Government Imposes Crude Oil Export Duty in Kazakhstan From May

More Changes to the Playing Field

Following up on a January announcement that the government was mulling the imposition of a crude oil export duty from next year, today Kazakhstan's Prime Minister, Karim Masimov, signed a measure that will see a duty of US$109.91/tonne (US$14.99/b) introduced as soon as next month. Kazakh officials, aiming to downplay fears that the duty would be imposed on existing projects, reassured foreign investors by saying that the duty—which will go into effect 30 days after it is officially published in state media, likely later this week—will only impact projects with flexible tax regimes. Thus, projects covered under production-sharing agreements (PSAs) or long-term concessions, which include the BG-led Karachaganak project, the Eni-led Kashagan project, and the Chevron-led Tengiz project, will be unaffected by the new duty.

Still, the introduction of the crude oil export tariff, the first of its kind in post-Soviet Kazakhstan, will be cause for concern for potential new investors in the oil-rich Central Asian state. The imposition of a duty, which is based on the average first-quarter global oil price of US$714.9/tonne (US$97.5/b) and is expected to fluctuate with global oil prices, is the latest in a series of steps by the Kazakh government to assert greater control over the development of the country's vast oil and gas reserves and/or increase the state's revenue take from the extraction and export of these hydrocarbons. Aside from securing an increased stake in the Kashagan project for Kazmunaigaz, the state oil and gas company, as a result of the dispute over the delayed start-up in oil production from the field, the Kazakh government in recent months has acted to shift the balance of power in the oil and gas sector to the state, vowing not to sign any further PSAs as well as passing legislation to allow the government to break oil contracts in the name of national security.

The Kazakh government, for the most part, has sought to reassure foreign investors that it has no plans to retroactively force changes to existing contracts, but new measures such as the oil export duty do little to assuage these fears, even if Kashagan, Tengiz, and Karachaganak will be exempt. New projects, of course, will not be so lucky (see table). Kazakh officials said that they have not yet drawn up a list of which projects will be subject to the oil export duty—which is Industry Minister Vladimir Shkolnik, a former Energy Minister, said is geared to stabilise domestic oil product prices, keep inflation under control and boost revenues—but Reuters reported that perhaps 40% of the country's oil production (which stood at 1.35 million b/d last year) will be affected, accounting for nearly 50% of total exports.

Fiscal Context

The oil duty was introduced in order to secure the government's fiscal revenue goals, to support oil supply in the domestic market, and to stabilise domestic oil product prices. Concern over budget performance has until recently not been high on the government's agenda, as past years have seen Kazakhstan's fiscal performance been strongly boosted by the strength of oil prices.

This year's revised state budget draft targeted the revenues at around 2.7 trillion tenge (US$22.3 billion), with the deficit put at 1.4% of the projected GDP. Kazakh public finances have in recent years greatly benefited from the record high oil prices, and budget revenues have typically exceeded expectations. However, since this year's budget was presented, and revised in November, the Kazakh economic outlook has deteriorated as the severity of the contagion from the international credit crunch has emerged. The negative effects from tighter liquidity have reached the real economy via slower credit growth expansion, which has led to moderating activity especially in the construction sector. Slower GDP growth naturally has a dampening effect on budget revenues. According to the Kazakh Industry and Trade Minister, Vladimir Shkolnik, the now presented oil duty will boost budget revenues to the tune of over US$1 billion.

Even if the growth outlook has deteriorated, meeting of the 2008 budget targets has not yet become under any considerable strain, given that the draft was based on a fairly conservative estimate of the average price for Brent oil at only US$60 per barrel. However, new spending needs have also emerged; the budget has recently been revised in response to the financial unrest, as President Nursultan Nazarbayev ordered the creation of a banking sector stabilisation fund.

Inflation Connection

Concern expressed by the government over domestic oil product prices is valid, Indeed, Kazakhstan's producer price inflation has been running at an average of over 39% year-on-year (y/y) over the first quarter, while consumer price inflation has been persistently hovering around disconcertingly high rates of 18.7-18.8% y/y. Notably, high cost of grains has pushed food price inflation to very elevated levels. Thus, by supporting domestic supply, the oil export duty may help in curbing inflation from the cost side.

Outlook and Implications