Investors heed oil funding row

Oil fields critical to Kazakhstan

In November 2002 TengizChevroil (TCO) stopped production at the Tengiz oil field in north-western Kazakhstan, the republic's biggest, after a row broke out over how to fund the next stage of development. Until recently proceeds from exporting production through a ragtag collection of trains, tankers and swap deals has financed development.

TCO is an international consortium led by US oil major ChevronTexaco that has been working the 9-billion-barrel oil field since 1993. Tengiz is the republic's cash cow and one of the biggest investments in the former Soviet Union. ChevronTexaco owns half of TCO, ExxonMobil 25%, Kazakhstan state oil company Kazmunaigaz 20% and LUKArco 5%.

The advent of the Caspian Pipeline Consortium oil pipeline, which came into service last summer and is the first large-diameter pipeline carrying oil out of the area, has increased the stakes.

The lack of a pipeline previously limited exports, so there was no rush to ramp up production. But with the CPC pipeline offering annual capacity of 60 million tonnes, the owners are keen to get cracking.

And that's when the problems started: TCO wanted to fund the expansion by reinvesting profits from exports, making use of a tax exemption for reinvestment. The government wanted it to pay tax as normal on its exports and borrow money abroad instead.

Downing tools and threatening to pull out was a slap in the face for already fragile investor sentiment as well as being a potential disaster for the Kazakh economy.

The field is Kazakhstan's biggest single source of revenue, accounting for 15% of the budget. It produces 12 million tonnes of light crude a year, 900,000 barrels a day. TCO has already invested $2 billion to date and plans to spend another $3.5 billion over three years to double annual production to 22 million tonnes.

A month later the two sides reached a compromise - one that heavily favours the Kazakhs. They agreed that the income would not be reinvested and that the Kazakh government would get its scheduled tax proceeds of $600 million. However, the Kazakh government will take part in cofinancing the project and help to find creditors.

"We have found a mutually satisfactory scheme for financing the second-generation project. We signed a document and have persuaded our partners," Kazakh energy minister Vladimir Shkolnik said.

Almost uniquely among the countries of the CIS (Commonwealth of Independent States) Kazakhstan's strong economic growth has been driven by high foreign investment. Over the past 10 years the republic of only 15 million people has attracted a whopping $18 billion in foreign investment, about $1,200 per capita, compared with Russia's $25. Nearly three out of four dollars invested in Kazakhstan come from abroad - more than four out of five of those go into raw materials extraction. But the TCO row is typical of the government's increasingly feckless attitude to foreign investors.

Now the republic is posting strong economic growth, there is resentment against foreigners among the Kazakh elite, who feel multinationals took advantage of the weakened government in the early 1990s.

"It is a common pattern among emerging markets," says Alexander Zaslavsky, a political analyst with Eurasia Group. "When things start to improve and the governments begin to earn real money from these resources they become unhappy about the terms they agreed to when they had no choice. A lot depends now on how important the government thinks foreign investment is to further growth."

Adding insult to injury a Kazakhstan regional court ruled against TCO last month, fining it $71 million for environmental damage. The government claimed that TCO had not stored 6 million tonnes of sulphur properly. The consortium contended that it was stored under the same conditions as in the US.

All these problems bode ill for the development of an even bigger oil field, Kashagan, off the Kazakh coast in its sector of the Caspian Sea, where oil is due to start being lifted next year.

Agip KCO is the consortium working on the Kashagan oilfield, which was discovered last year and is the biggest find anywhere in the world in the past 20 years. The consortium has submitted to the government its plan to spend some $20 billion over 13 years to develop the offshore field. Kashagan is the world's fifth-largest field, with recoverable reserves estimated at 13 billion barrels.

At the same time the government is preparing to offer more than 100 Caspian Sea exploration blocks to outsiders. Investors will, however, think twice about investing in Kazakhstan after the recent disputes.

However, while the government and companies bicker, Kazakhstan's strategic position has been improving. For most of the past decade Russia kept central Asia's energy resources bottled up by limiting access to the Russian pipeline network - the only routes out of the region.

With CPC onstream, the Kremlin has done an about-face. For most of the past year Russian president Vladimir Putin has been signing transport deals and has increased Kazakhstan's allocation of the Russian pipeline network in a drive to improve relations with Russia's southern neighbours.

"Putin's election, the effect on regional politics after the terrorist attacks on America and the advent of the CPC pipeline have combined to turn central Asian politics on its head," says Zaslavsky. "When everyone was mired in misery no-one was prepared to make concessions from the little they had. Now the oil producers are growing the incentive is towards increasing cooperation."

For its part Kazakhstan is following a "multi-vector" distribution policy: the government wants to see oil sent in all directions simultaneously so no one country can again threaten its export revenues. The Kazakh government has also said that it intends to export oil through the controversial Baku-Tbilisi-Ceyhan pipeline once it is completed, further weakening Russia's hold over its former vassal.

With alternative routes blossoming, Transneft, Russia's state-owned oil pipeline monopoly, is being particularly accommodating towards Kazakhstan and said in September that it was considering increasing its quota to 16.5 million tonnes a year. Russia and Kazakhstan signed a 15-year intergovernmental agreement in June 2002 stipulating the transportation of no less than 15 million tonnes of Kazakh oil a year through Russia's main pipelines.