Kazakhstan to abandon PSAs in new deals

Feb 22, 2008 01:00 AM

Kazakhstan announced that it would abandon subsoil contracts, which are favoured by international oil companies due to their liberal tax regime, a step likely to ring alarm bells among foreign investors seeking to tap its huge energy reserves. Prime Minister Karim Masimov, speaking at a meeting with tax officials, said the new rule would apply only to newcomers, adding the government would remain committed to obligations stipulated in all existing production sharing agreements (PSAs).
"For new contracts we ought to exclude production sharing agreements as a type of contract," Masimov said. "Kazakhstan will continue to fulfil its obligations for those contracts that have already been signed."

Current projects
Kazakhstan's biggest oilfields such as Karachaganak and Kashagan are developed by Western oil majors and based on PSAs, which provide the state with a portion of the output but fixes their tax burden for the duration of the project. Tengiz, another key oilfield led by Chevron,is based on an alternative concession agreement which leaves all the output for the operator but allows the government to change tax levels over time.
Kazakhstan has been toughening its energy policy over past years, alarming investors who see its new-found assertiveness as part of the growing global trend of resource nationalism.

Analysts said, however, Kazakhstan's intention to leave current contracts intact was a sign of a more balanced policy.
"The most positive moment in this situation is that the government representative [Masimov] officially stated the intention to fulfil obligations in existing contracts which is a sign of a favourable investment climate in the country," UniCredit brokerage wrote in a note.

Masimov did not describe a type of contract Kazakhstan wanted to use with oil and metals companies from now on. Officials have said in the past that Kazakhstan wants to switch to an all-concessions system after parliament passes a new tax code in the second half of 2008.
Masimov also said taxes should be increased for subsoil companies but reduced for firms operating outside the subsoil sector -- a move the government believes would help spur small and mid-size businesses and diversify the economic base of the country.

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