A Troubled Project Holds Warnings for Kazakhstan’s Oil Sector

ChevronTexaco has been Kazakhstan's primary oil and gas investor since 1993. Now, with disagreements halting a joint venture between the company and the Kazakh government, analysts are saying Kazakh officials may have overestimated their resources' value to foreign investors.

On November 14, ChevronTexaco announced on its web site that Tengizchevroil, the consortium it created to explore the Tengiz field, had suspended a planned expansion from 271,000 to 430,000 barrels per day because "partners have not yet been able to agree on a funding plan." Five days later, according to published reports in Western media, the government of Kazakhstan "warned" that the $3 billion expansion project at Tengiz might be canceled rather than suspended. Kazakh Energy Minister Vladimir Shkolnik told a news briefing: "if all partners do not reach an agreement on how to finance this project... it means the project will not expand."

ChevronTexaco owns half the venture; ExxonMobil owns 25 percent, and Kazakhstan's state-owned Kazmunaigas owns 20 percent. Analysts say the stalemate stems from multiple frustrations. Tass reported an accounting dispute on November 19. Private partners want to record a faster depreciation of the venture's assets, which would lower the taxes due on its profits, and Kazakh officials want to maximize profits in order to return more money to state coffers. But additional issues are hampering the partnership. "We needed to have an agreement on a funding mechanism, and that agreement has not been reached," says Fred Gorell, spokesman for ChevronTexaco.

The impasse suggests that despite possessing abundant oil and gas reserves, Kazakhstan's uncertain legal and business environment is hindering the realization of major deals. "Behind-the-scenes negotiations are ongoing, but the Kazakh [government] clearly overplayed its hand," says Dafne Ter-Sakarian, analyst for Russia and Central Asia for the Economist Intelligence Unit, based in London. "There was always a risk in dealing with the Kazakh government, and this risk has come to a head. The Kazakh government has misjudged the extent to which the oil companies would make concessions and tolerate contract revisions."

The expansion dilemma reflects a broader trend. In recent months, multinational oil companies have reportedly grown disenchanted with the government of Kazakhstan for its intrusive practices. These alleged practices include changing laws in ways that severely undermine existing contracts and imposing requirements that seem useless, especially with regard to site inspections. "There's no set business process in Kazakhstan. There are arbitrary exorbitant fines and the tax policy is a form of business persecution," says Elena Suhir, program officer for Eurasia and Central Asia for the Center for International Private Enterprise, a non-profit affiliate of the US Chamber of Commerce. Her organization hosted a roundtable discussion in Almaty in October where, she says, executives cited the bureaucracy and corruption in the inspection process as a "big problem."

Suhir says executives described "25-30 different government agencies imposing ridiculous conditions and extracting bribes." These specific complaints fit a troubling larger pattern in which investors see Kazakhstan's government steering its business decisions, according to Suhir's colleague Andrew Wilson. "The trend over the last year and a half in Kazakhstan has been the consolidation of the business interests around the Kazakh government," he says.

The consortium's suspension has already caused economic ripples. Parker Drilling Company, based in Houston, announced on November 15 that it would stop work in the Tengiz field once current drilling work ends and would not expect to operate until "agreement [on] funding issues facing the partners" emerges. The same day, the Moscow Times reported a source close to AGIP-KIOC, a consortium developing the Kashagan oil field in Kazakhstan off the Caspian shelf, may "shelve multibillion-dollar development plans at the end of this year if the Kazakh government does not cease to demand major contract revisions."

And a lot is at stake in the Tengiz and Kashagan deals. If both projects lag, the country will be hard pressed to deliver 85 percent of its planned oil production in 2015. Failure to resolve the current dispute could jeopardize the financing of future projects, and have a profound impact on the Kazakh economy. Kazakhstan's dependence on oil makes it likely that Shkolnik and his superiors will work hard to accommodate ChevronTexaco. "Over half of Kazakhstan's export revenues comes from oil, so I doubt they will not find a way to settle this issue," says Ter-Sakarian of the Economist Intelligence Unit. "In the long-term these latest developments at Tengiz are positive, because the Kazakh government has learned that the oil companies have limits."