EurasiaNet Business & Economics - Kazakhstan to Foreign Investors: It's Our Way, or The Highway

BUSINESS & ECONOMICS

KAZAKHSTAN TO FOREIGN INVESTORS: IT’S OUR WAY, OR THE HIGHWAY
Joanna Lillis 2/22/08

The Kazakhstani government’s no-nonsense approach toward foreign investors is expanding beyond the energy sector. And there are signs that Astana’s assertiveness is intimidating even major international energy conglomerates.

In recent months, President Nursultan Nazarbayev’s administration has acted aggressively to rectify what officials portray as unfair development deals. Most of these deals were struck years ago, when Kazakhstan was desperate to attract foreign investors with the expertise and resources to develop the nation’s energy abundance. Now that Kazakhstan has started to enjoy the windfall profits from its exports, officials seem reluctant to share such a large percentage of the bounty with those corporations that, in some cases, overcame significant technical hurdles to make production possible. The highest-profile case involving a revision of contract terms in Kazakhstan’s favor concerned the Kashagan oil field. [For background see the Eurasia Insight archive].

Astana’s success in forcing the changes in Kashagan development terms seems to have emboldened officials. They now make no secret of their desire to roll back the influence of foreign investors in the country. In the latest move, coming on February 21, officials announced that they would no longer negotiate production sharing agreements, or PSAs, which tend to be favored by international energy conglomerates because they tend to clearly outline taxation obligations. Prime Minister Karim Masimov said that all existing PSAs between Kazakhstan and foreign entities would be honored. The rule would only apply to new investors, he added.

On February 19, the government seemed to expand the scope of its "push back" when it warned international steel giant ArcelorMittal, which owns mines in Kazakhstan, that its license was in danger of being revoked.

"The owner has been warned that if measures are not taken to assure safety the question of revoking rights to subsoil use will be raised," Emergencies Minister Vladimir Bozhko � who heads a commission investigating a January accident at ArcelorMittal’s Abay mine which killed 30 workers - told the cabinet. [For background see the Eurasia Insight archive].

Bozhko’s remarks were backed up by tough talk from Prime Minister Masimov. "This is not the mid-90s, when everything was complicated and we invited investors in on any conditions," he said in remarks quoted by Kazinform news agency.

Addressing a February 14 cabinet session, Masimov promised that 2008 would see deals being broken off with energy firms that fail to meet their contractual obligations. In case anyone was in doubt about the firmness of the government’s intentions, Masimov announced that he had the full support of President Nursultan Nazarbayev, who attended the 14 February government session.

Masimov suggested that Kazakhstan’s success in the Kashagan case set a precedent for future government action. "This work will be continued," Masimov told Nazarbayev. "Your order on returning fields from un-conscientious subsoil users and owners of land plots will be carried out in the course of this year."

The remarks, carried on the government website, came on the heels of Masimov’s threat, issued February 7 during an Energy and Mineral Resources Ministry meeting, to take oil-and-gas fields away from investors who violate their terms and "to return [the fields] to the bosom of the state."

Energy Minister Sauat Mynbayev added to the pressure on investors by stating during the session that Kazakhstan had abrogated nearly 100 contracts in 2007. Government monitoring of 831 firms found that just over half were fully meeting their financial obligations, Mynbayev said, while 97 companies were meeting less than a third of them.

"These 97 contracts have to date been broken off. Notification has been sent to a further 182 [companies] about violations of contractual obligations and licensing conditions," Mynbayev said. The ministry did not immediately respond to a request for clarification about which companies were implicated, but Kazakhstani analysts suggested most were probably minor subcontractors.

It was not immediately clear whether the contracts were revoked in line with a law that came into force in 2007, allowing Kazakhstan to unilaterally break off contracts with foreign companies if national interests are at stake.

With a moratorium now in place on agreeing to energy deals until Kazakhstan adopts a new Tax Code later this year, Masimov hinted at the 14 February government session that investors can expect a tougher fiscal environment. "We need to define the rules of the game sufficiently clearly in the new Tax Code," he said, adding that the current list of 170 tax breaks will be cut and the tax burden on the non-raw materials sector will be reduced � raising the possibility that hydrocarbon developers will face higher taxes.

All the tough talk from the government may be prompting some foreign companies to adopt an appeasement strategy. For example, the Chevron-led Tengizchevroil consortium that is developing oil and gas deposits in western Kazakhstan agreed not to raise the price at which it sells gas to the Atyrau Region, despite a contractual clause allowing it to increase the tariff every six months. The decision - made in response to an appeal from local authorities � appeared to indicate that the firm was anxious not to alienate the government in the current jittery environment.

In addition, Tengizchevroil is embroiled in an environmental dispute with the government. On February 19, Minister of the Environment Nurlan Iskakov called on the consortium to stop the practice of flaring gas, and to act faster to dispose of sulphur stockpiles, which are a byproduct of oil extraction and a potential environmental hazard.

Tengizchevroil representatives say that the consortium has already taken action to respond to government concerns, emphasizing that it sold off 24 percent more sulphur in 2007 than in the previous year. Overall, sulphur stockpiles were substantially reduced in 2007. The same year, the government slapped the consortium with a roughly $300 million fine over for alleged mishandling of the stockpiles. Consortium representatives vigorously deny that any laws have been broken.

In considering the ongoing dispute, independent analysts note that the Kazakhstani government raised environmental concerns about Kashagan operations before forcing the consortium developing that field to make substantial financial concessions. [For background see the Eurasia Insight archive].

As Central Asia endures its worst winter in decades, energy security is top of the government’s agenda. "This winter has shown what a fine line we have trodden, and it is not known how this will end in the coming years," Masimov said on February 7 as he gave his approval to a bid for budget financing to build a gas pipeline linking western and southern Kazakhstan between Beyneu and Samsonovka, near Shymkent. This will allow gas to be sent from western fields to the populous southern region, which currently relies on gas from Uzbekistan, leaving it vulnerable to supply cuts. Though Kazakhstan has been spared the critical energy shortages faced by some neighboring states this winter, the government is keen to shore up infrastructure to reduce its reliance on foreign supplies. [For background see the Eurasia Insight archive].

Plans have also been mooted to develop oil refineries in Atyrau, Pavlodar and Shymkent and construct a new oil refinery and a new gas refinery at the Karachaganak field. The $1.6 billion gas refinery project will have an initial annual capacity of 5 billion cubic meters, rising to 10 billion cubic meters.

State attempts to boost its presence on energy markets are not limited to the oil and gas sector. Two days after London-listed copper giant Kazakhmys announced its acquisition of Kazakhstan’s largest power station, Ekibastuz, on February 5, Masimov ordered the state to open talks to secure itself a stake. Officials are also pushing ahead with plans to build a new thermal power station at Balkhash and a nuclear power plant in the western city of Aktau.

Editor�s Note: Joanna Lillis is a freelance writer who specializes in Central Asia.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

The views expressed in this publication do not necessarily represent the position of the Open Society Institute and are the sole responsibility of the author or authors.