earnings of $1.4bn. "There have been a number of changes recently," says Dominic Lewenz, director of oil and gas research at Visor Capital. "The main elements include a new tax code that was introduced at the start of 2009, affecting all companies except Tengizchevroil and those operating under PSAs [production sharing agreements]. More recently, we saw the reintroduction of Customs Export Duty, whilst also broadening the taxpayer bade. At the same time, the government is questioning the status of PSAs, albeit insisting that any changes will be made through negotiations."
Lewenz says that despite the recent changes, Kazakhstan remains a good place for oil companies to do business given the scale of its reserves. However, he stresses that the ability of the government to commit to rules and stick to its word is especially important for oil and gas companies, given the long time horizons and huge investments typical of the industry. "The government spent many years building up its international reputation. Kazakhstan's desire to increase its share of profits from the industry need to be offset against this risk to its reputation."
For the oil and gas industry, uncertainty over taxes makes economic planning and investment much more difficult, Lewenz says. A similar situation is arising in the mining sector, where the government has indicated it is likely to introduce an export duty in 2011, but without saying where the burden will fall.
Historically, the Kazakh government has encouraged international oil companies to operate in the country, which has allowed the exploitation of technically difficult fields such as Tengiz. Kazakhstan is acknowledged by international companies to be a much investor-friendlier place than, for example, Russia.
Although KazMunaiGas has increased its stake in Kashagan, the other five participants in the North Caspian Operating Company (NCOC) are all international oil majors. KazMunaiGas will operate on equal terms with Royal Dutch Shell during the second phase of the project, gradually taking on a greater share of responsibility for the operations.
When the Kashagan field was discovered in 2000, it was the largest discovery for some 30 years. Kashagan is estimated to contain between 9bn and 14bn barrels of oil. The tough operating environment has meant that getting to a stage where production can begin has been no easy task. Kashagan is located offshore in the north Caspian Sea where temperatures range from 40Â°C in summer to -35Â°C in winter, and rigs are at risk from ice floes and sudden storms. The field is high pressure and contains high levels of toxic hydrogen sulphide.
According to Kabyldin, KazMunaiGas plans to invest $8bn in Kashagan by 2014. Visor Capital estimates that the entire consortium - which also comprises Shell, Eni, Total, ExxonMobil, ConocoPhillips and Inpex - will invest a total of $47.5bn.
Production is due to start in 2012 or 2013, with an initial 300,000 barrels per day (b/d) being extracted. This is set to rise to around 1m b/d in the second phase, which has now been delayed until 2018 or 2019. Within around a decade, Kazakhstan's oil production is due to approximately double, when the third phase of production of 1.5m b/d begins.
This is expected to herald the start of a "Golden Age" for Kazakhstan's oil and gas industry, when Kashagan output is at its peak alongside continued production from the other mega fields of Tengiz and Karachaganak.
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