President Says Kazakhstan Has No Plans to Nationalise Energy Sector

Kazakhstan Is Not Latin America…

In January, after months of tough negotiations, the Kazakh government announced it had reached a deal with the Eni-led Agip KCO consortium to double the size of the state oil company's stake in the development of the massive offshore Kashagan oilfield. Kazmunaigaz subsequently saw its stake in the project to develop the 13-billion-barrel oilfield rise to 16.8%, putting it on par with the consortium's four largest shareholders, while the government secured compensation from Agip KCO—payment for the delay in the start of oil production from the field from 2008 until at least mid-2010—believed to be in the billions of dollars. Eni, the project operator, was also forced to cede its leading role in Kashagan as part of the agreement, with the Italian oil firm slated to share operatorship of the field once it goes into production (see "Related Articles" below). Initial output of 370,000 b/d is slated to rise to an eventual peak of as much as 1.5 million b/d.

The government's "success" in achieving its goals in the Kashagan dispute, together with strong warnings to other energy-sector investors to comply with their contracts, has triggered speculation about Kazakhstan's intentions. Having passed legislation to allow the government to break existing oil contracts on grounds of national security, Kazakhstan, like other resource-rich nations, is positioning itself to play a greater role in the development of its oil and gas reserves. Recent threats to the country's other two main foreign-led energy consortia, the Chevron-led Tengiz project and the BG-led Karachaganak project, have caused consternation about the government's plans, particularly as Prime Minister Karim Masimov and President Nursultan Nazarbayev have made no secret about their desire to see Kazmunaigaz, the state oil and gas firm, play a larger role in the country's oil and gas development.

Thus, when Nazarbayev sat down in the presidential palace in Astana on Friday (28 March) for an interview with Reuters, the subject of Kazakhstan's potential nationalisation of its energy sector naturally came up. The Tengiz, Kashagan, and Karachaganak projects are expected to more than double Kazakhstan's current oil production of 1.35 million b/d over the course of the next decade, and with Kazakhstan sitting atop some of the world's largest untapped oil and gas reserves, the Central Asian state is poised to become one of the world's top five oil-producing nations. However, Nazarbayev flatly dismissed the notion that Kazakhstan would follow the example of some Latin American states in nationalising the country's energy assets, telling Reuters that, "First of all, Kazakhstan has no desire to nationalise any assets like in Latin America. Kazakhstan does not want to nationalise or take anything away from anyone."

…But Kazakhstan Will Defend Its Interests

Kazakhstan's recent aggressive tactics may have triggered fears that the Central Asian state would take the ultimate step to sideline foreign energy companies, but Nazarbayev's comments should alleviate those fears. He further sought to clarify the circumstances surrounding the Kashagan dispute, dismissing suggestions that Kazakhstan merely forced Eni and its partners into yielding a larger stake in the project to Kazmunaigaz, pointing to the unique issues around the project's management. "It [Kashagan] is not a trend, it's a one-off case," he said.

Nevertheless, the president gave precious little breathing room to foreign energy investors, noting that, "In any case, any country has to defend its interests." Nazarbayev was referring to the Kashagan project, but this could well refer to other energy projects in development across Kazakhstan. Indeed, over the course of the past few years, as oil and gas production have grown substantially and prices have increased dramatically, the government has sought to alter the playing field to tip the balance in favour of the state, stipulating pre-emption rights for the state in buying any privately owned oil assets that are put up for sale and also reserving offshore Caspian blocks for Kazmunaigaz. The state has also become more confident in dealing with foreign investors, forcing the China National Petroleum Corp. (CNPC) to sell part of its stake in PetroKazakhstan to Kazmunaigaz while refusing to back down in the Kashagan dispute.

Likewise, the Kazakh government has insisted that foreign investors stick to their contractual obligations, with environmental authorities holding the Karachaganak and Tengizchevroil consortia responsible for environmental violations. Both Masimov and Nazarbayev have stated that Kazakhstan does not plan to revise existing contracts, but Nazarbayev again warned foreign companies that there will be penalties for non-compliance, stating that the government will ask for cash or equity compensation from investors if they violate Kazakhstan's laws. "If investors break their contracts themselves, and Kazakhstan sees that the country is losing out on something with regard to a certain contract...then we'll say: 'Folks, you have to either pay us compensation or give us shares back to compensate for the money we lost'," he said to Reuters in the interview.

Outlook and Implications

Although the media has largely focused on the Kashagan dispute and the successful outcome for Kazakhstan as evidence that the Central Asian state may be taking resource nationalism to the next level, the truth is that there were actually extenuating circumstances in the Kashagan situation, with the government having every right to demand compensation from Agip KCO for failing to deliver oil production according to the previously agreed timetable. Rather than merely strong-arming the consortium to get a larger stake in the project for Kazmunaigaz—mimicking the Russian government's cynical campaign against Shell with Sakhalin-2—the Kazakh government sought compensation in the dispute, and the outcome in which Kazmunaigaz doubled its stake in the project was an offshoot of this goal rather than the goal itself.

Still, it would be naïve to think that Kazakhstan is immune from the infectious trend of nationalism that has been spreading among resource-rich nations over the past few years as prices have more than trebled, and the Central Asian state is sure to continue to press for a greater role for Kazmunaigaz in the exploitation of Kazakhstan's oil and gas resources. Rather than outright nationalisation, however, the government is likely to continue to keep up the pressure on existing foreign investors in the country's energy sector while limiting opportunities for new entrants.

Moreover, while new investors will surely have to partner with Kazmunaigaz and/or offer lucrative terms to the state to secure access to oil and gas in Kazakhstan, existing foreign investors will need to ensure strict compliance with their contracts. Indeed, the government is certainly keen to use any such non-compliance as justification for extracting compensation and/or an equity stake for Kazmunaigaz. With the Kashagan dispute in the rear-view mirror and Tengiz now ramping up production, the Karachaganak project, aiming to boost gas output substantially in coming years, seems particularly vulnerable to a potential pressure campaign at this point, especially as gas production and exports become more important to Kazakhstan and because Kazmunaigaz has no stake in the project.

Related Articles

Kazakhstan: 28 March 2008: Kazmunaigaz Eyes Strategic Partnership with Foreign Firms for Oil and Gas Projects in Kazakhstan

Kazakhstan: 20 March 2008: Karachaganak Consortium Hit with Environmental Fine by Kazakh Authorities; Bank Accounts Frozen

Kazakhstan: 19 March 2008: Kazmunaigaz Expects 70% Increase in Gas Export Prices Next Year

Kazakhstan: 21 February 2008: PM Says No More PSAs to Be Signed in Kazakhstan, But Government Will Respect Existing Deals

Kazakhstan: 19 February 2008: Karachaganak Consortium Hit with US$7.5-mil. Fine for Pollution in Kazakhstan

Kazakhstan: 7 February 2008: PM Warns Oil Investors in Kazakhstan to Meet Contract Obligations

Kazakhstan: 30 January 2008: Tengizchevroil Launches Oil Production from Tengiz Field Expansion in Kazakhstan

Kazakhstan: 14 January 2008: Kazmunaigaz Says Kashagan Is a Done Deal, At Last

Kazakhstan: 26 September 2007: Parliament Passes Law Allowing Kazakh Government to Break Oil Contracts