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Kazakhstan: Investors See Risks In Oil-Field Development

Excitement is rising over the Caspian Sea's largest oil field, the Kashagan deposit off the shore of Kazakhstan. But environmental problems and political pressures have raised the risks for foreign firms, prompting complaints on both sides. Our correspondent Michael Lelyveld reports.

Boston, 18 July 2001 (RFE/RL) -- The biggest oil discovery in the Caspian Sea region may also prove to be one of its toughest tests.

Over the weekend, the "Financial Times" published a detailed report on the many problems facing the international project to develop Kazakhstan's Kashagan oil field. Industry officials have said the deposit may be the largest find anywhere in the past 20 years.

Unlike Kazakhstan's giant onshore project at Tengiz, the Kashagan field is located in shallow water. The consortium known as OKIOC, which is developing the resources, has taken extraordinary steps to guard against damage to the fragile environment.

Because the area is home to endangered sturgeon and seals, the oil companies have been scrupulous in their precautions against spills and releases of drilling wastes. According to the report, the company has also taken out a record-high insurance policy with coverage of $500 million in case of accident.

Winter ice jams make the operations treacherous in the northern Caspian, where the average depth is only 3.3 meters, the "Financial Times" said. The changing level of the waters also lengthens the distance between the drilling rig and the shore unpredictably.

But the problems are more than just environmental. Western oil companies have been subject to the capricious currents of conflicting pressures from Kazakhstan.

Earlier this year, President Nursultan Nazarbaev put heavy pressure on the OKIOC consortium members to guarantee that the first oil would start to flow from Kashagan in 2005. At the same time, the companies came under equally heavy fire after a minor spill of some 200 liters of oil from the drilling rig.

The government appears to be seeking speed without haste in realizing Kashagan's economic windfall, while it stands ready to blame the oil companies if anything goes wrong.

The consortium's problems have been a small part of those faced by other foreign ventures in Kazakhstan during the past year. Some have been subject to charges of tax evasion and labor violations, as well as environmental offenses.

Judging the validity of each allegation has been hard, since oil companies have frequently been subject to similar accusations in countries around the world. But it is clear that the atmosphere for foreign investment in Kazakhstan has been growing more difficult.

Foreign oil companies in Kazakhstan have struggled for years to deal with the influence of state monopolies and politically powerful groups. But frictions this year appear to be rising even faster than interest in Kashagan.

The Western press has started noticing the trend following reports in April on a new draft investment law that is planned to take effect at the start of next year.

The law would make it easier for Kazakhstan to renationalize assets and harder for foreign investors to bring appeals to international arbitration. President Nazarbaev and other top officials have openly called for reviewing the terms of previously-signed "subsoil" contracts, which are now seen as doing too little for Kazakhstan.

The government does not seem to be concerned that its threat to rewrite contracts unilaterally could harm future investment in the country.

Last week, "The Washington Times" quoted unnamed oil industry officials who voiced exasperation with the government and the investment environment in Kazakhstan.

One company executive said, "Who is making money in this country?" The official added, "Nobody in the oil industry is -- that's for sure. We're spending money, not earning it."

The paper also cited comments by the president of the European Bank for Reconstruction and Development, Jean Lemierre, who warned that Kazakhstan is losing opportunities because investors face "unnecessary obstacles." Lemierre said, "The patience of foreign investors is not endless."

So far, the rewards of Kashagan have made the venture worth the risk. But oil companies may have to endure years of pressure before their investment pays off.