The head of Kazakhstan recently signed the amendments to the Law On Subsurface and Subsurface Use that had lately become a subject of heated discussions about the worsening of the investment climate in Kazakhstan. In spite of the unanimous advice and requests from the investors not to enact the bill, the Kazakh president has made a decision that clearly defines the new and principled position of the country “should be respected.”
Oil is, after all, Big Politics and only then – Big Economics. However, in the case of the world’s largest oil field in Kazakhstan, Kashagan, the two are present together and intertwined. The second postponement of the first oil from this field is fraught with undesirable consequences for Kazakhstan. Firstly, the country’s reputation is at stake: the earlier announced plans to produce 150 million tonnes of oil by 2015 are quite likely to remain declarative intentions. Secondly, the expected oil sale profits that Kazakhstan could use to solve many of its problems remain tenuous.
The new amendments to the subsoil law, prompted by the situation around Kashagan, tighten the requirements to the oil producers. More precisely, they are meant to improve the foreign investors’ discipline in performing their obligations.
The foreign media had been quick to respond to the approval of the amendments by the two chambers of the Kazakh Parliament. Immediately, the headings had appeared in the press that the official Astana was “cracking down” on the foreign investors.
With one accord, the foreign VIPs were trying to talk the Kazakh president out of the signing of the amendments to the law, their main argument being that it would inevitably affect the investment image of the country.
And while the document was still on the president’s desk awaiting a decision, the foreign companies even wrote a letter to the head of the state asking him not to enact the bill as contradicting the country’s main document - the constitution. Within the oil companies, three possible scenarios were discussed: the president will either veto the bill, or send it for revisions, or sign it. As it appeared, the third, and the most feared by the investors, scenario happened.
One of the first to react to the decision of Astana was the European Commission whose prime concern now is to safeguard energy security for its members.
“The Commission will continue to analyse the possible effect of the new legislation on the European investments in Kazakhstan, including the new law’s conformity to the provisions of the Energy Charter Treaty, in particular, concerning the support and protection of investments,” EU Energy Commissioner Andris Piebalgs said recently.
Answering the question as to which of the decisions would be better for the country, a local industry expert told New Europe: “The third one, by all means. The enactment of the law will mean that the country, at last, will show grit and make (the investors) respect it. The concerns and the warnings that our investment climate will suffer from that are groundless. Wait and see; none of the investors will leave! It is high time we liberated ourselves of the image of a submissive primary resource producing colony. We have long grown out of it, and the foreign investors should take us seriously.”
One of the main goals that the Kazakh government is pursuing in the Kashagan project is to increase the Kazakh share in the project. But considering the current oil prices, it would be naive to believe that the members of the consortium will be willing to give up a part of their interest in the project in favour of the national company Kaz- MunaiGas. KazMunaiGas currently holds as little as eight percent in Kashagan. And what it is really about is who will control the entire project after the change of hands.
The bill was signed two days after the completion of the “friendly stage” of negotiations on Kashagan. The outcome of the negotiations is anything but disappointing, but it is far from satisfying either. As it has become known, one of the members of the Agip KCO consortium did not agree to the new share of KazMunaiGas. There is an opinion that if the members of the Agip KCO consortium do not agree to the requirements of Kazakhstan and “the parties fail to achieve a consensus, Kazakhstan may initiate arbitration proceedings.”
So far the matter has stayed out of the courts, and the parties hope for mutual reasonableness. However, the Kazakhstan’s desire to increase its share in the Kashagan project is regarded by the foreign investors as a threat of nationalisation. Many of them see analogy with the Sakhalin II case in Russia. But, according to the Kazakh oil industry officials, in spite of the tougher laws, Kazakhstan is one of the few remaining “conservancy areas” where nationalisation is not even being considered.
Gregory Vojack, managing partner in the Central Asia office of Bracewell & Giuliani, said in his presentation in Almaty recently at the international conference KIOGE- 2007: “In my view, it is better not to have strategic projects in Russia. The difference between Russia and Kazakhstan is that if a situation similar to Kashagan happened in Russia, it would not be resolved there the way is done here – through negotiations.” Regarding the amendments to the subsoil law Vojack sees no basis for concerns either: “In making laws at nationalising the mineral resources producing facilities, many countries had provided for compensation to the leaving investors. Kazakhstan did not include any such compensation provision in the amendments.
If there is no compensation clause, no nationalisation of the project is intended. As a lawyer, I believe that negotiation is the best way to resolve the Kashagan issue.”