A private company is working smoothly with the strongman government of an oil-rich nation. But when the company makes a move to sell major assets, the government decides it wants more control over its black gold. The company balks and finds itself accused of tax evasion.
Though it sounds like Russia's Yukos saga, this scenario is playing itself out in neighboring Kazakhstan between the government of authoritarian President Nursultan Nazarbayev and British energy giant BG Group. On July 19, citing the results of a March audit, Kazakhstan's financial police accused the company's local subsidiary, BG Karachaganak, of failing to pay $5.4 million in customs duties on liquid natural gas it produced between 2001 and 2003 and sold to buyers in Russia. BG says the charges are completely unfounded, and last week CEO Frank Chapman downplayed the allegations, calling them a "routine dispute." Still, the move has spooked investors who fear that Nazarbayev may be stealing a page from Russian President Vladimir Putin's playbook by asserting state control over the country's energy resources.
Unlike Yukos chief Mikhail Khodorkovsky, who remains behind bars in Moscow, no one at BG Karachaganak is being threatened with arrest. And, for now, the stakes in Kazakhstan are a lot lower than in Russia. Last week, oil prices hit record highs after Russian authorities told Yukos it would have to turn off the taps if it didn't fork over $3.4 billion in back taxes. Though the authorities later backed off and gave the company a month to find the money, the market jitters remained. In Kazakhstan, a mere $5.4 million is in play. Yet the mood in Astana, the austere, half-constructed new capital, is wary. "Doing business here is like negotiating with the wind," one Western oil company executive says.
The timing of the accusations against BG is curious, coming just weeks after the Kazakh government announced its intention to buy BG's stake in the multinational consortium contracted to exploit the Kashagan field in the northern Caspian Sea the largest oil and natural-gas deposit to be discovered in the past 30 years. According to the U.S. Energy Information Administration, Kashagan holds between 9 billion and 13 billion barrels of oil. Though crude is not expected to flow before 2008, Kashagan could produce more than 1 million barrels of oil a day by 2015, helping to make the country one of the top-five oil producers in the world. That could be a vital source for the West, especially if the political kinks in the supply lines from Russia, the Middle East and Nigeria persist.
Nazarbayev's government has signaled it wants a more active role in managing those vast resources. In 2003, it decreed that the state oil company, KazMunaiGaz, must be a 50% stakeholder in all new domestic oil and gas ventures. "This is not renationalization," says Martha Brill Olcott, senior associate at the Carnegie Endowment for International Peace in Washington and an expert on the Caspian region. "This is re-evaluation. Kazakhstan is learning to play with the big boys. This is the Kazakh definition of national interest." The government's move doesn't necessarily amount to a Yukos-style power grab, but it still worries many Western oil executives whose companies have already invested billions in the country. How did it come to this?
When Kazakhstan broke away from the Soviet Union in 1991, this sparsely populated region of mostly barren steppe about the size of Western Europe was crippled with debt. Though desperately poor, Kazakhstan did have a wealth of oil and gas deposits that local firms had neither the technology nor the money to develop. Kazakhstan turned to Western companies for help, and firms like Chevron and Mobil moved in. When the Kashagan field was discovered in 2000, the government invited BG to form a consortium with Eni, Royal Dutch/ Shell, ExxonMobil, Total, Conoco-Phillips and Inpex of Japan to exploit it. That was no easy task. In winter, the shallow waters of this part of the Caspian turn into ice floes that carried by high winds can crush conventional offshore rigs. So Agip, the operating arm of Italy's ENI charged with developing the field, built concrete-and-steel islands from which to drill.
Even more daunting, Kashagan oil lies below the spawning grounds of the Caspian's beluga sturgeon, the sole source of world-renowned beluga caviar. So Agip is making sure no waste material from its drilling is discharged into the Caspian Sea, and has employed a technology for recycling waste water previously only used on submarines. The environmental and technological risks mean that, all told, development of the field is projected to cost $29 billion.
But trouble began last year when, as part of what BG says is a standard rotation of investments, the firm decided to sell its 16.67% stake in Kashagan. The stake was first offered to two Chinese firms, but the other consortium members chose to exercise their contractual right to divvy up BG's share, worth an estimated $1.2 billion. Then, in June, Nazarbayev declared the state had the right to buy BG's stake. The government's argument: it owns the subsoil rights to Kashagan and so has a pre-emptive option to buy. "When the government wants to buy a stake at market prices, it doesn't hurt or damage the other contractors," says Uzakbai Karabalin, head of KazMunaiGaz. "All the government wants is to exercise its right to buy into its own oil deposit." BG says that it continues to negotiate with the Kazakhstan government over both its stake in Kashagan and the allegedly unpaid taxes.
Nazarbayev's stance may be part of a strategy to protect Kazakhstan's oil resources, but it's also intended for domestic political consumption. In September, the country will hold its first meaningful parliamentary elections, and though Nazarbayev is not in danger of losing power, he is for the first time facing an alliance of motivated opposition parties. Getting tough with foreign oil companies, whom many regard as outside exploiters, is likely to be popular with voters.
The police probe into BG is still ongoing, and no formal charges have been filed. If the Kazakh government can strike a deal with the Kashagan consortium on BG's stake, investors' jitters may subside. For its part, BG, which retains a 32.5% stake in the estimated 6 billion barrels of oil and gas lying in the Karachaganak field, is sounding upbeat. "We have been there for 10 years and we know it is pretty challenging," Chapman said last week. "But we have created a lot of value for the country and intend to carry on doing business there."
The hardball tactics of the government could be a deterrent to new foreign investors. Still, with fewer and fewer new oil deposits being discovered, the Caspian is alluring. "Perhaps Kazakhstan is so rich in resources that some companies will always want to be there," says Julia Nanay, a senior analyst at Washington-based PFC Energy. Only last week ENI announced that the consortium had discovered a fifth promising field on its patch of the Caspian. For the oil industry, Kashagan is looking like the best game in town and the Kazakh government seems to think it holds a winning hand.