Oil Chronicles.News from the Caspian Sea
Against the background of high world energy prices this year, the Kazakh oil and gas sector has maintained target growth rates: oil output grew by 2.1% in the first 10 months of the year (its exports grew by 11.5%), gas condensate output grew by almost 18% and gas output by 14.1%. Nevertheless, despite the favourable price situation, the autumn of 2007 has offered foreign investors unpleasant surprises too.
New Amendments to the Old Law…
Astana adopted amendments to the Law On Subsoil and Subsoil Use in late October, which toughened up requirements set for mining companies and, as a result, changed the nature of relations between Kazakhstan and foreign investors.
In particular, one of the amendments stipulates that “if the actions of a mining company, while conducting mining operations in deposits/mines that have strategic importance, lead to a considerable change in the economic interests of the Republic of Kazakhstan, posing a threat to national security, the authorised body has the right to demand that conditions of contracts be changed and/or amended to restore the economic interests of the Republic of Kazakhstan”.
These amendments also envisage expanding a list of reasons for terminating a mining contract by amending Article 45-2.2 of the Law On Subsoil and Subsoil Use.
For example, a contract can be terminated:
· if within two months of receiving notification the mining company fails to agree to hold talks to change the provisions of the contract in writing or refuses to hold these talks;
· if within four months of receiving the mining company’s agreement to hold talks, the parties fail to conclude an agreement; or
· if within six months of achieving a coordinated decision to restore Kazakhstan’s economic interests the parties fail to sign amendments to the contract.
In addition, the law was amended by the following provision: “On the government’s initiative, if the actions of a mining company, while conducting mining operations in deposits/mines that have strategic importance, lead to a considerable change in the economic interests of the Republic of Kazakhstan, posing a threat to national security, the authorised body has the right to unilaterally refuse to fulfil the contract.”
The introduction of this norm will not demand the authorised body to turn to court or arbitration. In the case of a unilateral refusal to fulfil the contract, the authorised body should warn the mining company about this no later than two months in advance. According to the law, the government is granted powers to compile a list of deposits that have strategic significance.
Amendments also envisage the retroactive power of the law on contracts that were signed earlier on extracting or prospecting and extracting at deposits which have strategic importance.
… and Their Impact on Investment
The amendments have caused controversial reaction by foreign experts. For example, the European Commission Energy Commissioner, Andris Piebalgs, announced the commission’s special statement on 25 October, which noted that taking into account Kazakh President Nursultan Nazarbayev’s decision to sign the amendments to the Law On Subsoil and Subsoil Use, the European Commission would continue to discuss this topic at various levels as part of the EU-Kazakhstan energy dialogue. He also said that the European Commission would continue to study the new law’s possible impact on European investment in Kazakhstan, including an analysis of the compliance of the new law with the Energy Charter, in particular, in the sphere of supporting and protecting investment.
Mr Piebalgs stressed special attention on the fact that “successful partnership in the energy sphere should be based on mutual respect, predictability and the principle of non-discrimination”. He believes that the latest statements were not a threat, but a warning. “New basic changes in mining legislation and a number of other legislative acts will not please our traditional investors,” the European Commission commissioner said.
Europe will not, above all, like the very real possibility of changing the “rules of the game”, which, in essence, was what the Kazakh government intended. “Kazakhstan is an important partner of the EU on energy cooperation, with which we have signed a memorandum of understanding on energy issues. In this connection, any new changes in legislation will demand thorough study by both sides,” Piebalgs noted.
New Loop in the Kashagan Spiral
The Kazakh Energy and Mineral Resources Ministry and the members of the Agip KCO international consortium on the Kashagan long-term investment project continued their negotiations in October-November 2007.
Let us recall that earlier the Kazakh side said that it might strip the operator’s status on the Kashagan project off ENI. The reason for this was the Italians’ announcement of the postponement of the date of commercial production in the field (from 2008 until the second half of 2010) and a significant growth in expenses on the project (from $57bn to $136bn). For its part, Kazakhstan responded that it did not accept the new plan and budget of the project.
It is expected that the negotiations solving the disputes on the Kashagan project will be completed by the end of the autumn. Kazakh Deputy Finance Minister Daulet Yergozhin believes that if there are not any specific accords on this project until 30 November 2007, the Kazakh side will raise the issue of the expedience of the further conduct of negotiations as part of amicable settlement. “In this case, the Finance Ministry will raise the issue of the necessity of taking adequate measures to protect the country’s economic interests,” Mr Yergozhin said.
However, he noted that measures would be taken in line with Kazakhstan’s legislation, including with the account of the recent amendments adopted to the Law On Subsoil and Subsoil Use.
In turn, the head of ENI SpA, Paolo Scaroni, has said that the negotiations with the Kazakh government on the Kashagan project had reached a difficult moment.
The foreign media have circulated information on the potential size of compensation the Kazakh government demanded from the consortium for the delay in the project. In particular, the Italian Corriere della Sera newspaper mentioned $10bn. However, Paolo Scaroni told journalists that that he had no idea about this fine.
In any case, independent experts estimate that the Kazakh oil and gas sector is entering 2008 with the new “rules of the game” which have significantly expanded legal boundaries for the state which owns the natural resources and narrowed “the scope for manoeuvres” by contractor companies.
Time will tell whether investors are ready to agree to the new rules dictated by Astana and how well Kazakh oil will manage to preserve its investment attractiveness.
Infrastructure for Big Caspian Oil
The Mangistau Oblast administration distributed information about the implementation of a long-term investment project to build the Sartas seaport in mid-October. As was announced, this project has the following aims: to attract new investment to the region and technology to develop coastal infrastructure; to ensure uninterrupted services for offshore oil facilities through the reduction of workload on the Bautino and Aktau coastal bases; to create new jobs (about 3,500) and increase the qualification level of the local population; to help solve environmental issues in the region and to raise additional revenue for the regional budget via taxes and other collections.
The port is expected to be built 130 km south to the town of Aktau on the southern coast of the Mangyshlak Bay as part of the Sartas–Teniz Port project, which was developed by KaspiyMunayKurylys. The construction of this new infrastructure facility will be launched by the end of this year, and it will cost $309.5m.
This project will build: a ship-repairing plant; facilities to produce light metal frames, to filter industrial and domestic waste and sewage, to produce reinforced concrete products and inert materials; a vessel-filling station; a concrete plant on a barge and self-propelled rapid-reaction barges to offer technical services to offshore facilities.
KaspiyMunayKurylys has now been allocated a plot of land with a size of 330 ha. It has also received 167.5 ha of land for a 49-year lease to build a road from the Aktau–Kalamkas road to the Sartas port.
In addition, a new town and the Kuryk port will be built on the Caspian Sea cost soon. The new town, which will accommodate 30,000 people at the initial stage and up to 60,000 people later, will cost $1.5bn. The port’s construction is stipulated in the state programme to develop the Kazakh part of the Caspian Sea. This project will build a cargo terminal to serve the needs of offshore fields in the Caspian Sea shelf. A Kuryk–Yeraliyevo railway sector and an Aktau–Kuryk road and water pipeline will be built in the future.
Along with Kazakh investors, Taiwanese businessmen have expressed their desire to take part in this project. In particular, the head of Taiwan’s trade mission in Almaty, Chang Shi-Chang, has noted that the KazDipper company intends to sign a memorandum of cooperation with KazMunayGas and Mangistau Oblast’s Karakiya District administration in the near future.
In addition, Kazakhstan intends to develop the country’s existing sea gateways – the Aktau port in the next few years. In line with the blueprint and the feasibility study of the project to expand the Aktau Seaport special economic zone, that have been coordinated with the Kazakh government, four subzones are expected to be built on new territories.
The general director of the Aktau Seaport’s administration, Zinulla Kaziyev, has said that additional territories will house the Aktau Industries industrial town, a centre for developing infrastructure in the Caspian Sea shelf, a transport-logistics centre and the Aktau Free Trade centre of border trade.
The Aktau Industries subzone, covering 195 ha, will house enterprises that will produce export-oriented industrial and consumer products.
The centre for developing infrastructure in the Caspian Sea shelf subzone, covering 225 ha, will include enterprises to produce and repair the main and auxiliary equipment of oil extracting enterprises. Companies that produce equipment and material for substituting imports of the domestic oil and gas sector will be offered special support.
Companies-operators of subzones and enterprises-members of subzones will fund the construction of engineering and transport infrastructure in the special economic zone.
A proposal on expanding a list of priority activities is being drafted for the Kazakh government to fully realise the potential of the Aktau Seaport. This is, in particular, supplementary and additional transport services, producing and distributing power, gas and water; wholesale trade, trade through agents; operations with property; leasing and providing services to consumers, research and development.
Experts believe that the successful development of investment projects to develop the energy and transport potential of the Caspian Sea is directly linked to the issue as how quickly littoral countries will manage to arrive at understanding and adopt a convention on a new legal status of the Caspian Sea.
With this aim, the second summit of the Caspian-littoral countries was held in Tehran on 16 October, which was attended by the presidents of Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. The participants expressed their points of views on a number of the most topical issues related to the joint use of the Caspian Sea.
For example, Kazakh President Nursultan Nazarbayev believes that it is enough to coordinate routes for future pipelines built on the seabed of the Caspian Sea between those Caspian-littoral countries on whose territorial sectors these routes will be built. “The launch of the intensive development of Caspian hydrocarbon fields demands the most active actions on defining conditions for fulfilling projects to transport them. With the aim of ensuring the economic interests of countries, it seems to be expedient to coordinate routes for building pipelines with those countries on whose sectors of the seabed they will be laid through," the Kazakh president said.
Moreover, Astana proposed to stipulate the international right to the freedom of transit by any transport means in the future convention on the legal status of the Caspian Sea. “Provisions on the right of intercontinental Caspian-littoral states to the freedom of transit by any transport means and access to other seas and the World Ocean that are envisaged in universal international treaties should also be stipulated in the convention," Nursultan Nazarbayev said. He noted that, "in this case the point is about not only vessels but also about other transport means, including pipelines”.
At the same time, the Kazakh president stressed that taking into account today’s reality in the world and the geopolitical situation in the region “where strategic interests of major countries that consume energy meet, it is necessary to ensure that cooperation between our countries in the Caspian Sea becomes an example of balanced, constructive and responsible approaches”.
He provided the experience of achieving accords between Kazakhstan, Azerbaijan and Russia on delineating the seabed and natural resources of the Caspian Sea as an example of such cooperation. President Nazarbayev said that the corresponding agreements signed by these countries had provided an international legal basis for developing oil and gas reserves in the northern part of the sea and, as a result, had created an attractive and stable investment climate.
Russian President Vladimir Putin, in his turn, stressed the necessity of boosting the work to create transport corridors in the Caspian Sea. “Russia is proposing to speed up the development of the North–South international transport corridor. The construction of an additional water canal that will link it with the Black Sea–Azov Sea basin will help to strengthen the transit potential of the Caspian region,” Vladimir Putin said.
The Russian president also said that a project to boost transport links between the Caspian and Black Seas had already been discussed at his meetings with the Kazakh president. “This link between the two seas can be improved and this should become a future project,” Vladimir Putin noted.
The Russian president also demanded that major energy projects that bore environmental risks to the Caspian Sea should be preliminary discussed by all five Caspian-littoral states and be approved by a consensus. "Environmental security should become a standard of security of all projects in the Caspian Sea, especially in the sphere of developing and transporting energy resources,” he said.
Vladimir Putin drew attention to a “sharp decrease in the population of sturgeons, including in the rivers flowing into the Caspian Sea”, which is the most obvious indicator of environmental ill-being in the region. In connection with this, he called on his colleagues to observe the necessary reasonable balance between developing oil and gas resources and strengthening the environmental system of the Caspian Sea.
At the same time, President Putin expressed his hope that the national mining zones in the southern part of the Caspian Sea would be defined soon. The Russian leader stressed that economic activities on the seabed of the Caspian Sea could be carried out in the national mining zones. He reminded summit participants that the boundaries of these zones had already been defined in the northern part of the Caspian Sea.
“We hope that the sides concerned will also find a balanced and mutually-acceptable solution in the southern part of the Caspian Sea," Vladimir Putin said.
Turkmen President Gurbanguly Berdymukhamedov spoke against unilateral actions in the Caspian Sea, in particular, in the oil extraction sphere. “Turkmenistan does not accept the practice of unilateral actions in the Caspian Sea, first of all, in conducting oil operations in those sectors which do not have agreements signed by the sides,” he said.
In his speech, Mr Berdymukhamedov also backed Iranian President Mahmud Ahmadinejad’s proposal on the regularity of meetings of not only heads of state of the Caspian region but also foreign ministers of these countries. For example, the Turkmen leader believes that foreign ministers should meet no less than once a year.
The summit of the heads of state of the Caspian-littoral countries adopted a joint declaration that confirmed sovereign rights of littoral countries to the Caspian Sea and its resources.
This document also stresses that until the new legal status of the Caspian Sea is defined, navigation and fishing should be carried out in the Caspian Sea only under the flags of Caspian-littoral countries based on the implementation of sovereign rights. In addition, the sides confirmed the countries' responsibility for damage inflicted on the environment of the Caspian Sea and one another as a result of activities to use the sea and develop its resources.
The summit participants admitted that the state of the environment of the Caspian Sea and its sturgeon population demand urgent joint efforts to prevent undesirable environmental consequences. As a result, the document confirmed the course on continuing to build a legal basis for regional environmental protection cooperation based on the convention on the legal status of the Caspian Sea.
The sides also agreed to conduct regular and coordinated meetings of the heads of state of Caspian-littoral countries and meetings of foreign ministers and authorised experts to discuss a whole range of issues relating to the Caspian Sea.
Kazakhstan produced 45.99 million tonnes of crude oil, including oil received from bituminous minerals, and 9.98 million tonnes of gas condensate in the first 10 months of 2007. This is respectively 2.1% and 17.9% more than in January-October 2006.
Natural gas output reached 24.2 billion cu m (up by 14.1%) in the given period. The output of natural gas in gaseous state stood at 13,805.2 million cu m (up by 21.3%), whereas its marketable volume was 7,497.4 million cu m (down by 4.7%). The output of associated gas was 10,393.7 million cu m (up by 5.8%) in January-October 2007.
The country produced 2,198,300 tonnes of petrol, including aviation fuel (a 14.1% rise from the previous year).
Heating fuel output fell down by 29% to 2,045,100 tonnes in this period. Kerosene output grew by 28.7% to 340,400 tonnes, gasoil output by 9.6% to 3,591,000 tonnes.
According to the Kazakh Statistics Agency, the country exported 45.84 million tonnes of oil and gas condensate in January-October 2007, up by 11.5%. In monetary terms, oil and gas condensate exports totalled $19,857.2m (up by 9.4%).
In addition, Kazakhstan exported 2,908,400 tonnes of petroleum products in the first 10 months of 2007 (10.7% up from the previous year) to the tune of $998.1m (6% up). The country imported 1,492,600 tonnes of petroleum products (a 56.3% increase) to the tune of $721.6m (a 53.1% rise).
The country decreased natural gas imports by 38.2% to 5,343.3 million cu m worth $274.1m (down by 29.4%) and exported 11,013.3 million cu m of natural gas (down by 0.5%) to the tune of $467.4m (up by 17.2%).
The oil and gas sector remained the country’s most attractive sector to investors. In January-October 2007, 28.7% of total investment in capital assets was placed in this sector and it totalled 2,453 billion tenge (up by 12.1%). Foreign investment was mainly placed in oil-rich Atyrau Oblast (68.2% of total foreign investment placed in Kazakhstan).
A significant growth in investment in capital assets was observed in West Kazakhstan Oblast (40.1%) – this was as a result of investment in equipping the Karachaganak gas condensate field. At the same time, investment fell in Atyrau Oblast (by 0.6%) and Mangistau Oblast (by 19.7%) in the first 10 months of this year.
The main source of investment in capital assets was enterprises’ own funds (49.4%) and foreign investment (20.5%). Budget funds accounted for 16.8% of total investment and loans 13.3%.
The lion’s share of the total investment was made by private-sector enterprises (61.6%) and foreign enterprises operating in Kazakhstan (23.2%). The public sector accounted for 15.2% of the total investment.
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