Explaining Kazakhstan's $150bn+ claims at Kashagan [Gas in Transition]

Kazakhstan’s launch of claims topping $150bn against the international consortium managing its largest oil and gas field risks tarnishing its investment climate, at a time when it is already grappling with fiscal challenges.

These claims, whether valid or not, far exceed previous ones that the government has made against the developers of its largest oil and gas projects. This could show Astana’s growing desperation about securing future revenue for its budget, as rising costs continue to outpace revenue. It may also be a play by the government of President Jomart Tokayev to differentiate his rule to that of predecessor Nursultan Nazarbayev in the eyes of the public, by taking a tougher stance against the international oil companies (IOCs).

The back story

Kashagan was hailed as the largest oil discovery in more than 30 years when it was found in 2000, with an estimated 13bn barrels of recoverable liquid reserves. But it has also proved one of the world’s most problematic and expensive upstream ventures, with its long road to production plagued by delays, cost overruns, technical difficulties and disputes between the government and investors.

The field is operated by the North Caspian Operating Co. (NCOC), which today comprises Kazakhstan’s state-owned KMG (16.9%), Shell (16.9%), TotalEnergies (16.8%), Eni (16.8%), ExxonMobil (16.8%), China’s CNPC (8.3%) and Japan’s Inpex (7.6%), under a production-sharing agreement (PSA) dating back to 1997.

Kazakh authorities originally hoped Kashagan could come on stream in 2005, but its launch was repeatedly delayed. Then there was a false start in September 2013, when the field achieved first oil, only to be shut down a month later after the highly corrosive hydrogen sulphide in its gas corroded the pipelines. This is just one of the serious technical challenges presented by Kashagan. Its light crude oil is located more than 4,000 metres under the seabed in very high pressure and temperature reservoirs that proved to have highly unpredictable characteristics. Adding to that are the logistical challenges of working in the landlocked Caspian Sea, the very shallow waters at the site that necessitated the development of artiifical islands to avoid damage from pack ice, and a host of other difficulties.

Production was finally restarted in September 2016 after many of its pipelines had been replaced. But NCOC initially struggled to keep flow rates steady. These issues were later resolved, and the field produced 18.8mn tonnes (around 375,000 barrels/day) of oil last year – equivalent to around a fifth of Kazakhstan’s overall output. It also yielded 11.8bn m3 of gas that year, also equal to roughly 20% of the national total.

However, this is far below the full potential that was envisaged during the development’s initial stages, when it was expected that it would eventually achieve a plateau production rate of 1.5mn b/d.

Cost estimates differ, although it is understood that the expense at the time of the field’s start-up came to $55bn.

The claims

Kazakhstan’s government in April launched a $138bn claim against NCOC for alleged lost revenue from Kashagan, citing its long delays and other setbacks, Bloomberg reported, citing people familiar with the matter. That adds to $15bn in claims against the consortium that were lodged last year over disputed project costs. An appeals court in Astana this year also overruled a past Kazakh court ruling throwing out $5.1bn in environmental fines levied at NCOC.

“While the government has not commented publicly on the latest claims, it appears to be stating two things: investors have been incorrectly calculating recoverable expenses; and, more dramatically, delays and cost overruns on the project have resulted in Kazakhstan missing out on huge sums of revenue that officials appear to believe that they are due,” Ben Godwin, head of analysis at London-based PRISM Political Risk Management, tells NGW.

For its part, NCOC confirmed it was involved in a number of disputes relating to the Kashagan PSA but did not disclose details only saying that “the contracting companies consider that they have acted in accordance with [the contract].”

Multi-billion dollar disputes at Kazakhstan’s largest oil and gas projects are nothing new. Past disagreements have typically ended with the developers agreeing to hand over a smaller sum, commit to new investments or provide the government with a greater share of future revenues.

NCOC agreed to pay $5bn to the state in 2008 and sell a larger stake in the consortium to state-run KMG. At Karachagank, a giant onshore gas and condensate field in Kazakhstan led by Eni and Shell, a dispute also led to KMG gaining an interest in the project in 2012. Only three years later the government sued the developers once more for $1.6bn, asserting it was not getting its fair share of revenue. The consortium later pledged to spend $1.1bn on a debottlenecking project in 2018 to expand sour gas processing, and in 2020 paid $1.3bn to end the case. The terms of the PSA governing Karachaganak were also revised to increase earnings for the Kazakh state.

Timing

It is the sheer size of the latest claims that sets a precedent, exceeding the entire cost of the project.

“This appears difficult to justify on any grounds,” Godwin says. “I think that investors will have strong grounds to dispute if an agreement is not found.”

The claims come at a time when Kazakhstan is coping with difficulties attracting new investment and rising social costs that are outpacing available revenue.

“Kazakhstan is facing difficult fiscal conditions after a series of crises – COVID-19, the war in Ukraine and most recently devastating floods,” Godwin says. “This has made the republic very concerned about securing revenue into the budget. This may have motivated the claims to a degree.”

“It is possible that the new administration sees such a huge claim as a route to securing additional revenue from the projects or simply winning popular support.”

Back in January 2022 Kazakhstan faced mass social unrest over economic inequality, corruption and general dissatisfaction with authorities, triggered by the government’s ending of price controls on fuel prices – a decision that was promptly reversed. At the time, President Tokayev claimed it was an attempt to overthrow the government. Since then his administration has pledged to do more to redistribute national wealth more evenly. 

Taking on the IOCs that dominate Kazakhstan’s oil and gas industry therefore has good optics. In this way Tokayev could differentiate his image from that of his predecessor Nazarbayev, under whose reign most of the largest original PSAs were signed.

At the same time, Kazakhstan is on a major push to attract more foreign investment. In the oil sector, Chevron and its partners aim to finish the $47bn expansion of another major field onshore, Tengiz, next year, and Kazakhstan is eager to advance fresh projects to replace it. In spite of the claims, it is in discussions with NCOC on an expansion of Kashagan. It has also been holding a series of auctions for oil and gas blocks onshore, and hoping to develop new fields offshore.

But the claims might trigger alarm bells for would-be investors.

“Whatever the outcome of this dispute, it is likely to prove quite damning for Kazakhstan’s image in terms of investment climate,” Godwin says.