The economic sector of Kazakhstan once again froze in anticipation of a new landmark event. On October 4-5 this year Astana will host the VI Eurasian Forum KAZENERGY commemorating the 20^th Anniversary of Kazakhstan. The following issues are in the list of the main topics of the upcoming forum: “A steady model of development of oil and gas and energy sectors – adequate global system of energy efficiency”; “The new perspectives for oil and gas industry development: innovation and investing in the new technologies”; “The Industrial-Innovation Development of Kazakhstan: the growth of the local content”.

It is should be noted that the forum is important not only for Kazakhstan but for the entire Caspian region. That is why it is possible that the event will address the topics that directly relate to the development of Kashagan and Karachaganak oilfields.

The policy Kazakhstan adheres to in the oil and gas industry gradually but clearly leads to strengthening positions of the public companies involvement in developing the oil fields and receiving dividends. An example is the current situation with the Karachaganak project. Despite of the long-run “confrontation” between Kazakh authorities and companies BI Group and Eni (their share is 32, 5%), Chevron (20%) and Lukoil (15%) that united into a consortium to implement the Karachaganak project it seems that the issue of kazakhstani national companies participation will have a positive outcome. Let us remind that the activities at Karachganak commenced in 1998 based on the signed production-sharing agreement (PSAs). In accordance with the terms of the agreement the consortium was to manage the project until 2038. At the same time no other new tax charges were to be applied to its members.  It is clear that such state of things does not satisfy the leaders of Kazakhstan who want to act not as a controlling unit but as an equal party of the project. There is a perfectly logical explanation to that. If over the period of formation of the Kazakhstani economy the attraction of investors on the basis of a production-sharing agreement was the most effective tool for maintaining and developing the industry in the country now the situation has changed. Kazakhstan has the means and it not only wants but it has the right to receive revenues from the projects that are being implemented not far away but directly on its territory. Whatever it was these arguments brought their first results. It seems that the issue with the continuing debates around Karachaganak that has lasted since 2009 can be closed. As Timur Kulibayev, head of NWF “Samruk-Kazyna”, Chairman of the Association KAZENERGY said, in accordance with a new agreement reached with the consortium in the progress of the negotiations Kazakhstan will receive its10-percent stake in the Karachganak project which oil reserves are estimated at 1, 2 billion tons.

In addition to that the investors are also focused on Kashagan oilfield since according to the recent estimates its geological reserves amount from 38 up to 50 billion barrels of oil.  According to the investment project at the pilot stage of developing the Kashagan field it is planned to produce 450 thousand barrels per day with gradual bringing the capacity to 1, 5 million which will make approximately from 8 up to 25 billion dollars a year. Thus the payback period of the project costs could range from 5-6 up to 15 years. For most large investors this is relatively a short period of time and moreover, promising significant returns.

However despite of huge profits expected approximately in the next decade there are lots of problems that could complicate the project implementation. Hard climate conditions in the region coupled with the geological characteristics of the developed territory can become a serious obstacle to implementing the plans. There is another issue of the accompanying gas containing large amounts of toxic contaminants including hydrogen sulfide. In addition to that the extraction of the “black gold” becomes complicated due to the formation pressure.  Another point is the lack of necessary experience in solving a similar variety of operating problems.

Nevertheless in this case as well Kazakhstan policy regarding its involvement in developing the oil field remains unchanged. As a result of the negotiations over the last several years Kazakh authorities have managed to increase its stake in the association from 8, 33 up to 16, 81%. This, as the experts emphasize, allowed our country being on the equal footing with other consortium members:  Eni S.p.a., Exxon Mobil, Shell, Total, INPEX and Conoco Phillips.

The main outcome of the negotiations were the items that will result in the state budget receiving royalty, taxes, various charges to be paid by the consortium as well as change in the model of projects management. Thereby, instead of a single project operator which was an Italian company Eni S.p.a., a new operating company “North Caspian Operating Company” was established and each of the project members will be responsible for a certain scope of work. As the result the activities will be distributed in the following way. The Italian company Eni will be in charge of operating-face and onshore operations.  Exxon Mobil company will be in charge of the drilling operations. The British company Shell will report on the offshore infrastructure. But the oil production will be carried out by the Kazakhstani company “KazMunaiGas” which is currently actively recruiting experience from Shell company.

It should be noted that lately the state influence in the oil and gas sector is becoming higher and higher. This fact was confirmed by Timur Kulibayev, the head of NWF “Samruk-Kazyna”. Answering journalists’ questions about the public policy he said: “It defines everything: volumes of supplies in the domestic market, export taxes, the tax laws”.  In addition to that Timur Kulibayev admitted that Kazakhstan still has contracts signed with foreign investors in the early 90s. An example there is a contract with “TengizChevroil” company which still has a benign tax regime. In whole the policy in respect of a foreign investor has nevertheless changed. But it doesn’t mean that Kazakhstan will now in all cases infringe the rights of foreign investors. On the contrary, inviting them to participate in various projects Kazakhstan has shown stability of its obligations.  “Therefore, I think it is our investors that do feel well and comfortable”, said Timur Kulibayev.

In truth such the position of the Kazakh authorities in respect of foreign investors is quietly justified. If for no other reason than because the mid-term and long-term programs of the government list diversification which is attracting investment not only in the production of the energy sector but also in their downstream processing and also release of product with high technological content and added value. And such programs are gradually being implemented. “Such projects include establishing oil and gas-chemical companies in western Kazakhstan, transferring vehicles with fuel oil to natural gas in Almaty city. Developing petroleum engineering and other infrastructure projects”, stated in his speech Timur Kulibayev at XI Summit of CIS countries on oil and gas held in Paris in May this year. In addition to that the new Kazakhstan policy provides tax incentives for investors that wish to invest in high – technology areas of the energy sector. As one might suggest from the topics stated at the VI Eurasian forum KAZENERGY the government sees in the energy sector not only the growing source of petrodollars flow but also the driver of innovation development of Kazakhstan economy as a whole.