BUSINESS & ECONOMICS
Deirdre Tynan
11/13/08
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The energy sector, Kazakhstans erstwhile reliable engine for growth, has stalled out. The trouble is related mostly to the global economic crisis, which has helped to spur a rapid decline in energy prices in recent weeks. But a backlash factor also may be at work, in which international energy companies start to push back against the hardball tactics that Kazakhstani leaders have been employing in recent months.
Kazakhstans rapid economic growth has been highly leveraged, leaving the country far more exposed than other Central Asian states to international pressure. [For background see the Eurasia Insight archive]. Kazakhstani officials have taken quick action to contain the economic danger, but sudden uncertainty in energy prices have raised longer term concerns in Astana and Almaty. [For background see the Eurasia Insight archive].
Kazakhstani development plans suffered a significant setback on November 4, when
BG Group plc, one of the largest investors in the Karachaganak hydrocarbon field in north-western Kazakhstan, announced that it was postponing Phase III development of the site.
Phase III was expected to come online in 2012 and raise production to 16 billion cubic meters of gas a year at a cost of $8 billion. The company suggested the delay was a tactical move aimed at decreasing costs. BG shares have tumbled in November after the conglomerate reportedly earned 3 billion euros in profit during the first three quarters of 2008.
Analysts suggest the company, as it reshapes its strategies in light of the global economic downturn, senses an opportunity to register its dissatisfaction with an unpopular oil export duty introduced in May, 2008, and with the Kazakhstani governments increasingly transparent ambitions to gain a stake in the entirely foreign-owned field. [For background see the Eurasia Insight archive].
Under the current production sharing agreement (PSA), which was signed in 1997 and runs for 40 years, BG Group and Eni of Italy each have 32.5 percent stakes in Karachaganak, while Chevron has 20 percent and the Russian giant Lukoil possesses the remaining 15 percent. There has been widespread speculation that state-owned energy company KazMunaiGaz (KMG) was seeking up to a 20 percent stake in the project, to be carved out of the shares held by the existing partners.
KMG set the precedent for such a move earlier this year when it doubled it holdings in Kashagan, another Caspian oilfield, to 16 per cent after protracted negotiations with a consortium of foreign companies. [For background see the Eurasia Insight archive]. However, the game has become ever more complex for the Kazakhstani side as the global financial crisis has deprived Astana of much of its leverage.
BG Group and KMG are currently locked in high-level discussions about the future of Karachaganak. "We have initiated discussion with KMG around alternative phasing of project expenditure to ensure that the large capital commitment associated with the Karachaganak Phase III project is not made at the peak of the cost cycle. These moves are expected to secure improved returns for both the partners and the Republic of Kazakhstan," BG Group Chairman Frank Chapman said at an early November news conference.
"Were working on a number of rephrasing options and at the moment we have not selected which of those options and agreed which of those options we will pursue." Chapman continued. "Its not about pushing back all the investment. Its about spreading out that investment and rephrasing it." Chapman gave no indication of what the new timetable for Phase III development would look like. He also denied that Kazakhstans regime influenced the companys decision regarding Phase III development but reiterated his unhappiness with the oil export tax imposed by the Kazakh government on foreign exporters in May. [For background see the Eurasia Insight archive]. "We are absolutely firmly of the view that we do not have to pay, or we are not liable to pay this because of tax stabilization clauses in the FSPA," he said.
Michael Dennison, a global risks analyst with Control Risks, an independent consultancy group based in London, described the oil tax as "defensible and logical" from the Kazakh point of view given the spike in oil prices earlier this year. The Kazakh government felt that the terms of many PSAs signed in the late 1990s were "too generous," and the rapidly rising price of energy earlier this year prompted Astana to employ tough tactics in order to enforce a correction.
From the investor point of view, Dennison said, "the problem ? is that theyve not had consistency or certainty from the government for a period of about six or seven years."
"They [international companies] have gotten the feeling that the government keeps moving the goal posts and theyve gotten a bit tired," Dennison continued. Clearly the operating environment has tightened up as a result of that and the taxation environment."
Dennison suggested that foreign companies will not be able to completely turn back the clock to the late 1990s. But he hinted that the current difficulties in the energy sphere could end up encouraging both sides to reach a compromise. "Is there money to be made in the Kazakh oil and gas sector? Yes. But margins are going to be tighter and they [international investors] are going to have to accept that KazMunaiaGaz will be a major partner in their operations. So in that sense things have changed," Dennison said.
Editor's Note: Deirdre Tynan is a freelance writer who specializes in Central Asia.
Posted November 13, 2008 © Eurasianet
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