Kazakhstan is undertaking a controversial overhaul of its oil and gas sector that appears to place additional financial burdens on foreign oil producers. Instead of promoting the state-owned oil company, Kazakhoil, to become a major oil producer, the Kazakh government is now to earn its cut from the oil sector by adding hidden export taxes. This new policy is based on the notion of rent-seeking, under which the government extracts revenues by using its privileged position, rather than by earning money from production.
The new rent-seeking policy follows nearly four years in which Kazakhstan promoted the fortunes of the state-owned oil company, Kazakhoil. In March 1997, at the instigation of the then influential oil minister Nurlan Balgimbaev, Kazakhstan set up Kazakhoil, giving the company control over hundreds of millions of dollars of state-owned oil sector assets. Although Kazakhoil's purpose was initially undefined, it soon became clear that the company was to act as a national champion in the oil sector.
After Mr Balgimbaev became prime minister in October 1997 the company's fortunes rose. Grand plans were announced for Kazakhoil to be guaranteed a 25 percent stake in all future joint ventures and for the company to enter into a strategic partnership with a large foreign firm, neither of which has been implemented. However, foreign companies in the oil refining sector were systematically subject to government pressure to force them to leave, allowing Kazakhoil to assume a dominant market position. Kazakhoil also managed to defeat a proposal to partially privatize large onshore oil producers. Kazakhoil represented the sort of policy-making that was all the rage as late as the 1970s, but which has since gone out of favour.
Despite government support, Kazakhoil is too small and too inefficient to become a major oil producer. Kazakhstan produced 714,000 barrels a day (b/d) in 2000, of which 57 percent came from five leading foreign joint ventures (the foreign companies' share in joint ventures at Karachaganak, Tengiz, Kumkol, Aktobe and Mangistau). Oil exports are currently running at around 560,000 b/d, of which at least 70 percent is from foreign firms.
According to Nurlan Balgimbaev, Kazakhoil's total estimated profits in 2000 are projected to be just 40 billion tenge (about $278 million). By comparison, Chevron, Kazakhstan's largest foreign investor, had net income of $1.531 billion during the third quarter of 2000 alone. Kazakhoil also lacks the ability to raise sufficient capital to engage in costly exploration of the Caspian Sea, where the future of the country's oil sector lies. Foreign oil companies exploring in the north Caspian Sea off Kazakhstan spent $768 million on exploration between 1993 and 2000. They still have hundreds of millions of dollars of extra costs to come before production begins in 2005, and even more costs before these companies earn their first profits sometime towards the end of this decade.
The government's fiscal problems have also whittled away Kazakhoil's asset base. In September 1998, Kazakhoil lost its 14.3 percent stake in the consortium exploring the north Caspian Sea when the government sold it to Philips Petroleum (US) and Inpex (Japan), with the proceeds going to the government. Kazakhoil's 25 percent stake in the Tengiz joint venture, a giant oil field being developed by a consortium lead by Chevron (US), was cut down to 20 percent in 2000 thanks to the government's sale of 5 percent to Chevron. The sale followed months of public disagreements within the government and Kazakhoil, which resulted in the sacking of Mr Nurlan Balgimbaev's successor as head of Kazakhoil, Nurlan Kapparov. The government also publicly discredited Kazakhoil, accusing it of charging too little for its oil exports, an accusation which the government has already levelled at foreign oil companies.
The final blow came in December 2000 when Kazakhoil lost its right to earn royalties from Kazakhstan's oil assets, and was stripped of the right to represent Kazakhstan in future Production Sharing Agreements (PSA) with foreign firms. Kazakhoil is now stuck with aging onshore oilfields and minority stakes in joint ventures dominated by foreign companies.
In its place, the new national champion is KazTransOil, the state-owned oil and gas pipeline operator, headed by Timur Kulibaev, a son in law of President Nazarbaev. As of December 2000, KazTransOil has monopoly control over oil exports. KazTransOil is now the government's gatekeeper and revenue extractor for oil exports.
Foreign firms will continue to be invited in to explore for and develop Kazakhstan's oil wealth, operations which will earn the government taxes and royalties. When these foreign investors export their oil, which they have to if they are to turn a profit, they will generally have to pay transit fees to use KazTransOil's oil pipelines, fees set by the government and KazTransOil.
KazTransOil has already increased its pipeline tariffs by 50 percent on October 1. Foreign exporters will then have their oil exports subject to controls by KazTransOil. The third and final hoop through which foreign oil exporters will have to jump is a new law against so-called transfer pricing, under which export prices will be checked by the State Customs Committee. The new law allows the government to charge exporters if their sales overseas are deemed to be too cheap.
The beneficiary of this new policy of skimming off the top will be, as usual, the budget and, more importantly, Kazakhstan's ruling elite. The obvious losers are likely to be Kazakhstan's foreign investors, firms which ploughed $7 billion (5.8 percent of GDP) in direct investment into the economy from 1993 to 1999, more than covering Kazakhstan's current-account deficit (3.9 percent of GDP from 1993 to 1999). They may find that their profits are not quite what they expected them to be.
Already there are signs that some foreign oil companies are disenchanted with Kazakhstan's economic climate. In early February, BP Amoco announced that it would sell its almost 10 percent stake in the Offshore Kazakhstan International Operating Company (OKIOC) to the French oil concern TotalFinaElf, which already has a 14.3 percent stake in the venture.
Andrew Apostolou is a historian at St. Antonys College, Oxford.
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