Unpleasant News from Kazakhstan

The Kazakh parliament has adopted a law allowing the government to unilaterally terminate contracts with foreign companies. This event went unnoticed by the broader public, but it was met with considerable anxiety by the oil business.

This is, in fact, a step closer to the possibility that the Kazakh government may terminate the contract with the consortium led by the Italian Eni, which is preparing to exploit the Kazakh field, the largest oil deposit in the last three decades.
Alongside Eni, the consortium includes Royal Dutch Shell, Exxon Mobil, and ConocoPhillips. Operations at the site have already been halted due to a dispute in which the government accuses the consortium of tax evasion and exceeding deadlines, but this dispute has served as a new means for the government to impose its policy. The main reason for the dispute is that the government wants its state company to take over the management of the consortium. However, the consortium has rejected this request and found itself under increasing pressure from the government.

This move reflects the dissatisfaction of the Kazakh government due to significant delays in the project, given that the start of production, originally scheduled for 2005, has been postponed to 2010. However, tensions escalated when in June the Italian partner informed the government that the costs of developing the Kazakh field are twice as high as originally anticipated. For example, the costs of the first phase of development, in which production of 300,000 barrels of oil per day is to be achieved, have risen to about $19 billion. Additionally, the overall costs of the project have soared to a staggering $136 billion, compared to the originally projected $57 billion.

However, experts believe that the government would be satisfied with a substantial financial compensation for the delays in the project, but not less than $10 billion, which would compensate for the expected fees that Kazakhstan is entitled to under the agreement, but not before the effective exploitation of the field begins. Regardless of whether the consortium will manage to appease the angry Kazakh government or not, the move with the new law has resonated unpleasantly, especially due to the close temporal coincidence with similar moves by the Russian government, which recently revoked concessions from Royal Dutch at the Sakhalin 2 site, and there is a concern among Western oil operators that Kazakhstan may follow Russia’s footsteps regarding business relations with Western investors. According to some reports, the government could transfer the project to Russian Lukoil in case the current consortium fails. Such an outcome would pose an additional problem for the European Union with easily foreseeable but unpleasant consequences for its efforts to make its energy supply less dependent on Russia. (Davorka Zmijarević)