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Kazakhs tighten grip on Karachaganak

Kazakhstan, which is seeking to strengthen its influence over the scale and pace of development of its natural resource projects, appears to have the onshore Karachaganak natural gas venture in its sights after driving through a shake-up at the offshore Kashagan deposit.

Late last year, in the context of a summit meeting between President Nursultan Nazarbayev and his Russian counterpart Dmitry Medvedev, Kazakhstan's Minister of Energy and Natural Resources Sauat Mynbaev implicated decision-making procedures within the consortium running Karachaganak for delays in expanding production at the venture.

Mynbaev went on last month to warn that Western consortia should expect to lose their exemption from domestic taxes when new ones are introduced soon. Adding to the sense that the government is re-evaluating the role of overseas partner, Daulet Yergozhin, head of the tax committee in the Finance Ministry, remarked last week according to Reuters: "We have analyzed PSAs [production sharing agreements] signed earlier and there are some questions … regarding the legality of some contracts."

Although Yergozhin did not name the Karachaganak consortium, prosecutors revealed that it was fined US$210 million for environmental violations from 2008. Bloomberg News reports that tax claims are being prepared against the consortium for the year 2004 to the amount of almost $1.4 billion: $615 million in back taxes, $440 million in late payment penalties, and $315 million in fines.

Meanwhile, the consortium is seeking to recover over $1 billion already paid in export duties while undertaking negotiations with the government to sell it a 10% interest in the field in order to settle the dispute. In November 2007, Nazarbayev approved amendments to the Kazakh law governing the development of hydrocarbon energy deposits and the participation of foreign entities in that development. These were implemented in early 2008. (See Kazakhstan announces new energy directions, 13 February 2008.)

An explicit purpose of the new strategy is the "recovery of balance of the country's interests" in "strategic objects". The government gave itself authority simply to cancel contracts if foreign partners do not meet their obligations, or to alter the contracts if it decided that the natural resource development and use ran counter to the country's national security.

At the time, these changes seemed directed against the international consortium developing the offshore Kashagan deposit. Indeed, the concerns then invoked were the same as those that earlier complicated the Tengiz development: delays in implementing production plants, increasing costs and disputes over how to cover them, and also allegations of violations of environmental legislation.

In the event, the Kashagan exploration consortium restructured itself, giving the national monopoly KazMunaiGaz (KMG) a plurality stake marginally larger than any of the other partners and providing for the entry into operation of a successor production consortium on such a basis. While KMG is not a joint operator of the project, it does provide the personnel for the permanent secretariat of the new consortium's executive, responsibility for which will rotate among its other corporate members.

Members of the Kazakhstan's government are now initiating moves likely to bring about a similar result for the Karachaganak natural gas deposit. Discovered in 1979, with production beginning in 1984, it has always sent its output to the gas processing plant in Orenburg. This route, never an international political problem while the Soviet Union existed, now crosses the international boundary between the independent states of the Republic of Kazakhstan and the Russian Federation.

With the opening of the Kazakhstan-China natural gas pipeline last year and the prospect of its expansion, Astana is no longer necessarily in thrall to Moscow to find a market for Karachaganak gas. (See Four-way street in Kazakhstan, Asia Times Online, September 17, 2009.) And Beijing has already been present for the better part of a decade in the energy industry in northwest Kazakhstan.

Phase Two of the Karachaganak development began in 2000 and was completed in 2004, but further development has since stagnated, at slightly over 7 billion cubic meters per year. The planned Phase Three, which would more than double that, has been on hold because Russia has not upgraded and expanded the Orenburg plant, as it had agreed in principle with Kazakhstan to do even in 2005.

Five years later, there is still no binding and official joint venture agreement between Gazprom, the Russian gas monopoly, and KMG. Meanwhile, the Financial Times reports that KMG claims that the postponement of investment, for which it blames the consortium, has almost doubled the cost of Karachaganak Phase Three to $14.5 billion from the earlier estimate of $8 billion.

This echoes the government's earlier complaint about the Kashagan consortium, a concern that led to further revisions in the Kazakh legal regime governing the development of hydrocarbon energy deposits in the participation of foreign entities in that development. KMG also played a role in re-organizing the Tengiz consortium's investment plans, after the latter had also came under juridical pressure for environmental violations.

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URL:  http://www.robertcutler.org/blog/2010/03/kazakhs_tighten_grip_on_karach.html
First published in Asia Times Online, 5 March 2010.

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