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looming disputes over major kazakh oil projects impose on energy sector stability

Looming Disputes Over Major Kazakh Oil Projects Impose on Energy Sector Stability

Author: Samantha Fanger


Image source: Kazmunaygaz

Kazakhstan is facing a series of oil project cost disputes with international oil giants. In June, Kazakh Energy Minister Almasadam Satkaliyev announced that the state had "filed lawsuits in international arbitration” on international investors for $16.5 billion in claims from these oilfields between 2010 and 2019. 

Kashagan and Karachaganak are two projects at the forefront of Kazakhstan’s disputes. They are the second and third largest producers of oil in Kazakhstan—an economy heavily reliant on energy exports. Together, these projects yield about 400,000 barrels of oil per day and operate under production-sharing agreements that allow companies to deduct certain costs from their income before sharing revenue with the Kazakh government. According to reports, the oil fields are accused of unauthorized spending amounting to $13 billion for the offshore Kashagan field and $3.5 billion for Karachaganak. Eni, Shell, TotalEnergies, ExxonMobil, CNPC, and KazMunayGaz are developers of the Kashagan field, while Shell and Eni, KazMunayGaz, Chevron, and Lukoil are partnered through Karachaganak. 

While details of the dispute have been kept internal, the Kazakh government's recent comments about the filings came after prolonged escalating tensions between the state and investors.  Signs of escalating tensions between public and private shareholders came as early as February 2023, when Exxon Mobil Corp, a significant investing company in Kazakh oil, warned of potential risks to continued oil operations in Kazakhstan. Oil investors globally are scrambling to find solutions to the multibillion-dollar disputes. At the same time, Energy Minister Satkaliyev maintains that the filings were made “in the interest of the people of Kazakhstan.” 

ExxonMobil's operations in Kazakhstan risked a loss of cash flows due to potential disruptions, curtailments, or temporary suspensions of oil exports through the CPC pipeline, as stated in a filing. ExxonMobil holds a 25 percent interest in the Tengizchevroil (TCO) joint venture, which controls the Tengiz and Korolev oil fields, and a 16.8 percent working interest in the Kashagan field. 

Chevron, the lead partner in TCO, produces over 12 percent of its total output from Kazakhstan, aiming to increase the total production at Tengiz by 40 percent to around 1 million barrels per day. Despite temporary shutdowns in 2022, Chevron's finance chief noted that the Caspian Pipeline Consortium (CPC) pipeline was generally reliable. However, the potential uncertainty in the future, because the pipeline runs through the territory of Russia, underscores the risks involved in their operations.

In May and June of 2023, Kazakhstan's Environmental Protection Ministry filed claims against the North Caspian Operating Company (NCOC), Kashagan’s project operator, over environmental compliance violation allegations. This followed another lawsuit against NCOC in March in which the Environmental Protection Ministry claimed NCOC inflicted ecological damage at its onshore facility at Bolashak following onsite inspections. In both cases, the court ruled in favor of NCOC, but the legal disputes have continued with other shareholders in the international arbitration court. 

Italy’s Eni SpA, which holds significant stakes in major Kazakh oil and gas projects, is taking a “leading” role in attempts to find a solution because of its important stakes in major oil and gas projects and, according to some sources, has even sought help from the Italian government to address the issue. Italy’s Prime Minister, Giorgia Meloni, was even scheduled to visit Astana in May of 2023, likely to address the problem, but was forced to cancel due to a flooding crisis in Italy at that time.

Since Russia’s invasion of Ukraine, Kazakhstan has played an essential role in stepping in to help meet global energy needs as the world continues sanctions against Russian oil and gas. Consequently, Kazakhstan has seen an even greater uptick in foreign investment in the last year, particularly in the energy sector. In 2022, Kazakhstan produced 1.75 million barrels per day (bpd), contributing to about 1.75 percent of global oil supplies. Kazakhstan has a 4,750-mile-long shared border with Russia, with its main oil exports passing through the CPC pipeline. Due to these disputes, halts on Kazakh oil shipments could result in billions of dollars in losses

The current disputes about Kazakh oil and gas projects possess wide-ranging implications for the nation's energy sector. The legal actions taken against international oil giants pose genuine concerns about potential disruptions in cash flows and the suspension of oil shipments through the Caspian Pipeline Consortium. Given Kazakhstan's pivotal role in supplying global energy during the sanctions on Russian oil and gas, these disputes have the potential to impede its ability to meet global demand and capitalize on increased foreign investments in the energy sector.

Moreover, uncertainties surrounding the Kashagan and Karachaganak projects might deter prospective investors, resulting in delays in new projects and technological advancements. To safeguard the stability and growth of the energy sector and maintain its significant contribution to global oil supplies and economic development, it is imperative for the Kazakh government and all involved parties to prioritize transparency and collaborative efforts to resolve these issues.

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