Kazakhs Provide Plenty of Material for Conspiracy Theorists

RelevanceKazakhstan said on Wednesday it would give the Chevron-led Tengizchevroil joint venture one month to decide how to deal with its vast stocks of sulphur or face license suspension. The parallels with Russia’s forced sale and purchase of Shell’s Sakhalin gas assets are clear. What’s not clear is whether Russia has had a hand in the TCO affair. That Russia considers Kazakhstan to be a strategic priority (along with the rest of the Caspian region) is well known. However there are many other explanations internal to Kazakhstan for the recent developments. Investors will need to watch very carefully as this story unfolds. While it is extremely unlikely that production will be shutdown, and only slightly more likely that a license will be revoked, there is a real risk of forced state participation or more burdensome fiscal terms. Furthermore, Kazakhstan is developing policies that seem to directly go against Russian interests.

AnalysisFactors affecting the TCO issue include:

  1. A government strategy to regain local control of assets. Earlier this month KazMunaigas bought a half share in an oil producer in Kazakhstan from a Chinese company, amid local concern about China’s rising influence in the local energy market. China International Trust and Investment Corporation, a state investment company, agreed to sell 50 per cent of Nations Energy, a Kazakh oil producer. CITIC bought the company only last year.
  2. Internal Kazakh politics. The sudden resignation of Prime Minister Danial Akhmetov earlier this month (which led to the departure of the entire cabinet under Kazakhstan’s constitution) appears to be the culmination of months of rumbling dissatisfaction over economic policy. Mr Akhmetov changed the law to give priority to state companies over foreign investors. The law stated that the Kazakh state oil company should own half of all future investments, while foreign partners would bear the risk of paying for exploration costs. The President, Nursultan Nazarbayev, recently installed Karim Masimov, a former advisor (and private banker) as deputy Prime Minister. Kazakhstan watchers will see Masimov’s elevation to Prime Minister as a sign that foreign investors are once again welcome.
  3. Economic rent. As discussed in an earlier White Paper, there is a trend in many oil provinces to increase government take from hydrocarbon resources. These range from stiffening fiscal terms (introduced by Pelosi and Brown in the US and UK respectively) to forced increased state participation, as in Russia. Developing countries in particular sold assets on the cheap in the 1990s (when they needed the money and technology) and are now recovering their position during a period of sustained high prices. High prices mean they do not need the investment as much as before, and they can buy much of the technology from engineering contractors on the open market.
  4. Regional geopolitics. Russia views the Caspian as an “internal sea”, and has been concentrating its efforts on former Soviet states having been refused entry to Western institutions (such as NATO). Added to that, almost all of Kazakh production is exported through Russia. So, there are many good reasons to suspect the hand of Russia in the TCO affair – but there is no hard evidence to back that up. Furthermore, Kazakhstan has, for many years, encouraged and received much Western investment in many sectors, not just in oil and gas. International ties are strengthening, and recently Kazakhstan signed an accord with the EU to look at gas infrastructure between the two. Longer term, Kazakhstan could be an important supplier of uranium to an expanded EU nuclear program.

22 February 2007

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