Kazakhstan Reintroduces Export Duty in Showdown with Oil Companies

Rejoining the Fight

When Kazakhstan first introduced an export duty on crude oil in May 2008, oil companies operating in the Central Asian state cried foul, particularly those operating under contracts with fixed tax and regulatory regimes. Kazakh authorities initially wavered in their position on whether the tariff—originally set at US$190.91/tonne (US$14.99/barrel, /b)—would apply to all companies or just those operating under the "normal", fluctuating hydrocarbon tax regime. Kazakh officials then decided that even those companies and consortia operating under a production-sharing agreement (PSA) or a long-term concession—including the country's "Big Three" projects at Tengiz, Karachaganak, and Kashagan—should be liable for the duty, promptly targeting the BG and Eni-led Karachaganak Petroleum Operating BV (KPO) consortium in pressing for payment. KPO consented to pay the duty, avoiding fines, but the consortium simultaneously launched a campaign for reimbursement, saying that it should have been exempt.

Just as the government began pushing the Chevron-led Tengizchevroil (TCO) consortium for duty payment as well, however, the bottom fell out of the global oil market, and the ensuing price collapse and eruption of the financial crisis ended the debate. In late January 2009, the government took the dramatic step of suspending the oil export duty, setting it at zero in an effort to prop up oil producers and ensure that they could continue extracting crude profitably, although officials reserved the right to raise the duty again at some future date. However, since Kazakhstan launched a new tax code earlier that month, raising the tax burden on the oil sector, the consensus belief was that the oil export tariff had been consigned to the dustbin of history. Although the government insisted that the tax changes should apply to all oil companies, the Big Three again argued that they should be exempt.

Fast-forward 18 months and the simmering battle between the government and its largest energy-sector foreign investors has not changed much. Kazakh authorities have continued to chafe under the belief that the terms of the 1990s-era fixed tax and regulatory contracts signed by the Tengiz and Karachaganak consortia, at least, are preferential to the oil companies. For their part, KPO and TCO continue to argue for the inviolability of earlier contractual agreements, rejecting any attempt by the government to unilaterally change fiscal terms and warning that any move to do so would cause damage to the investment climate. Earlier this year, President Nursultan Nazarbayev called on all oil companies in Kazakhstan to operate under the new tax code, prompting Oil and Gas Minister Sauat Mynbayev to say that he will seek to abolish special tax regimes for oil companies operating under old agreements. The authorities have already made it abundantly clear that they will not be signing any additional PSAs for new projects.

With the government currently engaged in a push to gain a stake for state-owned Kazmunaigaz in the Karachaganak project, and the state financial police recently alleging that TCO has garnered profits from over-production at the Tengiz field, yesterday Deputy Minister of Economic Development and Trade Marat Kusainov launched a new salvo in the battle, announcing that Kazakhstan will reintroduce an export duty on crude oil, as well as impose a tariff on exports of oil products. Kusainov said that the duty on crude oil will be set at US$20.00/tonne (US$2.73/b), while the duty on light oil products—such as gasoline (petrol)—will be set at US$99.71/tonne (US$13.65/b) and the duty on heavy oil products—such as diesel—will be set at US$66.47/tonne (US$9.07/b). The duties are set to come into force in mid-August, 30 days after their publication in the official gazette.

Questioning the Need for a Duty

Finance Minister Bolat Zhamishev said that the reintroduction of the export duty could generate up to 60 billion tenge (US$400 million) for the Kazakh budget through the end of this year, rising to 117 billion tenge in 2011. After the recent financial crisis and the economic downturn, Kazakhstan's public finances are clearly weaker than in the preceding years. Nevertheless, following the deterioration, the country's budget position is again strengthening. The government is now withdrawing its fiscal stimulus form the economy, and the improved economic outlook supports this goal. The 2010 budget still includes support for the recovery of the real economy in the form of rising social spending. The strength of the oil prices in early 2010, however, also indicates that this year's budget plans seem rather conservative. The revised budget for this year is based on a relatively cautious GDP growth projection of 2% and on an average oil price of US$65/b. Thus, the government's budget deficit target of 4.1% for this year will be met by a comfortable margin.

Kazakhstan's external reserves remain high and its public debt modest, while the National Oil Fund had gained nearly 9% over the first half of the year, standing at US$26.6 billion at the end of June. Moreover, it has recently also secured a long-term loan of US$1 billion from the World Bank, aimed for use in completing banking-sector restructuring. However, more than addressing any acute pubic finance needs, this loan—as well as the planned Eurobond issue—is aimed at smoothing the way for Kazakhstan's eventual return to corporate loan markets.

That a pressing need to seek new immediate revenue sources for the budget exists is not to say that challenges related to public finances going forward will disappear. For the most part, these are related to the spending side of the budget, where efficiency of public expenditure ought to be improved, while tax administration should also be strengthened. Encouragingly, the government seems to recognise the need to secure fiscal sustainability. Budgets are now planned using a three-year horizon, and narrowing deficits are put forward for ensuing years.

Outlook and Implications

Kazakhstan's improving economy means that there is less of an argument to be made that the reimposition of the oil export duty helps the government plug a hole in the budget deficit and more of an argument in favour of the government simply trying to bend KPO and TCO to its will. Rather than simply introducing an export duty as a matter of course in the midst of financial distress, the government is instead acting on principle, determined to show the oil consortia who is truly in charge in the Central Asian state. Dow Jones reports that KPO believes that the duty should not apply to Karachaganak, but the government's very decision to rejoin a battle that was previously fought (with no clear victor) demonstrates that Kazakh authorities are determined to triumph this time around.

One line of argument suggests that the battle over fiscal terms is really a proxy battle within the country's elite, as the jockeying for position to succeed Nazarbayev—who turned 70 earlier this month and has earned the title "leader for life", giving him immunity from future prosecution and clearing the way for him to step down, if he so chooses—has begun in earnest. This suggests a behind-the-scenes power struggle to curry favour with the president and win the title of anointed successor has broken out into the open, with various policymakers and institutions—including Prime Minister Karim Masimov, the financial police, the Oil and Gas Ministry, and the Finance Ministry—aiming to show that they can get the job done in bringing the foreign oil groups to heel. Successfully cajoling or convincing the oil firms to accept the new fiscal terms, in this scenario, could be key to elevating one group's status in Nazarbayev's eyes.

This could help to explain the decision to reintroduce the oil export tariff at a much lower level than when it was previously suspended, making it more acceptable, in theory, to all oil companies, not just those operating under PSAs and long-term concessions. KPO and TCO are likely to object to the duty in principle anyway, arguing that their contracts mean they are exempt and objecting to the government's attempt to unilaterally revise the fiscal terms under which they operate. KPO and TCO will also be wary of accepting the imposition of the duty for fear that it will rise in the future. Indeed, questions remain about how the export duty will fit in with the new customs union between Russia, Kazakhstan, and Belarus, and there is no guarantee that the duty will remain low going forward. Assuming that Kazakhstan will align its oil export duty with Russia as the customs union comes into clearer focus, Kazakhstan's tariff will necessarily increase. Hence, the oil companies are not likely to give in easily and accept the export duty, and with the government unwilling to give up the fight, the battle will go on.