Halyk Finance: Idea of transferring Western companies’ stakes in Kazakhstani oil projects to Russia is doubtful

According to Halyk Finance, the idea of transferring Western companies’ stakes in Tengiz, Karachaganak and Kashagan to Russia in exchange for frozen Russian assets is doubtful.

«The investment climate in the sphere of oil exploration and production in Kazakhstan isn’t that attractive due to problems with actual costs, difficulties in the domestic oil market, and requirements to investors. The idea of transferring shares in oil megaprojects in Kazakhstan to Russia, which is a target for Western sanctions, is doubtful. Don’t forget that Kazakhstan is trying to lower its dependence on Russia by pursuing alternative routes for its oil exports,» the company said in its market survey for 2023.

Halyk Finance also commented on recent litigation with operators of big oil fields and calls to revise the conditions of their contracts. Kazakhstan’s authorities filed lawsuits against the operators of Kashagan and Karachaganak last year, accusing both companies of violating environmental protection legislation and not delivering their obligations on investments and development.

«We believe that attacks on foreign investors in these three mega projects and recent calls to revise agreements with them are groundless and harmful, particularly when it comes to attracting new foreign investors,» HalykFinance said in its survey.

Investors have operated at the Tengiz oil field since 1993. The contract was signed for 40 years and will expire in 2033. Investors in Kashagan and Karachaganak have been working there since 1997 and are expected to remain part of the project until 2041 and 2038, respectively.

In 2016, before the first oil was produced at Kashagan, HalykFinance published its economic analysis of the project based on open-source information and some assumptions. (There was no official data on the project back then.) At the time, the company’s analytics didn’t find any discrimination of Kazakhstan’s interests in this mega project from taxation or investment points of view.

As analytics noted, after the contracts were signed, conditions improved in favor of Kazakhstan. However, Halyk Finance didn’t specify that all these concessions happened against the backdrop of reasonable tax claims and complaints by Kazakhstan’s government as the start of the projects was postponed on several occasions and their cost significantly increased. For instance, Kazakhstan obtained a 10% share in Karachaganak Petroleum Operating B.V. (KPO), the operator of the Karachaganak oil field, after a tax inspection that identified breaches in the country’s legislation worth hundreds of millions of dollars.

Tengiz, Kashagan and Karachaganak’s oil fields are primarily developed by Tengizchevroil, North Caspian Operating Company N.V. (NCOC), Karachaganak Petroleum Operating B.V. (KPO) and some other Western investors. However, the government of Kazakhstan is also involved in these projects through the KazMunayGas (KMG) national oil company. It controls 20% of Tengizchevroil, 17% of Kashagan, and 10% of Karachaganak.

According to Halyk Finance, the country’s government should focus on attracting new investors in the oil industry by improving the business environment rather than strengthening its requirements for existing investors and revising current contracts. 

The company noted that according to S&P Global, in 2022, the actual cost of oil in an average oil project in Kazakhstan was $67 per barrel, compared to $66.35 per barrel in Eurasia (the highest rate globally). That is why it is so hard for Kazakhstan to compete with other oil-producing nations and keep its current share in the global market.

Recently, the Parasat Alliance of Entrepreneurs proposed that foreign stakeholders in Kazakhstan’s biggest oil and gas projects, namely Tengiz, Kashagan, and Karachaganak, transfer their stakes to Russia in exchange for assets frozen by Western countries.