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Kazakhstan: Western Fuel Investors Face Further Setbacks

  • Michael Lelyveld

A shutdown of oil and gas production is the latest problem for Western companies in Kazakhstan. Officials say their operations may be suspended until next year because of a double-taxation dispute involving Russia.

Boston, 29 October 2001 (RFE/RL) -- Production is stalled at one of the world's biggest gas and oil fields, while Western companies complain that they are caught in a tax squeeze between Russia and Kazakhstan.

The trouble at Kazakhstan's huge Karachaganak field is just the latest snag for the country's foreign firms, which have already faced months of delays in opening a new export pipeline and the pressure of legislation that may put their investments at risk.

The U.S.-based ChevronTexaco oil company told analysts recently that operations at Karachaganak may be stopped until 2002 because both Kazakhstan and Russia are applying value-added taxes to the field's output. The giant deposit in western Kazakhstan on the border with Russia has been a source of contention for at least eight years.

The Reuters news agency said the field has been shut down for maintenance since mid-September. But it has yet to reopen because of the tax dispute.

The problem is seen as a blow to Britain's BG, the former British Gas, which holds 32.5 percent of the Karachaganak Integrated Organization, or KIO consortium. Italy's ENI also owns 32.5 percent, while ChevronTexaco controls 20 percent and Russia's LUKoil has 15 percent.

Attention has focused on the problem for BG, which relies on Karachaganak for one-fifth of its worldwide production. But the stoppage may be even more remarkable for ENI because of its influence in both Kazakhstan and Russia.

The company's Agip subsidiary is the operator of Kazakhstan's giant Kashagan offshore project in the Caspian Sea, which has been called the world's largest oil discovery in the past 20 years. ENI is also Russia's partner in the critical Blue Stream project to pipe gas across the Black Sea to Turkey with the deepest underwater line in the world.

The double-tax trap may be a sign that if trouble can happen to such big investors in Kazakhstan, it can happen to anyone. Karachaganak is the country's third mammoth field to be developed after Kashagan and Tengiz, which is also being developed by ChevronTexaco.

Karachaganak exports its products through Russia, either by pipeline or for processing at the Russian refinery at Orenburg. Earlier this year, KIO approved a $4.2-billion budget for its current phase of development, the Interfax news agency said. The field produced 4.5 million tons of petroleum in 2000.

Like many of the big projects in the region, Karachaganak has a long, tortured history. The field was exploited in Soviet times, but output dropped sharply after 1991. Russia's gas monopoly Gazprom tried but failed to gain a share in the western project to restore production levels. It is unclear whether the current dispute is related to any lingering ambitions for control.

BG and ENI won a tender to negotiate with Kazakhstan for the project in 1992, but a final production-sharing agreement took nearly six years to conclude. Since then, cost estimates have soared. The KIO consortium began drilling its first new well only last May.

The shutdown follows a series of other frustrations for investors in Kazakhstan this year.

Foreign oil companies suffered a four-month delay in opening the Caspian Pipeline Consortium connection between Tengiz and Russia's port of Novorossiisk in the Black Sea, largely because of wrangling with the Russian pipeline monopoly Transneft. The first tanker was loaded on 15 October, although the official ceremony has yet to take place.

Despite Kazakhstan's bright prospects as an oil producer, foreign companies have also been battling a new investment law that is aimed at ending preferential tax breaks and reducing investors' ability to seek international arbitration in case of disputes.

After months of negotiation, Foreign Minister Yerlan Idrisov pledged to foreign investors on 10 October that the government would honor the terms of their existing contracts. In September, President Nursultan Nazarbaev called for all agreements to be reviewed.

But a copy of the latest draft law obtained by RFE/RL shows few changes from a controversial version circulated last April. Unlike Kazakhstan's 1994 investment law, the legislation that would take effect in January still seems to require the government's agreement to take disputes to international arbitration.

Idrisov called the legislation "more reserved, more smooth, than the current law," according to the publication "Kazakhstan Today".

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