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Kazakhstan: Various Explanations Emerge For Suspension Of Oil Project

  • Michael Lelyveld

Officials in Kazakhstan have denied that the government's conflict over a canceled oil project is connected to a worsening investment climate. But statements suggest that the pressure over funds for the Tengiz oil field may soon grow into open hostility unless a compromise is reached soon.

Boston, 21 November 2002 (RFE/RL) -- One week after the suspension of Kazakhstan's biggest oil project, explanations of the government's dispute with foreign oil companies are starting to come out.

Speaking on 19 November at a press conference in Astana, Kazakh Energy Minister Vladimir Shkolnik said last week's halt to the $3 billion expansion of the giant Tengiz oil project followed a rift over financing the cost for the next three years.

The sudden shelving of the second phase of the nine-year-old Tengizchevroil venture shocked the industry and could damage Kazakhstan's economy, which relies on the U.S.-backed project. The foreign investment at the oil field in western Kazakhstan has been the oldest and largest in the region since Soviet times. Although production is expected to continue at current levels, Western oil companies have warned that thousands of jobs will be lost without the expansion.

But Shkolnik took a tough line this week in dealing with the Tengiz consortium, led by an affiliate of U.S.-based ChevronTexaco. The minister said, "If all partners do not reach an agreement on how to finance this project...it means the project will not expand," the Reuters news agency reported.

As a partner through its state-owned KazMunaiGaz petroleum company, Kazakhstan voted against the project during a production meeting at the end of last month. Because the venture's budget required a unanimous vote, the move blocked the development, which was expected to boost output by nearly 75 percent to 440,000 barrels per day.

Shkolnik's explanation focused on technical accounting, which the government argued would cut tax payments to the nation's budget by $1 billion over five years, Interfax reported. In a statement, the government said that Tengizchevroil had shifted its accounting for expenses, using a treatment known as "accelerated depreciation," to write off the costs quickly.

But Reuters framed the disagreement differently, saying Shkolnik opposed the venture's plan to reinvest revenues in the project instead of taking profits and paying more taxes. The government wants to finance the expansion with loans instead, keeping tax payments high.

Yet a third and more detailed explanation came this week from "The Russian Energy" newsletter, published by Russia's Prime-Online news agency. The weekly cited sources at KazMunaiGaz as saying the company wanted its 20 percent share of the costs to be paid by ChevronTexaco.

The Kazakh company reportedly argued that ChevronTexaco owed the country $210 million, plus interest out of a $1 billion signing bonus for the original Tengiz contract. The U.S. company contested the figures and refused to pay the KazMunaiGaz share of the project costs, the newsletter said. It was backed by other consortium members, effectively killing the plan. Other members include U.S.-based ExxonMobil Corporation and LUKArco, a Russian-U.S. joint venture.

The account is consistent with a report last week by the website eurasianet.org that some Kazakh officials have also suggested tapping the country's $1.6 billion National Fund to finance KazMunaiGaz operations. The government has previously insisted that the purpose of the fund is to support the country's economic stability.

A ChevronTexaco official, speaking to RFE/RL on condition of anonymity, said last week that the proposal would be tantamount to paying KazMunaiGaz with money from Western oil companies, since their taxes and royalties are the sole source of the National Fund.

Analysts have been quick to blame the standoff at Tengiz on a deteriorating investment climate and a two-year struggle over a new draft investment law. The legislation could limit the rights of foreign companies to appeal government decisions affecting signed contracts. President Nursultan Nazarbaev has said the government has held dozens of meetings with foreign oil companies to renegotiate tax breaks granted years ago.

The oil companies have complained that they are being squeezed by the government and its powerful monopoly KazMunaiGaz, which includes Nazarbaev family interests. But on 19 November, Shkolnik denied that the Tengiz funding issue is part of a trend and attacked those who have made the connection.

Shkolnik said: "The decision to suspend the project and the investment climate in Kazakhstan are not at all connected. Those who link these two things are doing this deliberately in an attempt to spoil the investment climate in Kazakhstan."

At the same time, Kazakh Finance Minister Zeinulla Kakimzhanov told reporters that foreign oil companies have paid $325 million less in taxes than expected this year. He suggested that some are withholding payments to pressure the government, Interfax reported.

While the investment environment has grown increasingly cloudy for foreign oil companies in the past two years, it now appears that it may turn openly hostile unless a compromise is reached soon. According to reports in the past week, members of the consortium for Kazakhstan's giant Kashagan oil field in the Caspian Sea are also considering a delay because of similar conflicts.

In a further sign of trouble, investors in the $2.5 billion pipeline from Tengiz to Russia's Black Sea port of Novorossiisk have been hit with a series of higher costs. Yesterday in Moscow, the general director of the Caspian Pipeline Consortium, Ian McDonald, cited "alarming tendencies" including port charges, Russian tax demands, and attempts to raise tariffs, all of which were supposed to be barred by legal agreements.

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