OIL COMPANIES AND THE GOVERNMENT IN KAZAKHSTAN

OIL COMPANIES IN KAZAKHSTAN

Kazakhstan has aggressively courted foreign energy companies, which have brought their money and technical know-how and helped Kazakhstan to find oil and efficiently extract and process it. Until the foreign companies showed up Kazakhstan used outmoded production methods developed 20 years out of date. Their safety methods were equally outdated.

After the break up the Soviet Union, most of the development of Kazakhstan’s petroleum and natural gas was handled by the state. These days foreign companies such as Chevron and Exxon Mobile have large stakes in the country’s energy development. Kazakhstan wants oil companies that buy into the Kazakh oil industry to include KazMunaiGaz — Kazakhstan’s national oil company — as partner, but has not demanded controlling stakes like Russia. Chris Weafer of Alfa Bank in Moscow told the International Herald Tribune, “If you want to get involved in Kazakh resources, the state has to get a stake. China has accepted the rules of the game, allowing it to gain significant resources in Central Asia.”

Beginning in the late 1990s, foreign investment stimulated rapid development of the oil industry. The state-owned oil and gas company, Kazmunaigaz, provided 20 percent of output, with the remainder accounted for by three major foreign consortia: Tengizchevroil, the Karachaganak Integrated Operation, and the Agip Kazakhstan North Caspian Operating Company. In the early 2000s, the government attempted to improve the terms of foreign ownership in the oil and gas industries, although substantial restrictions remain on ownership of Caspian operations. [Source: Library of Congress, December, 2006 **]

Some say the Kazakhstan oil industry might undergo a kind of creeping nationalization that occurred in Russia in 2004 and 2005, where the Kremlin gained control of two large oil companies. Kazakhstan’s oil money hasn't touched the lives of many ordinary Kazakhs. There are more jobs but unemployment remains high and most of the oil wealth ends up in the hands of the president's family and cronies. Many of the best jobs go to foreigners.

Kazakhstan Oil Companies

KazMunaiGaz is the national oil company. Involved in both oil and natural gas production, it is a joint-stock company in which the state is the sole stock owner. Until presidential election in 2005, the vice president of KazMunaiKaz was Timur Kulibayev. He is married to Dinara Nazarbayev, one of the daughters of Kazakhstan President Nursultan Nazarbayev.

In the early 2000s KazMunaiGaz produced about 200,000 barrels of oil a day. In 2002 it merged with the state-owned Transneftegas (later called Kaztranoil), which operates the pipelines and oil transport systems. KaMunaiGa has the pre-emptive right, guaranteed by the Kazakhstan constitution, to buy oil fields and facilities in Kazakhstan. It exercised this right in the Chinese deal to buy Canada-based PetroKazakhstan.

Tengizchevroil is a joint venture between Chevron (50 percent share in the consortium), ExxonMobil (25 percent share), KazMunayGas (20 percent share) and LukArco (5 percent share). It was formed in April 1993, when the Kazakhstan government granted an exclusive 40-year right to Tengizchevroil LLP (TCO) to develop the Tengiz and Korolevskoye oil fields in the northeastern reaches of the Caspian Sea in Kazakhstan. Tengizchevroil (TCO) is the largest oil producer in Kazakhstan. It and produces about 300,000 barrels of oil a day. Initially, Chevron Texaco had a 50 percent stake in the enterprise and ExxonMobile and the Kazakhstan government each had 25 percent stakes. It began producing oil in 1994.

Government Involvement in the Oil and Gas Sector in Kazakhstan

The Ministry of Energy oversees the oil and gas industry in Kazakhstan. In August 2014, Kazakhstan's president, Nursultan Nazarbayev, announced an extensive government reorganization with the intention of creating a more compact and effective government. The number of ministries in the government was reduced from 17 to 12, and the Ministry of Energy was created to absorb the functions of the Ministry of Oil and Gas and parts of the functions of the Ministry for Industry and New Technologies and the Ministry for Environment and Water Resources. [Source: U.S. Energy Information Administration (EIA) <>]

The national oil and natural gas company, KazMunaiGaz (KMG), represents the state's interests in Kazakhstan's oil and gas industry. It has played an increasingly important role in the country's oil and natural gas sector. kilometersG was created in 2002 and holds equity interests in Karachaganak (10 percent), Kashagan (16.8 percent), and Tengiz (20 percent), as well as interests ranging between 33 percent and 100 percent in many other production projects. <>

Kazakhstan's Law on Subsoil and Subsoil Use (Subsoil Use Law) governs investments in the oil and natural gas industries. The Subsoil Use Law has been amended several times, most notably in 2005, 2007, and 2010. Among other provisions, the Subsoil Use Law along with the December 2009 Local Content Law establish strict local content requirements for oil and gas contracts. Contracts that fail to meet specified requirements for local materials and labor can be unilaterally terminated by the government, although, no such terminations are known to have occurred. The Subsoil Use Law also establishes the government's right to preempt any sale of oil and gas assets. In 2013 Kazakhstan preempted ConocoPhillips sale of its 8.4 percent stake in the Kashagan project to India's ONGC. The preemption did not affect Conoco's proceeds from the sale, but rather than going to ONGC, the stake was purchased by kilometersG before being resold to China's CNPC. <>

The government announced the re-introduction of oil export duties in August 2010 and increased them in January 2011. Export duties were first introduced in 2008 and then were suspended in January 2009. Export duties affect all oil exporters operating in Kazakhstan, with the exceptions of those that include a tax stabilization clause in their contracts. <>

Foreign Oil Companies in Kazakhstan

Foreign oil companies in Kazakhstan have included Chevron, ExxonMobile, British Gas (BG), Royal Dutch Shell, Lukoil of Russia, Total of France, China National Petroleum Corporation (CNPC), Conoco Phillips, Statoil of Norway, ENI SpA of Italy, and Inpex of Japan.

Kazakhstan three major oil fields are being developed with a lot of foreign help. 1) Tengiz (& Korolev) is being developed by Chevron, ExxonMobil, KazMunaiGaz and LukArco (Lukoil and BP). 2) Kashagan is being developed by KazMunaiGaz, Eni, ExxonMobil, Shell, Total, CNPC and Inpex. 3) Karachaganak is being developed by BG, Eni, Chevron, Lukoil, KazMunaiGaz.

Medium-size oil companies involved in Kazakhstan have included Meridian, Nelson Resources. PetroKazakhstan (formally Hurrican) of Canada was a major player until it sold out to a Chinese company. Among the international consortiums set up to develop a specific field or sector have been Karachaganak, Mangistaumunaygas, Aktobemunaygas and the joint-venture company Tenge.

Shady Deals With Foreign Oil Companies

Chevron (and it predecessor Chevron-Texaco) has invested billions in Kazakhstan. It paid $1 billion for a 50 percent stake in the Tengiz oil field. It secured the deal with help of one Jim Giffen, a California lawyer used as a go-between by Nazarbayev. He secured a “success fee” of 7½ cents per barrel after making the deal, earning him millions every year. Later Giffen was indicted on charges under the Foreign Corrupt Practices Law. The $1 billion paid by Chevron-Texaco ended up in a Swiss bank account controlled by Nazarbayev. Documents showed that Nazarbayev drew $45,000 from the account to pay for tuition of one of his daughters at a private school in Switzerland. [Source: The New Yorker ***]

During their negotiations for access to Kazakhstan Tengiz oil fields, Mobile flew Nazarbayev to a company resort in the Bahamas and promised to fulfill Nazarbayev’s demand for a Gulfstream jet, tennis courts for his home and four trucks with satellite dishes for his daughter’s television station and $600 million in return for a 25 percent stake in Tengiz. Only $350 million reached the Kazakhstan national treasury. It is not clear where the remainder ended up. ***

Chevron has described negotiations between itself and the governments in Kazakhstan and Russia over oil pipelines and other issues as "difficult." Mobile has had its share of troubles too. To secure the deals with Kazakhstan it needed to negotiate with Russia, which controlled the pipelines from Tengiz. One $76 million payment to shady figures involved in that deal “disappeared.” ***

Conflicts Between the Kazakhstan Government and Foreign Oil Companies

Many of the lucrative oil contracts struck with the Kazakhstan government by foreign oil companies were signed when Kazakhstan was still in the early stages of developing a national government, and many in Kazakhstan thought the terms given foreign oil companies were too generous. The government decided to take a stand on the issue and demanded that tax term be “clarified” so that the government could get higher tax revenues and larger stakes in the profits. The foreign oil companies cried foul and some long and bitter disputes ensued over the contacts, which in some cases for 25 years.

A new amendment added to Kazakhstan tax laws in the early 2000s, raised the government share of oil income from 65 to 85 percent and removed a clause that stated that tax rates would not be increased during the duration of the contracts. Analysts regarded the rate as exorbitantly high especially when one considers there is so much risk, uncertainty and expense searching for oil, especially in Kazakhstan. Many oil companies and investors were turned off by this move. One analyst told the New York Times, “Host governments understand the majors are desperate for big projects. You can have horrendous terms and they will still come and invest, but here the terms are so horrible that the companies are staying away.”

Kazakhstan’s finance minister Zeinulla Kakimzhanov said, “To say that the investment climate here is bad is nonsense. The figures bear that out. I can only think that the companies who are thriving here want to reserve this ‘bad’ image. They want to keep everything for themselves, and don’t want any competition.”

Showdown Between Chevron and the Kazakhstan Government

The conflict between the Kazakhstan government and foreign oil companies came to a head in November 2002 when the government and Chevron (Tengizchevroil) became involved in a bitter dispute over taxes. The dispute began when Chevron began moving forward on a $3.5 billion expansion of the Tengiz oil field, using revenues from the project. The Kazakhstan government protested saying the move would cut into its tax receipts.

The dispute drew international media attention. Chevron suspended the expansion program. A compromise was reached in January 2003 but not after ruffling a lot of feathers in the oil world and damaging Kazakhstan’s image as a good place to invest.

In the deal the Chevron consortium agreed to pay $810 million to the Kazakh government, $600 million of it in tax payments, paid in installations through 2005. In addition the consortium took out a loan to cover the Kazakhs government’s share of the expansion. On analyst told the New York Times, “At the end of the day, no one was willing to drive off a cliff. Everyone really wanted it solved.”

Chinese Oil Companies in Kazakhstan

Chinese oil companies have joined the rush into Kazakhstan. They have been aggressively trying to buy oil fields and assets in Central Asia, often competing head to head with oil companies from India. The Chinese state oil company, China National Petroleum Corporation (CPNC), purchased controlling interest in Kazakhstan’s second largest oil field and promised to help finance two multibillion pipelines for $4.4 billion. Former Prime Minister Li Peng — one of the major players in the Tiananmen Square massacre — played an active part in lobbying for the deals, authorizing government funds for them.

Before that China had been rebuffed by major oil companies and neighboring countries as it attempted to develop oil and gas fields in Central Asia. American and Japanese companies outbid China for stakes in the Kashagan field on the Caspian Sea. China had high hopes of developing fields in the Caspian Sea. CNOOC and Sinopec— two other massive Chinese oil and natural gas companies — also thought they had stakes in the Kashagan field but were shut out by Royal Dutch Shell which is heavily invested in the Caspian Sea. The decisions raised doubts about plans for pipelines between Kazakhstan and China, which only make for sense if plentiful, guaranteed supplies of oil are delivered on them.

Some suggest these rebuffs may have been a good. They might force China to aggressively discover and develop more oil fields at home and make the energy industry as a whole more efficient.

See Pipelines

Chinese Oil Companies Purchase PetroKazakhstan

In August 2005, CNPC purchased Canada-based PetroKazakhstan, a Canadian company formally known as Hurricane, for $4.18 billion, the largest takeover by a Chinese company at that time. PetroChina outbid the Indian state-owned company Oil and Natural Gas. The Kazakhstan government only agreed on the deal after the Chinese company agreed to sell assest, including a refinery, to KazMunaiGaz.

The Chinese company is thought to have won out over the Indian company because the Kazakhstan government has more to gain politically by establishing warm relations with neighboring China than it does with India plus it is easier for Kazakhstan to transport oil to China—via new pipelines—than to India which has no pipeline and lies on the other side of the Himalayas from Kazakhstan. Kazakhstan needs Chinese support to wean itself from Russian dominance and China needs Kazakhstan’s support to keep it Muslim insurgency in the west pacified.

PetroKazakhstan was Kazakhstan’s second largest foreign oil producer and largest oil refiner as of 2003. It fully owns the Kumkol South field and half owns the smaller Germunaigaz fields and owned the Shymkent oil refinery. The majority of the company’s staff resided in Kazakhstan and 98 percent of them were Kazakhstan citizens.

PetroKazakhstan came to Kazakhstan in 1991 and purchased the fields and the refinery and the state-owned Kumkol oil company in 1996 for $120 million. There was speculation that bribes had been paid for it to have been obtained such valuable assets for such a low price. At the time the oil market was depressed, oil prices were low and PetroKazakhstan was under bankruptcy protection. In 2000 the company emerged from bankruptcy. For its Canadian owners to walk away with $4.18 billion was quite a coup. Shares for the company were sold at $55 a piece, up from 27 cents when the company was bankrupt.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.

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© 2008 Jeffrey Hays

Last updated April 2016

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