Stop Corruption: Foreign Investor Addresses KMG Head Khasenov

In November, Orda.kz published an interview with a specialist, US citizen Dorin Baru, who had worked for an extended period in Kazakhstan.

He spoke about the issues foreign companies face in Kazakhstan, the rampant corruption in the oil industry, and the role of oil trader Vitol in this situation.

A week later, KMG responded. KazMunayGas Chair Askhat Khasenov stated that Vitol fulfills its contractual obligations despite lawsuits in various countries.

Dorin Baru sent clarified specific aspects.

I want to emphasize and make clearer the statements made during my interview in ORDA on November 14 this year. For clarity I will write this in English.

 Here are the critical points:

I worked in Kazakhstan from early 2006 to mid-2009 in a lead management position for OMV, then managed as regional manager Kazakhstan business from Vienna from 2012 to 2014 and then back in Aktau from 2014 to 2020. OMV sold the Kazakhstan assets to a local private investor in 2021 and then I returned again managing the business from July 2022 to July 2024.

OMV had 4 concession agreements, one in Komsomolskoe field and the other 3 in Aktas, Tasbulat and Turkmenoi fields. 3 of the concession agreements have been renewed by my team in 2017 (not model contract) and one extended in 2022 practically prior to my arrival in 2022 (model contract). So in a nutshell this is my background in Kazakhstan, I will not detail it at this time

Below are the aspects of the interview I will emphasize:

1. The ‘Model Contract’

As I mentioned, this is practically ‘a contract without a contract’. There are many issues here, however, the most amazing element is that basically the investor is ‘assigned’ monthly the export and domestic quotas of its oil production (there are significant net back differences between export and domestic sales). So basically it makes impossible to forecast the business outcome over the duration of the contract. I believe it is unacceptable for an investor – local or foreign – to sign such contract. In addition, this is a recipe for corruption as quotas are being assigned on questionable criteria with very little oversight. 

2. Continuous Contract Terms Violation

The terms of the concession agreements still not ‘blessed’ with the model contract ‘terms’ – are being are being continuously violated by State bodies, mainly Ministry of Energy and Ministry of finance: The export / domestic quotas changed under the ‘excuse’ that ‘there is not enough gasoline or diesel in Kazakhstan, ‘the VAT is not refunded (or partially refunded), The transfer pricing definition is being completely ‘rebranded’ in spite of Kazakhstan being a WTO member (this allows MinFin to ‘collect’ huge amounts of cash via increased unwarranted taxation and penalties). Hundreds of unwarranted inspections mostly useless and time consuming and often targeting various forms of ‘consideration’ are damaging businesses and much more. 

3. Trading

I mentioned in my interview the VITOL monopoly on Kazakhstan exports. One of the largest oil trading companies in the world has a very strong grip on Kazakhstan oil exports. I will not go over additional details on how and under which circumstances this was achieved, but the bottom line is that most Kazakhstan oil producers get a several USD smaller return on their export oil. 6-7-10 or even more usd. I will emphasize that Kazakhstan oil is not under Russia sanctions and oil from Kazakhstan should flow free to world markets. Every single commercial manager in Kazakhstan is perfectly aware of this situation.

4. NIOCR

This is a 1% obligation imposed several years ago on all oil and gas producers. It was indeed included in new contracts, extended contracts and ongoing contracts. There is nothing wrong in funding applied and / or fundamental research – I would say it is good for Kazakhstan development. But the ‘good news’ ends here. Most of the service contracts done under NIOCR have absolutely nothing to do with research. I would strongly challenge the anticorruption bodies in Kazakhstan to review all the completed works under NIOCR and at the same time have some investigation on how (at under which circumstances various service companies have secured the respective licenses to operate under NIOCR (PIT and others). I am sure the public would be very interested to know the results of such investigations

Several days after my interview in ORDA there was a statement from KMG CEO Mr. Khasenov, who stated that KMG business with Vitol is basically ok. Mr. Khasenov is a very competent young Oil and gas Professional and I agree that after the huge amounts paid in advance by VITOL to secure long term KMG oil (and in many ways a complete dominance of the Kazakhstan market) KMG business with VITOL appears smooth. But is neither smooth nor profitable for most of the Kazakhstan producers – mentioned above in my statement. I suggest to open the export markets to more traders and also consider various corruption related scandals Vitol is or was facing worldwide

Over the last 30 or so years, Kazakhstan was blessed with huge revenues from oil. The middle class has grown (although not as much as it should have) and some cities are indeed impressive. However, the current standard of leaving does not match – for a very large % of the population – the level of oil revenues. Questionable at times administration, corruption, public contracts, and more. Over the years, I have trained, promoted, and enjoyed working with a lot of very high-quality people. While I am now partially retired, I keep an open eye on Kazakhstan development and hope it will thrive. But some things must be done ASAP: Stop corruption, state bodies hire people based on competence rather than ‘other’ criteria, all public contracts to undergo much more oversight, bribes, and unwarranted ‘consideration’ of any shape or form swiftly punished, and much more. 

I hope Kazakhstan will move in the right direction and ALL people of Kazakhstan, not just very few, will benefit.

Dorin Baru – retired 

(former) Managing Director OMV Petrom Kazakhstan

(former) Managing Director KomMunai and Tashbulat concessions

Original Author of Russian Version: Nikita Drobny