Big Oil, Big Decisions: Can Kazakhstan Secure a Better Deal with Foreign Investors?

cover Photo: Orda.kz

Kazakhstan’s economy depends heavily on three major oil fields: Tengiz, Kashagan, and Karachaganak.

These fields generate stable revenue but are controlled mainly by foreign investors. The question is whether Kazakhstan can take greater control of its oil wealth — or will it have to wait for circumstances to change.

At a government meeting on January 28, President Qasym-Jomart Toqayev instructed officials to negotiate new terms for these key oil contracts, aiming for a more favorable deal for Kazakhstan.

He emphasized that large investments require long-term planning and signaled that existing agreements should be revisited.

Olzhas Baidildinov, a member of the Public Council of the Ministry of Energy and the founder of the "Baidildinov. Oil" Telegram channel, recalls that Tengiz, Karachaganak, and Kashagan account for 67% of Kazakhstan’s oil production.

However, the state-owned KazMunayGas (KMG) only controls about 25% of this output. This imbalance has forced the government to make tough economic choices, such as raising VAT.

I’ve long said these contracts need to be revised. There’s no other way to address the economic and budget deficit. The need to raise taxes stems from the government's reluctance or inability to reassess these contracts. Back in the 1970s, the monarchies in the Persian Gulf reviewed unfavorable contracts for them and look at the UAE now —where the VAT is only 5%. Their CIT (corporate income tax) rate is 9%, and income up to $100,000 is not subject to CIT. And the secret to their success isn’t the tourism revenue, but that they began owning their country's oil wealth. says Olzhas Baidildinov.

The contract for Tengiz is valid until 2033, Karachaganak until 2038, and Kashagan until 2041.

Speaking at a government meeting, President Toqayev stressed the importance of maintaining investment stability, acknowledging that these contracts have been vital for Kazakhstan's success, and there’s no immediate need to expel foreign companies or fully nationalize the industry.

You can look at the experience of Arab countries - for example, Saudi Arabia, which completely nationalized the oil industry in 1978. It took them 45 years to do this. We have contracts for 40 years; as I understand it, we are not yet ready to fully assume such responsibility. Maybe Kazakhstan is not ready from a technical or financial point of view. Maybe the geopolitical situation has an impact - we need to consider the interests of Western investors to ensure a balance with the interests of Russia and China. Unlike the Arab countries, we do not have access to the sea, we have a northern neighbor and an eastern neighbor - this is our destiny, we will maintain a balance between strong players,  explains oil analyst Abzal Narymbetov, author of the Energy Analytics Telegram channel.

Still, the current agreements were signed decades ago under very different economic conditions. The government believes it is time for a revision.

Kazakhstan has the expertise, trained professionals, and advanced technology to manage its oil fields.

Increasing the state’s share in key projects is a logical next step.

We will not take this profit completely, but partially. This could be a larger stake in projects, or some privileges. The question here is how profitable it will be for the state if KMG gets this stake. Because KMG's main donors are now Karachaganak, Kashagan, and Tengiz, the rest of the fields are unprofitable. They are dragging KMG down,  Olzhas Baidildinov notes.

Currently, KMG relies heavily on revenue from the “big three” fields while other domestic fields are struggling. The government is looking for more favorable contract terms with foreign investors to improve this situation.

President Toqayev demands not just an extension of contracts but their revision on more favorable terms for Kazakhstan. Agreements on the largest fields (Tengiz, Karachaganak, Kashagan) expire in 2033-2041, but the government is already seeking to adjust financial and operational parameters.says Abzal Narymbetov.

The key objectives of the negotiations that Kazakhstan will conduct with investors are to increase the state's share of oil profits, expand KMG’s role in complex projects, like shale oil development, and attract long-term investments.

The President's instructions can be implemented by reducing cost recovery rates from 80% to 55%, expanding KMG’s stake in existing fields, or revising the structure of the foreign consortiums that manage Kazakhstan’s top oil projects.

Another tool Kazakhstan could use is higher royalties and removing excessive benefits for subsoil users. A similar approach in 2012 helped the government save $1 billion by adjusting costs at Kashagan.

One of the most critical contracts under negotiation is for Tengiz. The American side is pushing for a 20-year extension, but Kazakhstan must decide whether this is in its best interest.

"I’m against extending the Tengiz contract. This field should belong to us. We can bring in companies like SLB (Schlumberger) as an oilfield service company, but Kazakhstan should reap the main benefits," says Olzhas Baidildinov.

The situation in the oil sector is complicated by the ongoing legal disputes involving PSA LLP, the authorized body for Tengiz and Karachaganak, and foreign investors. These disputes include hundreds of billions of dollars.

President Toqayev’s recent comments might indicate a push to resolve these arbitration issues sooner rather than later.

Kazakhstan will continue to use arbitration as a pressure tool to achieve favorable conditions without abandoning claims. The strategy's success depends on an effective negotiation process and a balanced approach, notes Abzal Narymbetov.

The analyst points out that arbitration has worked in Kazakhstan’s favor before. In 2008, the country increased its stake in Kashagan from 8.33% to 16.88%, and in 2020, it secured $1.9 billion in compensation for Karachaganak.

The outcome of ongoing arbitration cases poses uncertainty for Kazakhstan, which is currently involved in lawsuits against investors in Kashagan (seeking $160 billion) and Karachaganak (seeking $3.5 billion) with limited success thus far.

The final terms of new contracts will likely hinge on the outcomes of these proceedings. 

Given the environmental claims against consortium members, it’s possible there could be discussions about altering the composition of NCOC, mainly since approximately 80% of Kazakhstan's oil is exported via the CPC pipeline.

Another challenge regarding extending contracts for the "big three" is whether KazMunayGas is genuinely prepared to manage the country's largest oil fields.

Analysts suggest that KMG still lacks a clear, long-term strategy for the oil and gas sector.

To effectively renegotiate these contracts, the government and KMG must adopt strategic and innovative approaches.

Kazakhstan has begun taking initial steps toward gaining more control over its resources. If successful, the country could follow in the footsteps of the UAE and Saudi Arabia, securing long-term prosperity from its oil wealth.

In any case, the President’s initiative to renegotiate on better terms is a positive step for the economy and our oil industry. Kazakhstan is currently losing $5–6 billion annually in export and customs duties on these three contracts alone. This is a large sum, which would, in any case, allow us to reduce the VAT increase that is planned in Kazakhstan, Olzhas Baidildinov summarizes.

Original Author: Nikita Drobny

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