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Kazakhstan: Energy Project Resumes, But Questions Remain

A settlement between Kazakhstan and its Tengizchevroil joint venture has cleared the way for a $3 billion project and saved thousands of jobs. But it is unclear whether the agreement marks the end of recent frictions with foreign investors or just a successful application of pressure by the government.

Boston, 28 January 2003 (RFE?RL) -- Kazakhstan and its biggest oil venture may have eased two months of doubt about the future of foreign investment in the country with the resumption of a $3 billion expansion project.

On 25 January, the Tengizchevroil joint venture said it had reached agreement with the government on funding work to nearly double output at the giant Tengiz field after suspending it in November. In a press release, the U.S.-backed consortium said the expansion plans "will provide significant benefits to the Republic of Kazakhstan during and after their execution."

The group said it would recall employees and contractors who were idled when a dispute over the funding began 10 weeks ago. Up to 5,000 jobs were reported to be at stake. The operations are expected to raise output at Tengiz from the current rate of 13 million tons to between 20 and 23 million per year in 2006, or up to 500,000 barrels per day.

The increase will be a major boost for Kazakhstan, which produced about 1 million barrels of oil per day in total last year, making it second only to Russia in the CIS. In their announcement, members of the decade-old venture known as TCO did not explain exactly how the dispute was resolved.

The suspension marked one of the worst rifts with foreign companies since Kazakhstan's independence. The row erupted when the state-owned petroleum company KazMunaiGaz refused to endorse plans by TCO's partners to pay off the expansion cost quickly with revenues, essentially wiping out $200 million in annual tax payments for the next three years. The government proposed instead that the project be financed with loans to keep profits and tax payments high.

After the resolution, KazMunaiGaz Managing Director Zhakyp Marabaev told the Reuters news agency that the expansion would yield $810 million to the state budget through 2005, above current tax payments. But the figures were not confirmed by the Western partners, making it unclear whether the foreign companies had given in.

In early December, Kazakh Energy Minister Vladimir Shkolnik also claimed that the problem had been settled, but TCO operator ChevronTexaco denied his account at the time. Marabaev's statement makes it appear that the companies agreed to pay even more than the $600 million in taxes that was first said to be at stake. TCO members include ChevronTexaco with 50 percent, U.S.-based ExxonMobil with 25 percent, KazMunaiGaz with 20 percent, and Russian-American LukARCO with 5 percent.

It is also unclear whether the decision to go ahead with the project was based on narrow financial issues or a broader settlement with the government, which has been gradually turning up the pressure on foreign investors over the past two years. In addition to the expansion conflict, TCO has been fighting a major environmental fine of more than $70 million for the open storage of sulfur extracted from the oil at Tengiz. There was no immediate word on whether the government would continue to press for the penalty.

Kazakhstan also recently enacted a controversial investment law that could prevent foreign investors from taking contract disputes to international arbitration. The government has tried to renegotiate dozens of foreign contracts, arguing that their tax breaks were too generous. It is too soon to say whether the TCO agreement is a sign that there is more bargaining to come or that it has come to an end.

Recent reports on other big projects in Kazakhstan have also been ambiguous. Last week, the Interfax news agency said that plans will be drafted this year for a processing plant and petrochemical facilities at the country's huge Karachaganak gas field. But the consortium for the field, which includes ChevronTexaco, said that the project would not proceed "in the immediate future."

ChevronTexaco Chairman David O'Reilly also recently said that a decision on expanding Kazakhstan's Caspian Pipeline Consortium project to deliver oil across Russia to the Black Sea is expected this year. But the 1,580-kilometer pipeline, which opened in 2001, has been subject to constant pressure from Russia, which has tried to impose value-added taxes and regulate rates on oil transit under its monopoly system, although the project was supposed to be contractually exempt.