Oil and investment games of Central Asia

 Dosym Satpaev

What had to happen sooner or later, has happened. The government of Kazakhstan has started operations in the conflict against Agip KCO consortium on all fronts. Not the fact of the conflict with one of the largest foreign investors is interesting here, rather the tendency.
The period from 1991 till 2002 was most favourable for attracting foreign investors and their activities. During this period Kazakhstan lost control practically over all f its oil and gas deposits, after selling them to foreign companies. Since 2002 – till present time we observe the policy of establishing investment parity and strengthening the control over investors. There are objective as well as subjective reasons for this.
Firstly, due to favourable pricing condition on the market, Kazakhstan could create strong enough economic platform to decrease dependence from foreign investors. It was also connected to increased role of the state in the economy, including oil and gas sphere, where positions of state owned KazMunayGas” are improving.
Secondly, new oil and gas elite appeared in Kazakhstan; this elite wanted an access to the resource pie, which for a long time belonged to foreign investors.
Thirdly, Kazakhstan started forming a new legislation base for resource sector. The main difference from the previous one is in strengthening new priorities in forming investment climate. While during the previous decade Kazakhstan’s priority was attracting foreign investors, in the recent years the priority is supporting national companies, which are closely connected with political elite. For example, several years ago a new law on investments was adopted in Kazakhstan, it cancelled 6th article of the old law “On foreign investments”. According to the abolished article, the government undertook responsibility to restrain from actions that would harm the investors.
The government also adopted the law “On changes and amendments to some legislative acts of Republic of Kazakhstan on the issues of mineral resources and conducting operations with oil in Republic of Kazakhstan”. Now the government officially has a priority in purchasing shares of investors’ projects that decide to trade them. Besides, Kazakhstan has already adopted the amendment to oil legislation, which prohibits transfer of rights for the resources within two years of singing the contract. The term “concentration of rights” was also included into legislation on natural resources, it means that the government has the right to interfere into a deal if it threatens considerable increase of foreign ownership that influences national security. According to the government, the reasons behind the changes are the interests of national security, and that the previous legislation didn’t provide the government with enough control over national resources.
Fourthly, the government of Kazakhstan has already started decreasing the dependence on western capital by broadening the areas of investment activities and inviting Russian, Chinese, Indian and South Korean companies. Activities of Chinese companies in oil and gas sector of Kazakhstan will only increase. It can be seen from their serious intent to participate in new tenders for development of Caspian deposits.
The first sign of changes in government’s policy regarding foreign investors were frictions between the government and “Tengizchevroil” about ecology. It was very uncommon in mid 1990s, the frictions ended up with a big penalty levied to the company.
Later the tax committee of the Ministry of Finance of Kazakhstan stated that it wanted to reconsider tax regulations of large oil companies; the contracts signed during 1993 – 1997 were to be reconsidered. The government wants the companies that came to our country more than ten years ago to stop emphasising investment risks in Kazakhstan. It means that they have to agree to increasing tax payments to the budget. That is to pay according to standard tax procedure of Kazakhstan. Particularly Astana is trying to increase TCO’s input into national economy by 20% without taking into account the growth of extraction of hydrocarbons.
Unexpectedly for everyone, in April 2006 KNB of Kazakhstan accused some foreign companies that their activities threaten national security. Nurgali Bilisbekov, head of economic security department of KNB, said that KPO (Karachaganak Petroleum Operating) and Agip KCO consortiums take actions to maximize their profits to the prejudice of Kazakhstan. This was one of the first precedents when KNB publicly accused foreign investors in threatening national economic security. Previously the main accusations towards the investors were about breaching ecological norms, labour legislation or, in extreme cases, non-payment of taxes.
Early this year Karim Masimov, Prime Minister, stated that in general implementation of contractual conditions by producers of natural resources is unsatisfactory. Then it was about extending the exploration periods, postponing beginning of industrial production from the deposits and increasing the costs. It has an obvious hint at the activities of large foreign oil and gas companies working on Karachaganak, Kashagan and Tengis deposits. Thus, the situation has been coming to this ending since long ago.
The government considers the price of political risks, which our country pays to oil investors that came during that period, to be overvalued. In early 1990s the government provided them with very beneficial taxation conditions and guaranteed invariability of terms of the contracts. That’s why in 2007 the government of Kazakhstan stated that it intends to strengthen control over export-import activities of largest producers of natural resources in the country.
On the instructions of the Prime Minister the Ministry of Energy and Mineral Resources together with the Ministry of Economy and Budget Planning have to arrange efficient monitoring of fulfilling the contractual liabilities. Strengthening the monitoring meant collecting the information required for pressing the investors. Then it seemed that the government would try to convince the producers that reconsidering the contract terms once was better than the government’s increased and adversary attention towards their activities.
In addition notice that the government of Kazakhstan often makes concessions to Kazakhstani investors. Extracting and processing with the country’s own companies is emphasized. For accomplishing this goal “KazMunayGas” wants to receive $70 billion in investments and credits from local businesses. Kazakhstani investors also received additional mechanism of cooperating with the President. On 21st of April 2007 the President announced creation of National Investors Council. Currently the investments into the country’s economy by local investors are $80 billion, which is $20 billion more than by foreign investors. However the main task for the President was to redirect internal investments of local companies into non-resource sphere, where foreign investors are not very active.
In perspective the government of Kazakhstan will continue to pursuit the policy of strengthening the control over all large foreign oil and gas investors. Possibly the international consortium that develops Karachaganak gas deposit will be the next target for the government, this consortium has also announced increase of exploration costs.
Besides, the policy of attracting foreign investments will provide more favourable conditions in non-resource sectors. New socio-economic programme of the government for 2007 – 2009, presented by Karim Masimov on 9th of February 2007, confirms it.
Hence, figuratively foreign investors are offered the role of a sheep rather than of a horse rider in kokpar game (Central Asian game of horse riders). It is surprising how our government discovered all of these ecologic and customs violations after a decade of closing their eyes on them. A big mistake by the investors was to accept the rules of the game and make those violations, after becoming accustomed to “blindness” of our officials. Now these officials successfully use the mistake as a powerful pressure tool.