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Kazakhstan: Investors Take Exception To Investment Law

Objections to a draft investment law in Kazakhstan marked the country's largest annual gathering of oil executives last week. The public criticism suggests that the struggle against government pressure is entering a new phase after private negotiations for the past two years.

Boston, 8 October 2002 (RFE/RL) -- Kazakhstan's long struggle with foreign investors broke into the open last week at a forum usually reserved for promoting the country's oil industry.

Speaking at the 10th annual Kazakhstan International Oil and Gas Exhibition in Almaty, foreign oil executives and officials made a rare public show of concern over government pressure to renegotiate their contracts. The oil companies have been waging a largely silent battle against a new draft investment law for the past two years.

Despite assurances from top government officials that they will respect the terms of the huge deals that Kazakhstan has signed in the past decade, others have used the threat of the new law to seek concessions in dozens of cases. Officials have argued that they are trying to make up for generous tax breaks that were granted in the early days of independence and assure equal opportunity for Kazakhstan's companies.

The legislation would replace Kazakhstan's 1994 law that guaranteed foreign investors the right to take disputes to international arbitration bodies. The draft law is ambiguous about whether government consent will be needed for arbitration, raising fears that foreign companies will be barred from appeals beyond Kazakh courts if the government tries to push them too hard.

Kazakhstan has also put pressure on investors over the pace of local hiring and contracting. Some companies have responded by accelerating their hiring programs. But while most have preferred to mount their resistance to pressure through private channels and business organizations, last week's Kazakhstan International Oil and Gas Exhibition, or KIOGE, seemed to suggest a more coordinated and public stand.

Speaking at the conference, James Taylor, head of U.S.-based ExxonMobil's unit in Kazakhstan, said, "In order to justify large-scale investment, the industry needs the assurance of a stable and predictable investment climate," Reuters reported. Taylor added "that means no arbitrary enforcement of rules and regulations, transparent and stable fiscal arrangements...and, above all, sanctity of contracts."

Reuters also quoted Mike Naylor, vice president of Royal Dutch/Shell's Kazakhstan affiliate, as saying that "Kazakhstan could supply between 2 and 4 percent of global oil consumption in future, but it will largely depend on its investment climate, which is reflected in contract terms."

Steven Mann, the U.S. adviser on the Caspian Sea, added a warning about the new law, saying that "there are certain practices and proposals which threaten to take Kazakhstan in the wrong direction," AP reported.

Mann said, "There is hot competition for investment dollars everywhere, especially in the depressed economic environment." He added, "Reconsideration of contracts is a clear disincentive to investment." Mann also voiced concern about efforts to force companies into more rapid hiring of local contractors.

Despite government pressure, Kazakhstan has been successful in drawing a large share of the foreign investment in the Commonwealth of Independent States to its energy sector. ExxonMobil's Taylor said direct foreign investment in the country had reached $13 billion, citing U.S. Department of Energy figures, while some estimates put the figure as high as $20 billion.

Top attractions have been the giant Tengiz and Kashagan oil fields. In July, the Department of Energy said that estimates of Kazakhstan's proven oil reserves range from 5.6 billion to 17.6 billion barrels of oil. Last year, the country produced nearly 40 million tons of crude oil and condensate, equal to 870,000 barrels per day. Kazakhstan's energy output jumped by 15 percent in the first eight months of this year, according to the country's State Statistics Agency.

But despite all the investment that has already taken place, Kazakhstan may need even more. In May, Richard Matzke, a former ChevronTexaco vice president, said that $6 billion should be invested in the oil-and-gas sector annually. Kazakh Prime Minister Imanghaliy Tasmagambetov put the figure even higher, saying that total investment needs would reach $200 billion, Interfax reported.

The comments at the KIOGE conference seem to make clear that the oil companies now see the government's measures as enough of a risk to raise the prospect of channeling their future investments elsewhere. The new law was supposed to take effect at the start of this year but has been held up repeatedly by redrafts and negotiations. The draft law would allow recourse to international arbitration courts "as agreed by the parties," raising doubts about whether the government would agree.

Kazakh officials have contributed to the worries with statements that seem as ambiguous as the new law. In July, Foreign Minister Qasymzhomart Toqaev was asked by the Internet website about the legislation, as well as the repeated visits that local tax authorities and health inspectors have made to foreign companies.

Toqaev said the government is committed to its contracts. But he also said: "At the same time, there are unfortunately some government agencies that undertake the kinds of actions you mentioned. My recommendation is that foreign companies respect the laws of Kazakhstan and carry on activities consistent with the laws. If there is a problem, then they need to find [a] proper mechanism for consultations and negotiations."

What Toqaev did not say is that the government would continue to regard international arbitration bodies as a "proper mechanism." Foreign companies now seem to see no alternative to a public dispute over the law itself.