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Kazakhstan: Political Questions Increasing Risks Of Oil Investment

  • Michael Lelyveld

Western oil companies have announced new estimates for Kazakhstan's giant Kashagan field that may officially make it one of the world's biggest discoveries in the past 20 years. But rising political tensions and concerns about contracts have combined to increase the risks along with the rewards for foreign investment.

Boston, 2 July 2002 (RFE/RL) -- Western companies have confirmed the huge size of the Kashagan oil field at a time of uncertainty about the political and investment climate in Kazakhstan.

The Agip KCO consortium for the giant field in the northern Caspian announced Friday that its recoverable reserves will reach 7-9 billion barrels of oil. The U.S.-based ExxonMobil Corporation says the estimate, which was required after a two-year contract period, means the deposit is officially considered commercial.

The estimate is only one of many for Kashagan since the first seismic exploration began in 1993 and test drilling started in 1999. Over the years, there has been little doubt about the commercial potential of Kashagan, which has been ranked as one of the biggest oil discoveries of the past 20 years.

The British newspaper "Financial Times" cited a Deutsche Bank analyst as saying the shallow-water field could be larger than Alaska's Prudhoe Bay and equal to about one-third of the output from the North Sea so far. The consortium statement said total reserves at Kashagan are likely to be 38 billion barrels.

Lyazzat Kiinov, head of the state-owned Kazmunaigas petroleum company, said the figure could be revised upward, Interfax reported. Kazakhstan has promoted estimates as high as 50 billion barrels. Kazakhstan will earn $150 million to $200 million a year from the venture starting in 2006, Kiinov said.

The numbers have been a source of curiosity and controversy. In April, Gian Maria Gros-Pietro, then-chairman of Italy's Eni oil company, told a conference in Almaty that the entire Caspian contained only 7.8 billion barrels of oil, of which Kazakhstan held 5.4 billion. Although Eni is the parent of Agip, the operator of the Kashagan consortium, it has given no reason for the lower figures.

In January, Agip also issued a press release claiming that the field's reserves were only about 1.8 billion barrels, an even lower estimate that Eni later denied.

The various figures may matter less than the commitment of companies to invest in Kazakhstan, which has been the scene of growing tensions over politics and business, as well as resources like Kashagan and the Tengiz oil field. Foreign firms invested nearly $3.8 billion in Kazakhstan's mineral-and-oil sector last year, according to the government.

Increases in investment were expected to bring Western values of democratization, but the evidence this year has not supported the case.

Since the emergence of the opposition movement Democratic Choice of Kazakhstan last November, concern has spread over repression of dissidents and the press. Two of the party's founders face government charges of embezzlement. Last week, Former Energy Minister Mukhtar Abliyazov awaited the verdict of Kazakhstan's Supreme Court, while former Pavlodar Governor Ghalymzhan Zhaqiyanov remained hospitalized under suspicious circumstances.

Kazakhstan's parliament also passed a new law last week that could abolish many political parties, despite criticism by the Organization for Security and Cooperation in Europe. International oil companies are often oblivious to such problems in countries where they invest. But there are signs that they, too, are struggling against the arbitrary exercise of power.

Last week, Foreign Minister Qasymzhomart Toqaev repeated assurances that the government will not reopen contracts that have been signed with foreign companies, Interfax reported. Toqaev was referring to a draft investment law that was originally scheduled to go into effect at the start of this year. The law has been stalled for months by objections.

Foreign investors have been fighting the measure because it would overturn protections that allow them to take disputes to international arbitration. Toqaev's statement was apparently needed because many previous assurances by President Nursultan Nazarbaev and other officials have not put the matter to rest.

Last December, Nazarbaev disclosed that 47 foreign companies had been approached to renegotiate their royalty payments to the government. Officials have complained that the government granted breaks that were too generous in the early days of independence.

In April, State Revenues Minister Zeynulla Kakimzhanov also took the pledge to preserve "the stability of accords." But he said stability does not rule out amendments that are "dictated by life," the "Almaty Herald" reported.

At an April conference in Almaty, Daniel Witt, president of the International Tax and Investment Center business group, told government officials that "the contract-stability question is hanging over Kazakhstan like a black cloud" for future deals.

Despite the misgivings, foreign companies have been willing to increase their investments because of the enormous opportunities represented by rich resources like Kashagan. But it is questionable whether they can ignore the political tensions in the country indefinitely as investments face risks on two fronts at once.

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