Kashagan Operator Accused Of Stalling Sulfur Fine Pending Washington Arbitration

The consortium operating the Kashagan field may be deliberately dragging out environmental proceedings in Kazakhstan in an effort to avoid paying a massive fine before a ruling is issued by an international arbitration tribunal in Washington, oil and gas expert Nurlan Zhumagulov wrote on his Energy Monitor Telegram channel. If the case is ultimately unsuccessful for the operator, the payment could reach 2.3 trillion tenge, Orda.kz reports.

Zhumagulov noted that the Supreme Court recently rejected an appeal by the North Caspian Operating Company (NCOC), the Kashagan operator. The company argued that procedural violations had taken place during the case, but the court did not accept those arguments.

The Ecology Department of the Atyrau region must now impose a 2.3 trillion tenge fine on NCOC over violations related to sulfur storage, he said. However, the operator still has the option to file another appeal. Zhumagulov described that step as a formality intended to buy time while the international arbitration case continues.

He also argued that Kazakh courts themselves are slowing the process. At the same time, he questioned how the state would actually enforce payment of such a fine.

Under the law, the authorities could freeze funds held in bank accounts or ban NCOC managers from leaving the country. But those measures may be difficult to use, Zhumagulov wrote, because NCOC’s accounts do not accumulate revenue from Kashagan production. Instead, the proceeds go directly to the project’s shareholders: KazMunayGas, Shell, Eni, ExxonMobil, TotalEnergies, CNPC and Inpex. Those companies independently sell the oil for export and transfer part of the proceeds to the state under the terms of the production-sharing agreement.

The environmental case over Kashagan has been ongoing since 2022. According to Bloomberg, NCOC shareholders had long been aware of possible violations involving sulfur storage and of potential claims from the Kazakh authorities. Bloomberg also reported that NCOC proposed grinding the stored sulfur to make it suitable for sale, but no action was taken.

Over the past four years, the state has also brought new claims against NCOC and Karachaganak operator KPO over alleged overstatements of capital expenditure. According to the claims, this allowed the operators and their shareholders to retain a larger share of produced oil as cost compensation, while state budget revenues declined.

The total size of those claims varies depending on the source. Bloomberg reported that Kazakhstan was seeking $6 billion from KPO alone, while the International Consortium of Investigative Journalists has said claims linked to Kashagan may reach $160 billion.

Original author: Alexey Afonsky

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