Kazakhstan Chamber of Commerce in the USA


Higher Oil Prices Are Not Enough 0

Posted on January 21, 2011 by KazCham

Anthony Robinson looks at what the government’s new tax laws, plans to modify production-sharing agreements, and higher oil prices mean for Kazakhstan’s oil industry

HIGHER OIL PRICES have come as a relief to Kazakhstan’s fast-growing oil and gas sector, which continued to invest heavily in major field development and infrastructure. Exports, whose value dropped sharply as oil prices fell from a 2008 peak of $147/barrel, are also rising – giving a boost to tax revenues and enabling the government to replenish the National (oil) Fund and rebuild central bank reserves.

Despite cutbacks at some of the higher cost, older fields, overall oil and condensate production is being boosted by the giant on-shore fields of Tengiz and Karachaganak. Overall production rose nearly 7 percent to 76.5 million metric tons last year, of which 68 million metric tons were exported, according to Sauat Mynbaev, the minister of oil and gas. He forecasts output of 80 million metric tons this year.

But a return to higher prices is not enough to allay the concerns of the international oil companies about the new tax code introduced in 2009 – and indications that the government wants to modify the long-term production-sharing agreements (PSAs) signed in thel990s to reflect the huge changes in oil prices and other factors since they were signed. The new tax code is specifically designed to raise the burden on energy and metals producers in order to lighten it on small and medium enterprises. The idea is to support diversification of the economy away from its current unhealthy reliance on the extractive industries, which require vast amounts of capital but employ relatively few people.

Government spokesmen have said that the Kashagan PSA is unlikely to be modified – reflecting the on-going nature of the investment, the technical complexity of safely operating the giant off-shore field, and the fact that KazMunaiGas (KMG), the state oil and gas company, negotiated a new deal two years ago which gives it an equal share with the four international oil majors running the project -Exxon-Mobil, ENI, Shell and Total, with smaller stakes for Japan’s Inpex and Conoco-Phillips. KMG also has

without a state equity share is Karachaganak – but this anomaly is not likely to last long. Both Oil and Gas Minister Mynbayev and KMG Chairman Kairgeldy Kabyldin have confirmed that the government wants an equity stake for KMG in Karachaganak.

UK-based BG and Italy’s ENI are joint operators of the Karachaganak field with each currently holding a 32.5 percent stake, and the balance held by Chevron with 20 percent and Russia’s Lukoil with 15 percent. Karachaganak is one of the world’s richest deposits of gas condensate, a high quality light oil, with an estimated 1.2 billion metric tons of oil and condensate and 1,350 billion cubic meters of gas. It was in a parlous state when the western partners inherited the polluted and badly managed Soviet-era field on which they have spent several billion dollars to turn into a well-run, profitable business.

Mindful of the damage done to Russia’s standing with foreign investors by Rosneft’s takeover of Yukos, BP’s struggles at TNK, and the forced purchase by Gazprom of the Shell-controlled Sakhalin liquefied gas venture, the government is seeking an agreed solution at Karachaganak. But it cites KMG’s stake in the other two large projects as precedents and argues the broader case for the state to hold substantial stakes in the nation’s richest resource projects.

The standoff at time of writing was accompanied by pressure from the government’s tax, environmental protection, labor and other agencies which presented the KPO consortium with a $1.3 billion cocktail of disputed tax claims and fines for alleged infractions of ecological, labor and other codes, which KPO disputes. Industry commentators, who recall similar pressure when KMG was seeking parity in Kashagan, suggest the claims could be at least partially dropped as part of a deal over the desired KMG stake.

On May 19 deputy oil minister Lyazzat Kiinov told reporters at an oil and gas conference in Paris that the government would not force an entry into the company, adding: “We are ready to repay the historical costs and contribute to our share equally with other other partners.” Mehmet Ogutcu, BG’s director for international and governmental affairs, later told Bloomberg that KPO shareholders wanted to resolve the tax and other issues with the government as soon as possible and were trying to work out a common position with regard to the future composition of the consortium.

What unsettles the international oil companies, who are about to embark on multi-billion dollar “third generation” developments, is that the Karachaganak saga is taking place against the background of increasing ambiguity about the government’s commitment to PSAs, and suggestions that the new tax laws should be universally applicable in the name of transparency and “leveling the playing field” for all foreign investors. Kazakhstan’s track record thus far indicates that changes will continue to be negotiated and ultimately be acceptable to both sides. Prime Minister Karim Massimov addresses these concerns in an interview on pages 22 to 25.

Meanwhile, the rapid development of new gas technologies, which have opened up vast shale deposits in the United States, Poland and elsewhere, is having a big impact on assumptions about future global gas prices and supply patterns -just as Kazakhstan’s associated gas output from the new deep oil fields is rising strongly.

Most Kazakh gas is associated with oil production and will be re-injected to keep up pressure in the oilfields. The government also imposes heavy fines on gas flaring, which fell by more than 60 percent in 2009 as oil companies invested in gas treatment plants to supply domestic customers and small power stations. Gas from the condensate field of Karachaganak is already exported to Orenburg in Russia for processing, and by the middle of 2010 Kazakh gas will also be exported to China via a new export line from Beinau to the Chinese border, which will also supply gas to southern Kazakhstan.

Looking further ahead, some Kazakh gas could also be exported to Europe. But this will require either building an expensive liquefied natural gas plant and liquefied gas tankers, or a gas pipeline to cross the Caspian to Baku. This investment will not be forthcoming until Europe makes up its mind whether to opt for the Nabucco project, entailing a new pipeline through Turkey to Central Europe, or Russia’s South Stream project under the Black Sea. Neighboring Turkmenistan, with vast on- and off­shore gas reserves, faces a similar dilemma.

Against this uncertain background, the government is also pressing ahead with plans to develop a domestic gas-based petrochemical industry and export value-added petrochemicals – mainly to China. ?

Anthony Robinson is a former Financial Times Moscow correspondent, and East Europe editor and originator of the Russian business newspaper Vedomosti.

SOURCE: Invest in Kazakhstan 2010

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