In its promises to toughen the tax burden for oil companies, the Kazakh government has moved from words to deeds. The Cabinet of Ministers in Astana voted unanimously for introduction of a customs duty on export of crude oil as early as in a month, not next year as had been intended before. After the meeting, Minister of Industry and Trade Vladimir Shkolnik explained to journalists there were several reasons for such haste. He named two: “First, the stabilisation of internal prices for oil products where it would be equally beneficial for the oil producer to sell crude for export and to a refinery. Second, the replenishment of the state budget.”
True, the growing world prices for crude means the growing prices for diesel and gas, in its turn means higher prices for food products and utilities. Clearly, under these circumstances, the government could not afford to wait until next year.
According to an existing procedure, the signed government resolution will come into force after one month, and then a customs duty of USD 109.91 will be levied on each tonne of Kazakh crude going for export. It could mean an additional USD one billion for the state treasury.
However, this amount could be considerably higher if the government’s hands were not tied by conditions of contracts made with the foreign companies at the dawn of the country’s independence, on beneficial terms for investors.
According to Minister of Finance Bolat Zhamishev, the customs duty will apply to approximately one-third of the total crude produced in Kazakhstan each year. “This makes approximately 27 million tonnes,” he clarified.
Last year, oil production in Kazakhstan totalled more than 55 million tonnes, out of which as little as about 12 million went to the domestic refineries for processing. Falling under the category of “holy cows” are such giants as Tengizchevroil and Karachaganak Petroleum Operating.
However, the national company KazMunaiGas (KMG), which provides a lion’s share of the state budget, has been less lucky. In its press release yesterday, KMG said that with the introduction of the export duty on crude oil the company might revise its investment programmes.
However, there is an opinion that the new export duty will be short-lived. For example, Daulet Ergozhin, Vice Minister of Finance and an initiator of the disturbingfor the oil industry-tax on extraction of mineral resources, said: “The customs duty is ultimately a tax of a corruption nature, as it is established by someone and has no direct action. Considering that Kazakhstan plans to join WTO, this duty will have to be lifted sooner or later.”
According to Ergozhin, more viable for the new Tax Code will be the tax on extraction of mineral resources promoted by his agency. Both the tax on extraction of mineral resources and the customs duty on export of crude oil are linked to the world prices for crude. It is unknown at this point if both these levies will be present in the country in the future, but one thing is certain – any step of the Kazakh government towards the tightening of the tax policy will provoke a reaction from the investors. It is not unlikely that again there will be an outcry over the worsening of the investment climate in Kazakhstan.
However, this time the developers of the new taxation concept are taking a harder stand than, say, five years ago. For instance, Ergozhin responds as following to such challenges: “Our oil and gas are nonrenewable sources of energy - we cannot put them back into the ground. All that remains in Kazakhstan from their extraction is the salary and the margin. And strictly speaking, we are the service personnel and we have been happy with it. But we must be the masters of our resources, and such time has come,” he said.
He supports his opinion with numbers. “We have given to the investors enough time to profit. Since 2004, when the oil prices started to grow, only four companies in Kazakhstan have not repaid themselves. All the others have more than recouped their costs. According to my data, there are companies whose internal rate of return is as high as 74 percent,” he said.
With such a strong government position, it seems like the oil companies in Kazakhstan cannot expect any relief in the future.