Changing the Rules

by Nathan Hamm on 10/30/2004

Kazakhstan is setting unfavorable terms for foreign participation in new oil projects.

For years, energy ministry officials here have talked about opening some 100 promising blocs in the shallows of the northern Caspian Sea to foreign oil companies for exploratory drilling. The area borders the Kashagan field, the world’s fifth largest, and has the potential to yield as much crude as Kashagan itself, more than one million barrels a day.

But a new amendment to the country’s tax law has raised the government’s share of oil income, to 65 to 85 percent, and removed a clause guaranteeing investors that the tax rate will not be increased during the contract. Specialists consider that percentage exceptionally high, especially considering the early stage of oil development in Kazakhstan.

“Host governments understand the majors are desperate for big projects,” said Laurent Ruseckas, an analyst for the Eurasia Group, in a telephone interview from New York. “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 officials deny that they are trying to keep out investors. But they acknowledge that delaying the development of the offshore blocs would give KazMunaiGaz, the state oil company, time to gain the expertise that would allow it to play a more lucrative role in these projects.

Energy Minister Vladimir Shkolnik said at a recent news conference: “We will work with investors and we will take their opinions into consideration. But Kazakhstan must defend its own interests, too.”

At stake is whether Kazakhstan, whose production has grown from 400,000 barrels a day to 1.2 million barrels a day in the last decade, thanks to foreign technology and investment, will be able to reach its stated goal of tripling production again by 2015.

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Nathan is the founder and Principal Analyst for Registan, which he launched in 2003. He was a Peace Corps Volunteer in Uzbekistan 2000-2001 and received his MA in Central Asian Studies from the University of Washington in 2007. Since 2007, he has worked full-time as an analyst, consulting with private and government clients on Central Asian affairs, specializing in how socio-cultural and political factors shape risks and opportunities and how organizations can adjust their strategic and operational plans to account for these variables. More information on Registan's services can be found here, and Nathan can be contacted via Twitter or email.

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