Accessibility links

Kazakhstan: Western Companies Avert Shutdown Of Oil Production

  • Michael Lelyveld

A tax problem that threatened to shut down oil and gas production in Kazakhstan has reportedly been solved after Russia agreed to suspend its levy on exports. The dispute over double-taxation has been the latest problem for Western companies in Kazakhstan.

Boston, 30 October 2001 (RFE/RL) -- Western companies have reportedly avoided a prolonged shutdown at one of the world's biggest oil and gas fields following a last-minute agreement to avert a tax squeeze between Russia and Kazakhstan.

The publication "Kazakhstan Today" reported on 29 October that Russian Deputy Prime Minister Aleksei Kudrin agreed not to impose a value-added tax, or VAT, on exports of gas condensates from Kazakhstan's giant Karachaganak field near the border with Russia.

Officials of U.S.-based ChevronTexaco said recently that operations at the field would be halted until next year because both Kazakhstan and Russia were imposing a VAT on the exports.

The Reuters news agency said the field has been closed for maintenance since mid-September. But it has yet to reopen because of the tax dispute. According to "Kazakhstan Today," production is expected to resume soon. The huge deposit in western Kazakhstan has been a source of contention for at least eight years.

The trouble at Karachaganak has been the latest for 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 double-taxation was 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 have been 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 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.

"Kazakhstan Today" said the controversy was the result of recent technical changes in Kazakhstan's tax law by valuing goods according to the country of destination rather than the country of origin. No decision had been made on how to treat the gas condensates, or liquids, apparently leading to double-taxation and unacceptable cost.

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 dispute was 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 tax threat followed 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 which is aimed at ending preferential tax breaks and reducing their 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 "Kazakhstan Today."