Old Saint Basil's Cathedral in MoscowJohnson's Russia List title and scenes of Saint Petersburg
Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

#25 - JRL 7004
New York Times
January 4, 2003
Energy-Rich Kazakhstan Is Suffering Growing Pains

ALMATY, Kazakhstan At the presidential palace here, a confident President Nursultan Nazarbayev strode out in December to greet foreign investors. It was all smiles for the cameras as Mr. Nazarbayev sat down with the investors, most of them oil executives, to talk about recent business developments in this vast country, rich in energy resources.

But behind the facade of friendliness, tensions could not be hidden. A consortium had recently halted a long-planned $3.5 billion expansion at the largest oil development project in Kazakhstan, in a standoff with the government over the terms of the contract.

A criminal inquiry in Washington into Mr. Nazarbayev's relations with some American oil companies was, meanwhile, moving forward despite efforts by Mr. Nazarbayev's aides to stop it.

Kazakh officials said the dispute with the consortium had already been resolved. The oil industry group, however, denies that. Whatever the outcome, that disagreement, the separate criminal investigation and a new toughness toward foreign investors have shown that Kazakhstan is not as risk-free for investors as it likes to present itself. The difficulties come in a region that the United States has long said is central to its efforts to find alternatives to the Middle East as a source of oil.

Some say the country is just experiencing growing pains. Leaders in Kazakhstan, a former Soviet republic five times the size of France, "did not know where Paris was eight years ago," one American executive said. Now it has a high credit rating, rapid economic growth, and global oil companies still clamoring for entry to its oil industry.

Economic achievements were followed by new oil discoveries. The oil find at Kashagan, a field in the northern Caspian Sea with seven billion to nine billion barrels of recoverable oil reserves, is the largest discovery in the world since Prudhoe Bay in Alaska over 30 years ago.

The years of successes have given Kazakhstan and its government a new confidence. Officials are younger and more worldly. The economic free-for-all of the early 1990's, during which foreign companies were given advantageous deals, are over, the officials say. The time has come for foreign companies to pay more.

According to the American executive, a senior Kazakh official recently described the early deals with foreign oil companies as "giving them everything they wanted in exchange for beads."

The Kazakhs "are sophisticated and have money," added the executive, who works closely with the government and is one of the few foreigners here willing to talk about the situation in Kazakhstan but only on condition he not be identified.

"It's not the poor country it was even five years ago," he added. "They think they can call the shots, whether it's with ChevronTexaco or TotalFinaElf."

That approach, however, has caused big problems with foreign investors.

Consider the ChevronTexaco oil consortium and its very public falling-out with the government in November over investments in a large field in western Kazakhstan called Tengiz.

The consortium known as TengizChevroil and including Exxon Mobil; LukArco of Russia; and a Kazakh company, KazMunaiGaz suspended a long-planned expansion of the project when the government insisted on an accounting method that would have brought in more for the state but was not, the consortium contended, part of the 1993 contract.

Kazakhstan's finance minister, Zeinulla Kakimzhanov, railed at the suspension and said the accounting method of the consortium would deprive the budget of $1 billion in revenue. "For Kazakhstan, this is a significant sum of money," he said at the time. "The Kazakh side supports production expansion, but not at the cost of lower tax payments."

The foreign companies say the contract should be respected. They say that without favorable and predictable tax regimes, no international company will invest the billions of dollars needed to develop a large oil field. Besides, they say, they are contributing their fair share in taxes.

The tax payments from TengizChevroil alone account for 15 percent of the Kazakhstan budget.

Executives for ChevronTexaco and TengizChevroil in Almaty declined to be interviewed.

A senior United States Department of Energy official said in an interview in December: "You cannot change the rules of the game after people have invested. People are making decisions and there are implications all down the line. If the rules were being changed, that's a problem."

Signs of tougher conditions began to appear even before 2002, with the government's drafting of a law to level the playing field between foreign and local investors. That measure, critics say, has worsened conditions for foreigners.

The government has become "more assertive in terms of regulation," said Menno Grouvel, director in Europe and Central Asia for TotalFinaElf. "They tend to apply constraints that are more difficult to implement."

Tax and ecological fines are more frequently imposed, executives said. The ChevronTexaco project has been fighting a $71 million environmental fine it contends was wrongly imposed. Another oil investor said that he was fighting for the repeal of a tax fine that was equal to the entire amount of its 2001 net profit for its Kazakhstan project.

"The energy minister says the contracts are sacrosanct," said a lawyer at an international law firm with an office here in Almaty that represents foreign oil companies. "But on a practical level, state tax auditors are often using new laws that make the contracts worse."

The local business and political elite support the government's stance. Bulat Abilov, a businessman and former opposition member of Parliament, said higher taxes for foreign companies should be a prerequisite for support for the war on terrorism by the United States. Kazakhstan gave the United States military landing rights here after Sept. 11, 2001.

Foreign oil concerns "hold a few baseball tournaments and everyone thanks them," Mr. Abilov said. "You want help with the fight against terrorism? Have the big oil companies pay more taxes here."

"It's been 10 years" since the TengizChevroil deal was signed, he said, and "people in the provinces are still thinking, `What do we get from this oil?' "

Mr. Abilov and other critics say the oil companies carved out good deals for themselves in the early 1990's, when Kazakhstan's legal system was just being formed and profitable contracts could be won through bribes and close ties with state officials.

Some of the contracts have been the subject of criminal inquiries in the United States, where the authorities are investigating claims that Mr. Nazarbayev took bribes from American companies to award desired oil fields and later tried to obstruct an inquiry into the payments.

Mr. Nazarbayev and the companies, which include Mobil, now part of Exxon Mobil; Amoco, now part of BP; and Phillips Petroleum, now part of ConocoPhillips, deny any wrongdoing.

Despite all the difficulties, foreign companies are showing no signs of abandoning the rich reserves here. Competition for the investment dollars could intensify if Iraq's oil fields open for development after a possible American-led war against that country, analysts said. Even so, they said, Kazakhstan would remain the leading energy power in the Caspian region. And that means the investors would have to figure out a way to work with the more demanding Kazakh government.

And vice versa. The Kazakhs "are playing hide-and-seek with foreign companies," said Sergei Lukyanov, Caspian expert in Moscow for Petroleum Argus, an oil industry publication. "But Kazakhstan has very ambitious oil export plans. If they aren't backed by real export growth, it will have to forget them. Kazakhstan cannot wait. It is the emerging market, not ChevronTexaco."

Back to the Top    Next Issue