ASTANA - Monday, August 16, 2010 -
For years the international consortium that runs the big Karachaganak gas and oil field in western Kazakhstan has been staving off the government’s demand for a stake in the project.
The consortium has finally given in, agreeing that state-owned KazMunaiGas can obtain a 10 percent share, Reuters reports.
A London-based spokesman for BG, the lead operator of the Karachaganak project, declined today to confirm the Reuters report, saying, “We do not comment on rumor and speculation.”
But Reuters’ reporting about major events in the Central Asian petroleum industry has proven accurate in the past.
The government wants a stake In Karachaganak, Kazakhstan’s largest gas field, because it believes the operation hasn’t expanded fast enough, costing the country billions of dollars in tax revenue.
The current Karachaganak shareholder lineup is Britain’s BG and Italy’s ENI, 32.5 percent each, Chevron, 20 percent, and Russia’s Lukoil, 15 percent. Some or all of them would have to give up portions of their shares to accommodate a KazMunaiGas entry.
If the Kazakh government gets a slice of Karachaganak, it will have a stake in all three of the country’s major gas and oil projects.
It owns 20 percent of the Tengizchevroil operation and in 2008 doubled its stake in the giant Kashagan project in the Caspian Sea to 16.8 percent after becoming exasperated with delays and cost overruns.
The reason that analysts have believed for some time that the Karachaganak consortium would cave in to the government’s demand for a stake is pressure, both direct and indirect.
Kazakh government applies heavy pressure to Karachaganak consortium and Tengizchevroil
The government has used a number of oversight and investigative agencies to tighten the screws on the Karachaganak Petroleum Operating Company.
The pressure has included:
-- A demand that the consortium pay more than $1 billion in oil export taxes in 2008 and 2009. The company has fought the claim in international arbitration on grounds that its contract with the government exempted it from the duties.
-- A $21 million fine in February for what the government said were environmental violations at Karachaganak.
-- Financial police accusations in March that the consortium illegally earned $708 million in 2008. The financial police are Kazakhstan’s anti-corruption enforcement agency.
-- A Finance Ministry demand in March for $136 million in back taxes on the consortium’s 2004 earnings. The company says it doesn’t owe the taxes.
-- Deportations of several of the consortium’s international employees on grounds that their employment violated immigration law.
Although the direct pressure on the consortium has been palpable, the indirect pressure the government has applied to Karachaganak partner Chevron may be what led to the Karachaganak surrender.
In recent months the government has been leaning on Chevron’s crown jewel, Tengizchevroil.
Its strategy has been to put so much pressure on Chevron, which owns half of Tengizchevroil, that Chevron convinces its Karachaganak partners to give KazMunaiGas a stake, analysts say.
As Central Asia Newswire reported Friday, Tengizchevroil has faced pressure for months including:
-- An order from the Oil and Gas Ministry for Tengizchevroil to begin paying an oil export tax that the company says its long-running contract exempts it from paying. The government announced in July that it was reimposing the tax on the industry and that for the first time Tengizchevroil would pay it.
-- A criminal investigation into Oil and Gas Ministry allegations that Tengizchevroil pumped $1.4 billion worth of oil from depths prohibited by its contract. The company maintains that its contract says nothing about depths at which it can produce.
-- A $1.4 million fine for burning gas that is a byproduct of oil production rather than capturing and using it. Tengizchevroil said it burned the gas for safety reasons – to ease a pressure buildup that could have caused an explosion. The fine came despite the fact that Tengizchevroil just spent $258 million on facilities to capture and use byproduct gas.
-- A recent Labor Ministry requirement that Tengizchevroil’s international employees obtain work permits. The requirement violates the company’s contract, which has always stipulated that international employees need work visas but not work permits, according to an international oil executive who asked not to be identified. Work permits are more difficult to obtain than visas and are subject to arbitrary labor ministry approvals.
Government officials are unhappy with Karachaganak delays and lost revenues
The government wants a stake in Karachaganak, one of the world’s largest gas and oil fields, to move the operation’s Phase 3 expansion plan from the drawing board to the bricks-and-mortar stage.
Higher production at Karachaganak would increase tax revenue at a time when the government is helping finance a major industrialization drive and spending billions of dollars on highways, rail lines and other infrastructure.
Earlier this year KazMunaiGas Chief Executive Officer Kairgeldy Kabyldin offered an indication of how much tax revenue the government is losing from the Phase 3 delay.
“If the expansion is implemented in full, Karachaganak Petroleum Operating, the venture that operates the onshore Karachaganak field, will boost (oil) output to 16.5 million metric tons a year,” he said.
That would be a 46 percent jump from the 11.3 million tons expected this year, which presumably would translate into 46 percent more tax revenue.
The government is also likely unhappy that oil and gas production at Karachaganak are expected to slip this year, generating even less tax income.
The 11.3 million tons of oil forecast for 2010 is 5 percent less than the 11.9 million produced in 2009. Gas production is expected to slip 6 percent to 14.7 billion cubic meters from 15.6 billion in 2009.
Oil and Gas Minister Sauat Mynbaev has blamed the Phase 3 delay on Karachaganak’s cumbersome decision-making procedures.
KazMunaiGas officials have complained that expansion delays have driven up the Phase 3 cost from $8 billion in 2007 to $14.5 billion.
Higher development costs mean less profit for the consortium and less tax revenue for the government.
Soviet petroleum engineers started limited production at Karachaganak in 1984 and a production-sharing agreement was signed in 1997 between the Kazakh government and the international consortium.
The Karachaganak deposit contains more than 1.35 trillion meters of gas and 1.2 billion tons of oil and gas condensate.