Western Oil Companies feel the Heat in Kazakhstan

    Fine levied on group developing gas field stirs concern government may adopt Russian-style pressure tactics
    By Guy Chazan
    A consortium of Western oil companies developing a huge natural-gas field in Kazakhstan was slapped with a $21 million fine Friday, the latest step in a pressure campaign that is raising concern among investors in the oil-rich Central Asian state.
    The consortium developing the Karachaganak natural-gas project, above, in Kazakhstan was fined by the government over environmental issues.
    The move, against the group developing a field called Karachaganak, is reminiscent of tactics deployed by Russia, which also used penalties and investigations to coerce Western oil majors into giving state companies stakes in their projects.
    Kazakhstan, on the shores of the Caspian Sea, is currently scrutinizing all the landmark oil deals it signed in the early 1990s, many of which are now seen as being unfairly skewed towards the international oil companies.
    The biggest deals, known as production-sharing agreements, or PSAs, were supposed to lock in favorable tax regimes. But authorities now want to open them up and remove their exemptions from tax changes so as to increase government revenues from the oil sector.
    The Kazakh Finance Ministry is currently analyzing 17 contracts, including the main PSAs, and may recommend sweeping changes.
    "We have issues regarding their legality," said Deputy Finance Minister Daulet Yergozhin in an interview. "There are certain clauses, including on tax, which may need to be amended to bring them in line with Kazakh law."
    He said the ministry would present the findings of its analysis to the government by April 1.
    Friday's fine was imposed on Karachaganak Petroleum Operating B.V., or KPO, which is led by Britain's BG Group PLC and Eni SpA of Italy.
    Many observers think it is a prelude to Kazakhstan's state-owned oil company, KMG, forcing its way into the consortium.
    The companies referred all questions to KPO, which declined to comment.
    A person familiar with the matter said the consortium may appeal the fine in Kazakhstan's Supreme Court.
    KPO is vulnerable because it is the only big oil-and-gas project in Kazakhstan in which KMG doesn't have an interest.
    Last December, Kazakh authorities confirmed they wanted KMG to become a partner in Karachaganak, although BG and Eni deny there have been any discussions on it joining the consortium.
    "This is part of the 'bully then buy out' model," said Ana Jelenkovic, a Central Asian expert at consultancy Eurasia Group.
    There are precedents for such a scenario. A long-running dispute between Kazakhstan and an Eni-led group developing another huge oilfield, Kashagan, ended with KMG doubling its stake in the venture.
    That echoed the travails suffered by Royal Dutch Shell PLC, which was forced to sell a majority stake in its massive Sakhalin 2 natural-gas project in Russia's Far East to OAO Gazprom after a long campaign of official harassment.
    A statement Friday from the Kazakh prosecutor general's office said a regional court had fined KPO for environmental violations such as excessive dumping of waste dating back to 2008.
    KPO is currently seeking to recover more than $1 billion in export duties which it says were illegally levied on the venture by the Kazakh government in 2008.
    Analysts say the Kazakh authorities could pay back the $1 billion and get a 10% stake for KMG in the venture in exchange, the Wall Street Journal reports.