ASTANA FINDS A SOLUTION

Kazakhstan has finally reached a compromise with foreign companies on the development of the major Kashagan field in the Kazakh sector of the Caspian Sea, says a statement by the Kazakh Government press service.

"Compromise solutions have been reached on all issues and the legalising of appropriate documents is currently in process," said Prime Minister Karim Masimov in Astana during a meeting with the EU special representative for Central Asia, Pierre Morel.

Details of the solution are not being elaborated. The government statement only indicated that the parties discussed issues of cooperation in the energy sector and the transportation of oil. Mr. Masimov confirmed Kazakhstan's adherence to the policy of multiple options for the export of energy and expressed support for EU initiatives on the development of southern transportation routes for oil. At issue is the future construction of pipelines bypassing Russia - through the Southern Caucasus to Europe and the Mediterranean, for which the EU has been actively lobbying. 

"Morel said Kazakhstan was playing a pivotal role in promoting projects which aim to develop additional corridors for the export of hydrocarbons," says the press release.

Commenting on the European envoy's working visit to the Kazakh capital, analysts in Astana believe that it had a particular purpose. They believe that Morel was expecting to have agreements reached during lengthy negotiations on Kashagan reaffirmed during private meetings. There is speculation that foreign companies involved in the project have been "retreating from their positions" under pressure from Brussels and Washington, which have stepped up diplomatic efforts to engage energy-rich countries in Central Asia in major projects in order to provide European markets with alternative sources of oil and gas.

Independent expert Joanna Lillis says in comments for Eurasia.net that the developments around Kashagan show that the Kazakh authorities are not minded to compromise with foreign investors who are keen to preserve the beneficial terms of agreements signed in the 1990s. The government today is clearly reconsidering the terms of some earlier deals - mainly in a unilateral fashion.

Some time ago the Kazakh Ministry of Energy and Natural Resources signed a new agreement with a consortium of foreign investors developing the vast Kashagan field. It acknowledges that the start of production from the field is to be postponed again - this time until 2013, i.e. eight years later than the original target of 2005, then 2008 and then 2010. Then, in January of this year, agreement was reached on the target for final industrial commissioning of the project - 2011. Under this agreement, the national company KazMunayGaz (KMG) doubled its share in Kashagan at the expense of foreign investors.

The new agreement will "significantly expand the boundaries of agreements reached in December and January and open the way for further development of the project, says a KMG statement, issued after the deal was signed. Along with important changes to economic terms, the new deal will provide the Republic of Kazakhstan with considerable assurances that the project will be implemented in full, accordance with the schedule."

Astana was extremely unhappy about the constant delaying of production from Kashagan. The field was discovered in 2000 and is the largest of all discoveries in the last 30 years. According to some estimates, the field has reserves of 13 billion barrels of oil. The delays have jeopardized the government's plans to more than double oil production in the country, bringing it to 150 million tons a year by 2015 and joining the world's 10 leading energy producers.

We recall that tensions around Kashagan began to run high when project implementation encountered difficulties in 2007. The project operator, the Italian company Eni, informed the Kazakh government that it would have to slightly amend financial and technical terms of the contract, postpone commencement of industrial production from 2008 to the latter half of 2010 and significantly increase project costs from $57 to $136 billion.

Naturally, such developments, which hampered ambitious plans for the earliest export of Kazakh oil to world markets, caused dissatisfaction in Astana. The energy ministry issued a harshly-worded statement laying the blame for the delay at the feet of the consortium. The government even threatened severe sanctions and possible termination of the contract.

Several years ago the authorities had already backed down and agreed to adjust the terms initially agreed on payoff. This time the payoff "trick" was not repeated and, in order to prevent such surprises from recurring in the future, Astana decided to take the initiative by increasing the presence and participation of KazMunayGaz. To add even more conviction, national legislation was amended to impose new obligations on foreign companies.

Many months of an uncompromising game of "let's see who gets the upper hand" almost became a subject for discussion at inter-state level, when Kashagan was the focus of attention in the dialogue between the EU and Kazakhstan.

Joanna Lillis links the Kashagan developments to a new economic strategy in Kazakhstan, which is taking steps to invigorate control over the country's lucrative energy sector. This encourages foreign investors to take defensive positions.

She said that over the last few weeks, Nursultan Nazarbayev's administration had acquired a controlling share in one of Kazakhstan's main oil companies, entered into verbal bickering with the consortium developing Kashagan and stated that another international consortium was paying a new export duty on oil, from which many foreign investors had thought they were exempt.

At issue is the take-over of MangystauMunayGaz (MMG), one of Kazakhstan's largest oil producing enterprises: in July KMG announced the conclusion of a long-awaited agreement on the acquisition of a controlling share in MangystauMunayGaz JSC from the Indonesian company Central Asia Petroleum. According to a preliminary agreement, KMG will take over 51 per cent of the company. The Russian company Gazpromneft expressed interest in buying the remaining 49 per cent. On 17 July its representatives discussed the possibility of buying the minority package of shares with KMG president, Serik Burkitbayev.

The volume of confirmed reserves in fields being developed by the company is around 500 million barrels of oil, while production is close to 120,000 barrels a year. Experts think this will enable KMG to increase production and establish control over the Pavlodar petrochemical plant.

Although details of the deal have yet to be worked through, KazMunayGaz is already managing the activities of MangystauMunayGaz, Mr. Burkitbayev told Interfax-Kazakhstan at a news conference in Astana. KMG has already appointed a new head of MMG: Uzakbay Karabalin, Mr. Burkitbayev's predecessor in the state energy company.

It mid-July it also transpired that one of the largest consortia developing the gigantic Karachaganak field is paying a new oil export tax, to the sum of $109.91 per ton. Analysts think that this additional income will pave the way for an influx of funds into the state budget and enable the government to finance suspended construction projects.

The latest developments and statements by Kazakh officials in Astana are an indication that Kazakhstan is determined to do everything it can to prove its independence, that it is now a fully-fledged economic partner in negotiations with potential buyers of energy and will not be content with small profits.