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Home » Kazakhstan Starts Arbitration Process Over Oilfield Development Costs

Kazakhstan Starts Arbitration Process Over Oilfield Development Costs

by Liam Velazquez
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Paris, Brussels (29/7 – 75)

Kazakhstan has started arbitration proceedings against companies developing Kashagan and Karachaganak oilfields, over US$13 billion and $3.5 billion respectively in costs deducted as part of profit-sharing deals, its Energy Minister said on April 11.

“I can only say these lawsuits have been filed in the interest of the people of Kazakhstan,” Energy Minister Almasadam Satkaliyev told reporters, declining to provide any further details about the claims.

The offshore Kashagan field in northern part of the Caspian Sea, one of the biggest discoveries in recent decades, is being developed by Italian Eni, British Shell, French TotalEnergies, United States ExxonMobil, Kazakh KazMunayGas, Japanese Inpex and the China National Petroleum Corporation.

Eni, Shell and KazMunayGaz are also partners in Karachaganak, alongside American Chevron and Russian Lukoil. The Karachaganak onshore field is located in Oral, West Kazakhstan region.

Both projects are covered by production-sharing agreements, in which those companies can deduct certain costs from income before splitting it with the government. The size of the deductions determines how much income there is to be split.

Kashagan and Karachaganak, which pump around 400,000 barrels and 200,000 barrels of oil per day, respectively, are the second and third biggest producers of oil respectively in the Central Asian nation, one whose economy relies heavily on energy exports.

Kashagan is one of the world’s largest offshore fields, with estimated reserves of 13 billion barrels of oil. Discovered in 2000, the oil field has faced endless delays, owing to technical problems.

Kazakhstan filed a claim in March against the field’s operator, incurring environmental protection fines for allegedly violating rules on sulfur storage at the site.

Kazakhstan’s largest oil field is Tengiz in Atyrau region with more than 700 million tons of recoverable reserve.

The Astana government has already had a series of disputes with its partners about the terms of oil deals, which typically ended with settlements.

According to a Bloomberg report published in April, the claims cover the period from 2010 to 2018 for Kashagan and from 2010 to 2019 for Karachaganak.

Kazakhstan and the Karachaganak consortium settled their most recent dispute in 2018 after three years of negotiations, with the group paying Astana $1.1 billion and giving it a greater portion of future profits.

In a separate development, Kazakh Prime Minister Alikhan Smailov told the newly appointed Minister Energy Almassadam Satkaliyev to prioritize tasks in the energy sector in a meeting on April 4.

Smailov said that the ministry needs to focus on developing major oil and gas projects and export transportation corridors, taking measures to increase gas process, strengthening heat and electricity production sector, and continuing the development of renewable energy.

“Recently, some problems that have been accumulating for years have become more acute,” Smailov said as quoted by the government’s website.

“A shortage of diesel fuel, power and gas supply interruptions, accidents at heat supply facilities are all evidence of serious problems in the energy sector. All of them have to be promptly resolved.”

The Prime Minister also pointed out that one of the ministry’s main objectives was to fill the domestic market with oil products and that it was necessary to ensure strict control over their production and turnover.

“The Ministry is facing a lot of complex issues, and not only the future of the fuel and energy sector, but our entire economy directly depends on their effective solution,” Smailov said.

“I am sure that Almasadam Maidanovich will direct his knowledge and experience to the successful development of the energy sector.”

Kazakhstan is among the world’s Top 15 oil producing countries. As of December 2021, the Central Asian country produced 1,488,707 barrels per day, increasing from 1,470,005 bpd in December 2020.

Meanwhile, Kazakhstan plans to raise its ceiling on 92/93-octane gasoline prices by 11% and that on diesel by 20% in order to bring them into line with those in neighboring countries, said then acting energy minister Bolat Akchulakov on April 3.

The oil-rich nation has some of the world’s lowest fuel prices and keeping gasoline cheap through price controls has been one of the pillars of state policy for years.

But price disparities with neighboring countries have led to illegal exports and price regulations have made the refining industry unattractive for investors, leaving Kazakhstan’s domestic market with fuel shortages.

The increases will raise the price of gasoline to 205 tenge (45 US cents) per liter, or $1.70 per gallon, while the diesel price will rise to 295 tenge per liter, or $2.50 per gallon.

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