The Kazakhstan Parliament’s Bill allowing the government to break contracts with foreign firms is unsurprising. Under the existing contract for the $19 billion (Rs75,430 crore) Kashagan oilfield, its near-doubling in costs and two-year delay seriously hit the Kazakh budget, while profits from higher oil prices will eventually flow to the consortium led by Italy’s Eni.
Kazakhstan had previously used environmental laws to halt the project and renegotiate its terms, a trick pioneered by Vladimir Putin against its foreign partners in its massive Sakhalin project. Given Kazakhstan’s economic and historical ties with Russia, which still supplies 37% of its imports, the worry is that Putinism has found a new convert.
The Kashagan contract was negotiated when oil cost $20 a barrel. Due to the field’s geological complexity, the consortium got the better of the deal, paying only a 10% royalty and delaying that until all development costs had been recovered.
Oil prices have since risen beyond $80 a barrel, greatly increasing the value and eventual profitability of the field to the consortium. The oil price increase on Kashagan’s 13 billion barrels of estimated reserves could be worth $780 billion, or $52,000 per head of Kazakhstan’s population. However, the field’s operation has been delayed twice, most recently to 2010, while costs have almost doubled—both factors delay money to Kazakhstan’s budget.
Having seen Putin’s success with foreign investors in Russian oilfields, the concern is that Kazakhstan has decided to copy him, firstly by using environmental issues, then by forcibly renegotiating the Kashagan contract and rewriting laws to do so. In spite of Kashagan’s geological complexity, it’s likely that Kazakhstan will succeed in forcing substantially better terms. Kashagan’s size makes it irresistible and in the oil world, Kazakhstan appears positively welcoming compared to bad actors such as Venezuela or Russia,?or?Western?outcasts?such?as?Iran?or?battlefields?such?as?Iraq.
Many of Putin’s critics fear he wants to recreate the old Soviet Union as an economic and political bloc. And Kazakhstan, with its oil and poor imitation of democracy, is the juiciest of all its potential partners. A tough stance by the Kashagan consortium, however well-grounded in principle, may only accelerate this process.