Authorities pressure foreign investors

by Alexander Zakharov

The government is planning to jettison many of the favourable terms that have allowed overseas firms to reap huge profits from the country's oil reserves. The Kazak authorities' decision to fine a foreign-financed oil company millions of dollars is being seen as an attempt to put pressure on overseas investors.
Analysts believe that the recent 11 bn tenge ($ 71 mm) penalty imposed on TengizChevrOil -- which is based in the oil-rich western city of Atyrau -- for environmental damage is a way of obtaining money the government feels it signed away in Nineties-era oil deals. The United States oil giant ChevronTexaco has a 50 % stake in TengizChevrOil, 30 % is owned by other foreign companies and the remainder is held by the Kazak state firm KazMunaiGaz.

TengizChevrOil has denied the authorities' claims that it failed to minimise the environmental damage caused by sulphur waste released into the air during oil extraction. The firm insists that under Kazak law sulphur is not considered a waste and intends to appeal against the decision.
The court decision followed an earlier disagreement over funding the expansion of TengizChevrOil's activities. ChevronTexaco wants to reinvest the joint venture's profits to pay for it rather than borrow money from financial institutions. Astana insists on TengizChevrOil doing the latter because it is keen to continue taxing its profits. The December 2 court ruling has further alarmed foreign investors, who are already concerned by the government's plan to amend the country's current overseas investment law, to remove many of the favourable terms foreign companies have been accustomed to in the former Soviet republic.

A draft amendment has already been placed before parliament and is expected be adopted at the beginning of the year. "In developing our laws, we take international experience into account," said Erlan Abildaev, the head of the investment committee for the Kazak ministry for industry. "In no way does this infringe upon the rights of investors."
Despite this assurance, analysts and businessmen fear the legislation is an attempt by the authorities to reverse a trend established in the first years of the republic's independence, when overseas firms were encouraged to invest in Kazak enterprises on extremely favourable terms. As a result, the energy-rich republic has seen a lot of overseas investment during the last few years. Of $ 18 bn attracted in 2002, just under half was invested in the oil and gas market.

However, some deputies have voiced concern about the profits these overseas investors are taking out of the country -- around $ 24 bn this year alone. According to the local oil experts, this imbalance occurred for several reasons. In the early Nineties, when most of the big oil contracts were signed, there was a lack of experienced energy specialists in Kazakhstan and the country was desperate for outside investment. This clearly weakened the government's position during negotiations, they contend.
Analysts say the authorities are now flexing their muscles because they know that they are in a much better position than before, since the economy is stronger and western energy companies have never been more eager to tap their oil reserves. "There is a feeling that Kazakhstan is pushing and pressuring foreign investors in order to let them know how much pressure they can put on them," said Laurent Ruseskas, a specialist on the Caspian Sea at the Cambridge Association of Energy Research.

But there are concerns that the government may overestimate its ability to force powerful overseas firms to play by its own rules. "President Nursultan Nazarbayev should not forget that Kazakhstan still depends on foreign investment and won't be able to develop its big oilfields without outside help," said one analyst from Almaty's Oil and Gas magazine.
Sergei Smirnov, a senior research officer at the Institute for Strategic Research, told IWPR that the Kazak government, alarmed by the fact that the state has "virtually lost control over the largest and most promising oil fields", is now trying to attract local companies to exploit the resources.
But observers fear the fledgling domestic industry is not yet capable of taking control of the market. "The local companies currently cannot compete (in terms of expertise and experience) with the foreign corporations now lobbying to protect their interests here," said analyst Oleg Sidorov.