Global Insight Perspective | |
Significance | According to a Reuters report, Kazakhstan's Economy Ministry has put forward a proposal to the government that would see an end to the practice of awarding production-sharing agreements (PSAs), together with moves to raise taxes and cancel tax breaks on exploration. |
Implications | A tighter tax regime would be in line with Kazakhstan's efforts to redress perceived wrongs from what many in the country view as overly favourable investment terms offered to Western energy companies back in the 1990s. |
Outlook | In a high oil price environment, there is a strong incentive for Kazakhstan to push ahead with the tax system overhaul in order to secure more revenue for the state, but even with the current dispute over the Kashagan field, the country seems unlikely to push for retroactive changes that would scrap the PSA for that project. |
Overdue Changes?
Reuters reported yesterday that the Economy Ministry has submitted to the government a proposal that would substantially alter the investment climate for international oil companies (IOCs) in Kazakhstan by overhauling the Central Asian state's oil taxation policy. Galymzhan Zhakupov, a senior tax official at the ministry, said that Kazakhstan's current tax system is "very complicated and untransparent," arguing that it was time to abandon the practice of awarding production-sharing agreements (PSAs) and cancel tax breaks on exploration, among other proposals. Zhakupov said that the proposal submitted to the government would also see taxes increased on oil companies, all in the name of making the oil sector more transparent.
Although few details on the proposal have been made public—and there are questions about exactly how burdening oil companies with more taxes really makes the sector more "transparent"—there is likely to be strong support within the government for the idea of tightening the oil sector's tax regime. As global crude oil prices have trebled in the past four years alone, there has been a growing sentiment, both in the Kazakh population and in government, that the lucrative investment terms that Kazakhstan offered to foreign energy companies back in the mid-to-late 1990s were overly favourable. At the time, the country was desperately in need of foreign investment to help develop its oil and gas reserves, thereby providing a boost to the country's nascent economy as it tried to shake off the post-Soviet malaise.
Just as IOCs likely got a better deal out of Kazakhstan then, due to the country's relative weakness (not to mention the collapse in oil prices to below US$10/b in 1998), so now Kazakhstan is looking to take advantage of the fact that oil prices are threatening to break through US$100/b. The country's oil production has more than trebled since 1995, and today Kazakhstan's booming economy is the strongest in the region. Still, the perception is that Kazakhstan could be doing even better were it not "saddled" with the oil-sector agreements that it signed back in the late 1990s, and as such, there is a sense that those agreements need to be reworked, bringing them more in line with the current price environment.
The fact that Kazakhstan is currently embroiled in a dispute over the future of the Kashagan project has certainly exacerbated these feelings (see "Related Articles"). The Eni-led Agip KCO consortium is developing the oilfield under a PSA, and with the timetable for the start of oil production now pushed back at least two years to mid-2010, together with the reported cost overruns at the project, it is obvious why the government is no longer enamoured with PSAs, which allow investors to lock in a set tax and regulatory framework for the duration of the contract. Kazakhstan's proposal to scrap PSAs would see probably the country sign concession deals, which require investors to comply with changes in tax and other legislation, in the future. Kazakhstan's other signature oilfield, the Tengiz project, is being developed by the Chevron-led Tengizchevroil (TCO) consortium under a concession agreement.
Outlook and Implications
Given that TCO has had its own share of run-ins with the government, it is clear that a shift from PSAs to concession deals would not be a panacea for Kazakhstan's problems with the Kashagan project. Moreover, any move to end the practice of awarding PSAs would likely only apply to future projects, not existing ones, meaning it would not address the current Kashagan impasse. Despite the government's growing impatience, it seems unlikely to try to force Agip KCO into converting its existing PSA into a concession deal, lest Kazakhstan risk raising the ire of Western governments and undermine the Central Asian state's own legitimate argument in the current dispute. While it has every right to demand compensation from Agip KCO for failing to meet the terms of the contract with regards to starting oil production, a solution in which the government unilaterally forces the consortium into converting its PSA into a concession deal will potentially poison the working relationship between state-owned Kazmunaigaz and the other consortium members even before the first oil is extracted from the field.
Still, with a new deadline set to resolve the impasse before the end of the month, Kazakhstan's patience with regard to Kashagan is not limitless, and a decision to revamp the country's oil taxation policies but not apply them to Kazakhstan's largest oil development projects will be seen as largely pointless. The government has taken an increasingly stronger stance with foreign investors in the past few years, seeking to tilt the balance of power in its favour, while also standing up for the Central Asian country's "national interests", which have been widely interpreted as its economic interests. Kazakhstan's parliament is now entirely made up of government supporters, and many feel that the time has come—indeed, is long overdue—for the country to re-examine its relationship its main oil-sector investors and perhaps even renegotiate the terms of the deals signed a decade ago in a vastly different era, both for Kazakhstan and for the oil industry. With the future of Kashagan hanging in the balance, there is no time better than the present if Kazakhstan is to take such bold action.
Related Articles
Kazakhstan: 5 November 2007: Kazakh Official Confirms New Deadline for Kashagan Talks Set for End-November
Kazakhstan: 26 October 2007: EU Voices Concern About New Kazakh Subsoil Law's Impact on Foreign Investors
Kazakhstan: 23 October 2007: Eni-Led Consortium, Kazakhstan Sign Framework Agreement to Continue Kashagan Talks
Kazakhstan: 26 September 2007: Parliament Passes Law Allowing Kazakh Government to Break Oil Contracts
Kazakhstan: 19 January 2007: New Kazakh PM Promises Greater Scrutiny of Foreign Oil Companies
Kazakhstan: 5 October 2005: Government Aims to Assert 'Strategic Control' over Kazakhstan's Oil Reserves
Kazakhstan: 23 September 2005: Parliament Strikes Nationalist Chord in Kazakh Oil Ownership Debate
Kazakhstan: 21 October 2004: Parliament Gives Kazakh Government Energy Project Pre-Emption Rights
Kazakhstan: 15 April 2004: Kazakhstan: Economic Nationalist in Central Asia or Just Emerging World Oil Giant?
Kazakhstan: 8 August 2003: Kazakh Prime Minister Seeks PSA Legislation Promoting National Interests