Kazakhstan: state-backed oil producer pressures western consortium for a share in major gas project
9 November 2010, Oil, Gas
Earlier this year, Kazakhstan's oil and gas industry underwent a shake-up when the Ministry of Finance proposed to strip foreign producers of their tax immunity by annulling long-standing production sharing agreements. This was prompted by the government's need to raise money as well as by uncertainties regarding the legality of these long-term contracts. The agreements had been inked in the 1990s when the cash-strapped country was desperate to attract capital into the politically risky operating environment, offering tax immunity and favorable contract terms.
Now, in another bid to further wrest control of Kazakhstan's hydrocarbon assets, state-backed producer KazMunaiGaz has expressed its intentions to acquire an equity partnership in the multi-billion dollar Karachaganak gas project, seeking up to a 10% stake in the field's 40-year production sharing agreement.
Discovered in 1979, Karachaganak holds half the country's proven gas reserves (an estimated 1.2 trillion cubic meters) and is one of the world's largest oil and gas condensate fields. It produces around 12 billion cubic meters (bcm) a year, which is over a third of the country's gas production. The entirety of the field's annual output is purchased by Russian energy giant Gazprom at the Kazakh-Russian border.
The project is headed up by the Karachaganak Project Operating Company (KPO), a consortium comprising BG Group, ENI, Chevron and Lukoil. The state eagerly wants a share of the field's phase III development, which is expected to boost production to 16bcm/year. In order to put pressure on KPO the government has hit the consortium with a GBP760m tax claim, while also accusing members of producing beyond their quota, overstating costs by $1.3bn between 2002 and 2007 and violating immigration laws.
Members of the consortium are now in talks with KazMunaiGaz. Should the government drop its costs overstatement lawsuit or its reinstated oil export duties, it is possible that KPO will relinquish a shareholding. If a deal goes ahead, BG Group and ENI, which each own 32.5%, are the most likely to cut their interests.
This struggle between the state and international oil companies is of course not exclusive to Kazakhstan, but is representative of the growing dominance of national oil companies globally. In 2008, KazMunaiGaz secured an 8.5% stake in Kazakhstan's giant Kashagan oil field. This came after the government used the same pressure tactics on foreign producers, with accusations of environmental violations, transfer pricing and cost overruns. Now Karachaganak, the only major field in Eurasia to have evaded state control, is likely to follow the same path.
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