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Kazakhstan: Government Policies Threaten Foreign Holdings

Kazakhstan's new policies toward investment have reportedly affected the value of foreign holdings in the oil-rich country. The problem stems from a series of threats to alter the terms of contracts that have already been signed. Our correspondent Michael Lelyveld reports.

Boston, 17 August 2001 (RFE/RL) -- The booming oil business in Kazakhstan has attracted foreign investors, but it is also driving many away as concerns continue over government threats to rewrite existing contracts.

A report this week in the industry newsletter "Nefte Compass" says that some foreign oil companies have been trying to sell their interests in Kazakhstan. But they have been unable to find buyers because of a pending investment law.

The draft law, which is due to take effect in January, would allow Kazakhstan to seize foreign holdings and bar appeals to international arbitration without the government's consent.

Along with the legislation, top officials have made a series of statements in recent months indicating that oil contracts would be reviewed. In June, for example, Finance Minister Mazhit Yesenbaev called for changes to existing contracts "in favor of amplifying and strengthening the positions and interests of Kazakhstan," the Interfax news agency reported.

At an investor conference in Almaty last week, Yesenbaev reportedly toned down his earlier warnings that the government would make unilateral changes, insisting that it would only try to clarify the terms.

Regardless of the explanation, the questions about legal stability seem to be having an effect.

According to "Nefte Compass," foreign investors hoping to sell their holdings in Kazakhstan have been disappointed by the response, in spite of high oil prices and Kazakhstan's rapid rise in the ranks of the world's oil producers.

The newsletter said that "with the Kazakh government continuing to irk foreign investors by threatening to renegotiate contracts, the expected flood of offers has failed to materialize."

The largest affected company seems to be Kerr-McGee Corporation, an independent exploration firm based in the United States. Kerr-McGee has been trying to sell its stake in the Caspian Pipeline Consortium and a joint venture with the powerful Kazakhoil company.

The only offer for the share in the pipeline, known as CPC, has been less than half the asking price, "Nefte Compass" said. A Kerr-McGee official contacted by RFE/RL had no immediate comment.

But interest in the CPC pipeline should be running high. After months of delay, the giant project from Kazakhstan's Tengiz oil field is scheduled to load its first tanker at Russia's port of Novorossiysk on the Black Sea on 2 September. The event is expected to launch Kazakhstan as a major oil exporter.

Kazakhstan's second mammoth oil field, the Kashagan offshore deposit in the Caspian, has been described as the world's biggest discovery in the past 30 years.

But enthusiasm of investors has been hit by the twin afflictions of contract risk and the government's order to funnel all of the country's oil exports through a single well-connected company, Kaztransoil.

"Nefte Compass" said, "Not only have they failed to dissuade the government from appointing state Kaztransoil as 'coordinator' of all pipeline exports, but they also face the prospect of having their production-sharing contracts changed against their will."

"This is a favorite topic for President Nursultan Nazarbaev, who seems convinced the republic is getting a raw deal from foreign investors and sees nothing wrong with changing the terms of their contracts," the newsletter said.

Kazakhstan's resentment appears to have risen along with signs that foreign investment in the country could prove profitable.

In the first half of this year, the nation's oil production jumped 22 percent to 17.3 million tons, Interfax reported. Kazakhoil's president, Nurlan Balgimbaev, said that output this year will reach 40 million tons, including gas liquids.

Since independence, foreigners have invested $12 billion in Kazakhstan, including $4.6 billion in the petroleum industry, Balgimbaev said at a conference last month.

The government seems to believe that investments will keep flowing in, even if it keeps profits from flowing out. Few countries have succeeded in pursuing such a policy for long.