IHS World Markets Energy Perspective | |
Significance | The Kazakh government and Karachaganak Petroleum Operating BV (KPO), the international consortium that is developing the Karachaganak field, have been at loggerheads for much of the past three years over tax payments and the government's desire to secure a direct stake in the project. |
Implications | The dispute has hovered around the project's crucial phase three development, which is intended to more than double natural gas production from the Karachaganak field. The field is already the largest single source of gas output in Kazakhstan. |
Outlook | A lack of export routes, together with a lack of market demand, has effectively frozen the phase three development of Karachaganak already, and since an actual shutdown of existing production from the project would hurt Kazakhstan as much or more than KPO, the two sides have little alternative but to continue negotiating in an effort to resolve their dispute. |
Calling It Like It Is
The Kazakh government has developed a bit of a reputation among foreign investors over the past eight or so years for being a bit difficult to deal with, particularly when it comes to the country's all-important energy sector. Thus, it comes as little surprise that a meeting yesterday (18 May) in Astana, Kazakhstan's capital, between key energy investors and Kazakh policymakers generated more friction than co-operation. Then again, the government of the hydrocarbon-rich Central Asian state is not in the business of placating foreign companies in the name of "improving the investment climate".
Indeed, Kazakh oil and gas ,minister Sauat Mynbayev launched what amounted to a verbal grenade towards the Karachaganak Petroleum Operating BV (KPO) consortium, the international group developing one of the country's three largest oil and gas fields. Speaking to reporters, Mynbayev said that the government was prepared to freeze further development of the field unless the government and KPO—which have been locked in a years-long dispute over the consortium's tax payments and liabilities and the government's attempts to change the existing contractual terms—come to an agreement (see Related Articles). Mynbayev told reporters that, "Without reaching agreement, Phase Three of the project will not be set in motion—full stop".
The dispute between KPO and Kazakhstan is longstanding and increasingly complex, with each new push by the government against the consortium—from slapping KPO with environmental fines to alleging that the group is violating Kazakhstan's labour laws—making it seemingly more difficult for the two sides to reach a deal. Essentially though, the dispute comes down to the Kazakh government's attempts to change KPO's contract to make the consortium—comprised of BG (32.5%), Eni (32.5%), Chevron (20%), and LUKoil (15%)—liable to pay more taxes. The government's argument is that the 1990s-era production-sharing agreement (PSA) for the project no longer reflects the current realities of the oil market (and the government's petroleum-fuelled economic and political power).
Not surprisingly, KPO disagrees, and the consortium has parried the government's offensive in stating the principle of the inviolability of signed contracts. The government, despite various threats to revise the previous contracts for the country's "Big Three" projects—Karachaganak, Kashagan, and Tengiz—thus far has heeded these de facto warnings from the foreign companies that contractual changes would damage the investment climate, refusing to make good on the government's own threats. Hence, the friction between the international consortia and the Kazakh government continues, becoming a more-or-less permanent part of the investment climate in Kazakhstan by this point, although (ironically) not causing any real outward damage to the very same investment climate.
Outlook and Implications
With regard to the Karachaganak project specifically, another flashpoint has been the government's attempts to exercise greater control over the development of the field. State-owned oil and gas firm Kazmunaigaz has made no secret of its desire to gain an equity stake in the project. KPO seems to have yielded on this point, with reports from earlier negotiations stating that KPO was willing to cede a 10% stake in the project to Kazmunaigaz, which would then give the government a direct say in the implementation of the all-important phase three development of the field. Although Mynbayev's remarks yesterday may have caused a stir, the reality is that phase three—a multi-billion-dollar investment programme geared to more than double gas production from the field from around 8 bcm/y at present—is already effectively frozen, irrespective of the dispute.
Indeed, in the wake of the global financial crisis, the timetable for phase three was delayed, and the market reality is that more gas output from Karachaganak is not needed at this time. Kazakhstan's internal market can barely absorb current gas production volumes, and the country's lack of export routes other than shipping the gas to Russia means that additional output from Karachaganak will struggle to find a market. Gazprom is keen on supplying its own gas to export markets in Europe, leaving Kazakh gas with no alternative to the Russian market, at least until a new pipeline connecting Kazakhstan to the Central Asia-China gas pipeline is operational. On the other hand, Kazakhstan's economic recovery would be jeopardised by a rash move by the Kazakh government to halt existing production of gas and condensate from Karachaganak, while such a move could further sour the relationship between KPO and the government. Hence, the only real option for the two sides is to head back to the negotiating table in search of a resolution to their lingering dispute.
Related Articles
- Kazakhstan: 18 May 2011: LUKoil Suggests Resolution to Kazakhstan-KPO Dispute Could Take Years
- Kazakhstan: 17 March 2011: KPO, Kazakhstan Reportedly Close to Deal to Resolve Karachaganak Dispute
- Kazakhstan: 26 January 2011: Karachaganak Consortium Slapped with Environmental Fine in Kazakhstan
- Kazakhstan: 16 August 2010: KPO Consortium Reportedly Consents to Make Room for Kazakhstan with 10% Stake
- Kazakhstan: 14 July 2010: Kazakhstan Reintroduces Export Duty in Showdown with Oil Companies
- Kazakhstan: 4 June 2010: Kazmunaigaz Targets 10% Stake in Kazakhstan's Karachaganak Project
- Kazakhstan: 7 April 2010: Kazakhstan Opens New Front Against KPO, Threatening to Expel Foreign Workers
- Kazakhstan: 26 January 2010: Kazmunaigaz Says Karachaganak Phase III Cost Estimates are Growing; Kazakhstan Seeks Increased Role
- Kazakhstan: 27 January 2010: Energy Minister Reiterates Plan to Impose New Tax Rules on All Oil Firms in Kazakhstan
- Kazakhstan: 15 December 2009: Report Suggests ENI, BG May Sell Partial Stakes in KPO to Resolve Dispute with Kazakhstan