Royal Dutch Shell Group .com

THE NEW YORK TIMES: Investors Recoil From Oil Terms in Kazakhstan: "The terms offered by the government are not enough to justify the risk," said Dr. Martin Ferstl, chairman of Shell Kazakhstan, in an interview this month at the annual Kazakhstan International Oil and Gas Exhibition in Almaty, the country's commercial capital. (ShellNews.net)

 

By CHRISTOPHER PALA

27 Oct 04

 

LMATY, Kazakhstan: International oil companies are balking at tougher financial terms being set by the government of Kazakhstan, one of the few countries where major discoveries may still be made.

 

For years, energy ministry officials here have talked about opening some 100 promising blocs in the shallows of the northern Caspian Sea to foreign oil companies for exploratory drilling. The area borders the Kashagan field, the world's fifth largest, and has the potential to yield as much crude as Kashagan itself, more than one million barrels a day.

 

But a new amendment to the country's tax law has raised the government's share of oil income, to 65 to 85 percent, and removed a clause guaranteeing investors that the tax rate will not be increased during the contract. Specialists consider that percentage exceptionally high, especially considering the early stage of oil development in Kazakhstan.

 

"Host governments understand the majors are desperate for big projects," said Laurent Ruseckas, an analyst for the Eurasia Group, in a telephone interview from New York. "You can have horrendous terms and they will still come and invest, but here the terms are so horrible that the companies are staying away."

 

Kazakhstan officials deny that they are trying to keep out investors. But they acknowledge that delaying the development of the offshore blocs would give KazMunaiGaz, the state oil company, time to gain the expertise that would allow it to play a more lucrative role in these projects.

 

Energy Minister Vladimir Shkolnik said at a recent news conference: "We will work with investors and we will take their opinions into consideration. But Kazakhstan must defend its own interests, too."

 

At stake is whether Kazakhstan, whose production has grown from 400,000 barrels a day to 1.2 million barrels a day in the last decade, thanks to foreign technology and investment, will be able to reach its stated goal of tripling production again by 2015.

 

In a world oil market under pressure from rapid growth in China and India and disruptions in Iraq and Nigeria, a million barrels a day - given world production of 80 million barrels - can have a major influence on prices, industry specialists say.

 

But even with oil at $50 a barrel, investors have been turning down Kazakhstan's offer of maximum rates of return that would be below 10 percent, even though it is one of the few politically accessible areas in the world for new oil development.

 

"The terms offered by the government are not enough to justify the risk," said Dr. Martin Ferstl, chairman of Shell Kazakhstan, in an interview this month at the annual Kazakhstan International Oil and Gas Exhibition in Almaty, the country's commercial capital.

 

"The return should be over 15 percent at a minimum to justify the risks in exploration, development, pricing and transportation," he said. Kazakhstan's oil is deep, expensive to extract and far from an open sea.

 

On Wednesday, the lower house of Parliament approved legislation that would allow the government to step in uninvited and buy any share put up for sale by an oil company that is a member of a consortium, effectively reducing the value of the company's assets. The legislation, which would apply retroactively to existing contracts, is "virtually unprecedented in other jurisdictions," said Marla Valdez, managing partner of Denton Wilde Sapte in Almaty, a law firm specializing in oil issues. It is likely to be approved by the Senate and signed into law by the president, Nursultan Nazarbayev.

 

The notion that the government can pre-empt any sale is a subject of hot dispute at Kashagan, which at $30 billion is the world's costliest oil field development project. The government, insisting that it has the right to buy the share itself, has refused to allow the BG Group, the former British gas monopoly, to sell its one-sixth share to its partners.

 

Kashagan's consortium partners are blocking the sale to the government, saying the production-sharing agreement provides for no such right. After nearly a year, no end is in sight to the standoff, although the development project is moving forward. More than $3 billion will be spent next year.

 

Kazakhstan's government has been stable and economic reforms have been remarkably successful since independence in 1991, but investors say they are often treated in a more capricious and unpredictable manner than in other oil-producing countries.

 

The Kashagan oil field was expected to start producing in 2006, but was delayed for two years because of a financial dispute between the government and the consortium, which includes Agip S.p.A., the operator; Royal Dutch/Shell; Total; Exxon Mobil; and BG Group, along with ConocoPhillips and Inpex of Japan.

 

Kazakhstan's deputy energy minister, Lyazzat Kiinov, said his ministry had been opposed to the legislation that is discouraging foreign investors, but other parts of the government prevailed.

 

Kazakhstan's relatively small economy is flush with cash from high oil prices, and the local press regularly depicts foreign oil companies as rapaciously stealing the motherland's riches. Making the companies pay more is seen as a popular move.

 

"The jury is still out on whether all this will delay Kazakhstan's production," said Richard Vierbuchen, Exxon Mobil's vice president for the Caspian and the Middle East. "There is still time to make adjustments."

 

http://www.nytimes.com/2004/10/27/business/worldbusiness/27kazakh.html


Click here to return to Royal Dutch Shell Group .com