ASTANA – Kazakhstan is preparing to revise its production sharing agreements (PSAs) with major foreign oil companies, securing more favorable terms for the country and meeting domestic demand, experts say.
Oil drilling and pipelines. Photo credit: Gary Kavanagh / Getty Images
Kazakhstan’s primary oil production comes from the Tengiz, Kashagan, and Karachaganak oil fields, which were developed in partnership with leading international oil companies.
The Tengizchevroil (TCO) project operating on the Tengiz oil field pioneered the stabilized contract in Kazakhstan in 1993, nearing its end in 2033. The North Caspian PSA, which covers Kashagan, Kairan, and Aktoty fields, was signed in 1997 for 40 years. A similar agreement was signed for the Karachaganak field for 40 years.
For almost three decades, foreign oil companies benefited from PSAs, where a portion of the production is initially allocated to recover the investor’s costs. The remaining part of the output is recognized as profitable production and split between the investor and the state. The investor then pays income tax and other applicable taxes on its profit share.
Now that allocation is gradually being revised to ensure “more favorable terms” for Kazakhstan, as President Kassym-Jomart Tokayev described during a recent expanded government meeting.
Kazakh Minister of Energy Almassadam Satkaliyev. Photo credit: sk.kz
According to Kazakh Minister of Energy Almassadam Satkaliyev, the conditions and requirements from when those agreements were signed no longer align with today’s realities.
“It is clear that to attract investment, potential investors were granted significant benefits under the terms of PSAs. They have received significant profits. In this regard, the government has formed a full package of requests. One of them may concern the change of tax regime,” said Almassadam Satkaliyev at the government briefing, as quoted by the Kazinform news agency.
According to him, the government has established a dedicated commission to assess the current PSA contracts and review the conditions for their extension.
“Moreover, the consortium participants have repeatedly raised the issue of the need to clarify whether the government plans to extend the relevant agreements. We are talking about investments and the planning of subsequent capital investments. We are interested in ensuring that the facilities operate at an optimal level. That said, following the terms of the PSA, we still have time. We have at least two to three years to hold these negotiations,” said Satkaliyev.
Potential PSA modifications
Oil and gas expert Nurlan Zhumagulov said new terms might include an obligation to supply oil to the domestic market and additional taxes.
“Tengizchevroil started to develop oil under the future expansion project. More than $48 billion has been invested for its realization. The project will produce 40 million tons of oil annually. Some TCO shareholders want to extend the agreement. The President’s words about taking into account the country’s interests, apparently, point to supplying oil to the domestic market,” he told Kazinform.
Oil and gas expert Nurlan Zhumagulov. Photo credit: from the personal archive of Nurlan Zhumagulov.
“I think they are also talking about introducing a new export customs duty. Now, Kashagan and Karachaganak are exempt from it. Tengiz pays it reluctantly. For example, they export 28 million tons of oil with a duty of $80. In the future, as projected, they will produce 40 million tons, which could bring up to one trillion tenge (US$1.9 billion) to the national budget. It is possible that mutually beneficial agreements will be reached,” he added.
Gasoline and diesel fuel are essential petroleum products used daily by people, making oil supply to the domestic market crucial. The slow development of the refining oil industry led Kazakhstan to rely on fuel imports.
“Every year, we face a shortage of oil products, which we cover through imports. This is nonsense for a country with such vast oil reserves. In reality, Kazakhstan relies on gasoline, aviation fuel, and diesel imports. Over the past seven years, more than six million tons of oil products have been brought into the country, mostly from Russia. It is time to address this issue,” said Yedil Zhanbyrshin, a member of the Parliament, as quoted by Kazinform.
Olzhas Baidildinov, a member of the ministry’s public council, said that low domestic oil prices discourage oil companies from meeting local demand.
“The three whales [referring to Tengiz, Kashagan and Karachaganak oilfield projects] do not supply oil to the domestic market because it is not specified in the agreement. Besides, we need to understand that a barrel sells for $20-25 on the domestic market, which naturally isn’t attractive for them at that price,” Baidildinov told Kazinform.
“Even if we set the world price, not counting transportation costs, I can’t say they will turn towards Kazakhstan’s market. Europe has its own refineries and continues to expand its oil processing capacity. Despite this, the three whales don’t pay export customs duties on raw materials, costing our budget $5 billion – $6 billion annually,” he added.
The article was originally published on Kazinform.
