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Kazakhstan: Heavy Fine Levied Against Tengiz Oil Field Developer

The developer of Kazakhstan's Tengiz oil field has reportedly lost an appeal against a $72-million environmental fine. The Supreme Court ruling may raise new questions about the continuing conflicts with foreign firms, which have been fighting the terms of a new investment law for more than a year.

Boston, 29 March 2002 (RFE/RL) -- Kazakhstan's biggest oil venture is facing a huge environmental fine as questions continue about the country's relations with foreign investors.

On 27 March, Kazakhstan's Supreme Court denied an appeal of the $72-million penalty imposed on the developer of the Tengiz oil field, the Interfax news agency reported. The Tengizchevroil joint venture was charged in February with causing environmental damage by storing 5 million tons of sulphur in the western Kazakhstan region of Atyrau.

Kazakhstan's Ministry of Natural Resources and Environmental Protection argued that the sulphur is classed as industrial waste under a recently issued government regulation. The ministry accused Tengizchevroil of creating a public health hazard with the piles of sulphur near the oil field, Interfax said.

The company argued in its appeal that the sulphur is a raw material or product, not an industrial waste. The court did not agree. The venture has been processing the high-sulphur petroleum from Tengiz for years to make it suitable for export.

Tengizchevroil is the oldest oil venture in Kazakhstan and its biggest taxpayer, with operations since 1993. The company produced 12.5 million tons of oil at Tengiz and other fields in the country in 2001. Fred Gorell, a spokesman for ChevronTexaco Corporation in the United States, which owns 50 percent of Tengizchevroil, insisted that the material in Atyrau is not hazardous.

In a phone interview, Gorell told RFE/RL, "There is no waste material stored at the Tengiz field." Sulphur is stored in the same way at ChevronTexaco operations in the United States and Canada, Gorell said, adding, "It's benign."

In a later, written statement yesterday, Tengizchevroil said it is "disappointed" by the decision of a member of the Kazakhstan Supreme Court to uphold the environmental rule. The company said it is examining the decision "to determine our next steps." It also argued that "there is no evidence of any significant environmental impact" from its storage of sulphur.

According to earlier reports, the venture has been working on several plans to handle the sulphur, which accumulates at the rate of 4,500 tons per day, according to DPA news service. The company has found few buyers for the substance in its lump and granular states. Since October, it has been building a plant to turn the sulphur into coated pellets for export. Gorell said the company is investing $40 million to $50 million in the plan in 2002.

The fine may be the largest levied against a Western oil firm in a Commonwealth of Independent States (CIS) country since the Soviet breakup. Interfax quoted the press service of the Kazakhstan Environmental Ministry as saying that Tengizchevroil has not exhausted its appeals, but it is unclear what the recourse from the Supreme Court ruling would be.

Despite its history of good relations with the government, Tengizchevroil has been feeling pressure over its operations in Atyrau. In May, a special commission of lawmakers visited the region following complaints of health problems and high infant mortality rates in the nearby village of Sarykamys, Kazakhstan television reported.

In November, Kazakhstan's state oil and gas company said it would pay $5.7 million, or half the cost of relocating the residents of Sarykamys. Tengizchevroil had agreed to pay the rest, Interfax said. Gorell disputed the account, saying, "There are no environmental conditions involving Tengiz that have resulted in the relocation of anybody."

The akim, or governor, of Atyrau pressed for the designation of the sulphur as industrial waste and was backed by the government in imposing a fine. Tengizchevroil said the Supreme Court decision related only to the imposition of a storage fee. But the blame may be further complicated by the government's knowledge from the start that sulphur would be a by-product of oil development.

While ChevronTexaco's affiliate in Kazakhstan is the operator of Tengizchevroil, Kazakhstan owns 20 percent, which may put it in the curious position of fining itself, if the costs are distributed. The remaining shares in the venture are owned by U.S.-based ExxonMobil and the Russian-British firm LUKoil-BP.

The dispute may also be hard to separate from a series of recent frictions between Kazakhstan and foreign investors. The government has been preparing a new investment law for more than a year, despite strong objections from Western oil companies and business interests.

The law would curb the rights of foreign firms to take disputes outside Kazakhstan courts to international arbitration. President Nursultan Nazarbaev and other officials have stated repeatedly in recent months that all existing contracts will be honored, after suggesting in 2001 that the terms would be reviewed.

But investors remain wary. In February, foreign companies appealed the entire draft law to the International Center for Settlement of Investment Disputes, according to a Kazakhstan television report, relayed by the BBC.

Kazakhstan officials have argued that changes in contracts are needed to make conditions equal for local businesses and to compensate for reduced tax rates.

Most recently, on 26 March, Foreign Minister Qasymzhomart Tokaev assured members of the American Chamber of Commerce in Kazakhstan that signed contracts "would not be reconsidered even despite the demands from many Kazakh ministries and agencies." The statement may have been less than reassuring, since it cited the pressures within the government itself.

Government officials have said that many foreign companies have been approached to renegotiate terms of their contracts.

Under the circumstances, it may be harder to evaluate the trouble for Tengizchevroil and the charges of environmental damage, particularly since the industrial waste rule was apparently issued years after the company's contract with the government was signed.

But it seems clear that the trend toward more difficult relations with foreign investors is continuing in Kazakhstan. Officials have said that enactment of the draft law on investment is likely in the spring.