Kazakhstan is set to lose up to $20 billion in the next 10 years, due to an unfair contract to extract the world’s largest undeveloped oilfield. These are the findings of a report released today by development and environment organisations, as a dispute between the Kazakhstan government and oil companies failed today to reach its conclusion.

Earlier this year, the Kazakhstan government announced that it wanted a better deal from the international oil companies developing the Kashagan field. The government and companies had set a deadline of today to complete the negotiations, but have failed to reach agreement.

The argument was originally sparked when Eni, the Italian company leading the oil project, announced that costs would spiral, whilst startup of production would be delayed to 2010. Eni admitted that it had underestimated the costs in its earlier plan.

Today’s report, entitled ‘Hellfire Economics[1]’, for the first time reveals the causes of the dispute. It finds that [2]:

 

  • It is Kazakhstan rather than the companies that must pick up the bill for Eni’s mistakes. Kazakhstan will lose $20 billion in the period up to 2017, nearly 40% of its annual GDP.

 

 

  • The oil companies will continue to make very high profits – with returns of 14.5% – whilst Kazakhstan pays the costs.

 

 

  • The contract is structured such that Kazakhstan carries most of the project risks, while company profits are effectively guaranteed.

 

The report is published by PLATFORM, Center Globus, CEE Bankwatch Network, Friends of the Earth Europe, Campagna per la Riforma della Banca Mondiale, Crude Accountability and Amis de la Terre.

Greg Muttitt, an oil analyst at London-based PLATFORM, authored the report. He comments:

“This research shows that the real reason for the current controversy was that oil companies took advantage of Kazakhstan’s weakness in the 1990s to sign a highly profitable deal lasting 40 years. It seems the real culprit of the dispute is not the ‘wave of nationalism’ so often moaned about, but old-fashioned corporate greed.”

The government of Kazakhstan has called for a $7 billion penalty to be paid by the consortium, or for the state-owned KazMunaiGas to increase its share in the project. Today’s report, however, finds that:

 

  • None of the proposed measures will restore Kazakhstan’s economic position. In fact, most of the $7 billion payment would go straight back to the companies through reallocation of profits, according to the terms of the contract.

 

 

  • All of the proposed measures would still leave the project highly profitable for the oil companies, with returns above 13%.

 

Yet the companies have fought with the government over the compensation for nearly six months, with consortium member ExxonMobil refusing to compromise at all.

Although emerging best practice in the oil industry is for such contracts to be published, Eni and the Kazakhstan government have refused to do so. Yet there is no commercial reason for them not to do so, since such contracts are easily available to their competitors, but priced beyond the reach of civil society groups and Kazakhstan citizens. [3]

Greg Muttitt added,

“Seeing how extremely unbalanced this contract is, it’s perhaps not surprising that they are embarrassed to publish. But transparency is one of the best defences against unfair deals and against corruption.” 

The project has also been highly controversial for its environmental and health impacts, including the unsafe storage and release of toxic sulphur.[5] Darek Urbaniak, on behalf of Friends of the Earth Europe commented,

“We have reasons to believe that the development of the Kashagan oil field is causing unacceptable levels of pollution in the Caspian Sea region, which can only get worse once oil extraction begins. Fish, birds and mammals are dying and local people’s health is suffering as a result of exposure to toxic chemicals from oil extraction in the region. On top of this, the field operator is refusing to disclose crucial information about its social and environmental impacts. It must release this data immediately.” 


Open publication[2] – Free publishing[3] – More extraction[4]

UPDATE

Kazakhstan loses further $5 bn from oil deal as new delays emerge

Oil companies accused of ‘hiding bad news’ over Kashagan oilfield

A new deal with an Eni-led consortium to develop the super-giant Kashagan oilfield will leave Kazakhstan $5 billion worse off than previously, according to new analysis published today. [1]
The deal, reached on Sunday after more than six months of dispute over the field, slightly improved Kazakhstan’s share of revenues, but at the same time included an announcement of a further delay to startup of production, from 2010 to 2011.
The analysis released today shows that the improved terms – worth around $3.5 billion – is more than offset by the $8.7 billion cost to Kazakhstan of the delay. [2]
Greg Muttitt, an oil analyst at London-based PLATFORM, authored the analysis. He commented,
“Oil companies signed a draconian 40-year contract when Kazakhstan was at its weakest in 1997. Now they have the government over a barrel. The contract has a profound impact on the people of Kazakhstan but is shrouded in secrecy. It is vital that Eni and its partners adopt common standards of transparency, and make the contract public.”
PLATFORM was leaked a copy of the contract. But due to the secrecy, other observers have misread the implications of Sunday’s deal, assuming a slight improvement to Kazakhstan’s economic position.
The surprising result stems from the high price of oil and the huge volumes of oil to be extracted from the field, up to 1.5 million barrels a day. Due to these two factors the cost of a delay exceeds any change in economic terms.
Galina Chernova, of Kazakhstani environmental group Center Globus, noted,
“After six months of the government pushing for a fair share of the revenues, it is shocking that Kazakhstan actually ends up losing. It seems the oil contract is more powerful than any other instrument in Kazakhstan. So what hope is there for the environment and local people?”
The dispute was originally sparked by an earlier delay, from 2008 to 2010, and major cost increases, both announced last year.
However, there have been rumours over recent months of Eni falling further behind schedule. Greg Muttitt accused Eni of announcing the delay at a time when it would not get noticed:
“It’s the oldest trick in public relations to hide bad news in another story. Whilst most reporting has focussed on the change of contract terms, Eni saw a good time to quietly release news of yet another delay – news that neither the people of Kazakhstan nor Eni’s investors would be impressed by.”
Since becoming the single operator of the Kashagan oilfield ENI has also failed to release all information available on the environmental, health and social impacts of its operations while receiving European Commission support in the above negotiations as expressed on several occasions by the EU Energy Commissioner Andris Piebalgs. [3]
Darek Urbaniak, on behalf of Friends of the Earth Europe commented,
“The public should be informed about all the effects of this investment, including contamination, spills, dumping, poisonous substances emissions, toxic wastes, It is not acceptable that the European Commission prioritises EU energy security over the people of Caspian region’s right to healthy lives and a safe environment.”

Endnotes:
  1. Hellfire Economics: http://www.carbonweb.org/documents/hellfire_economics.pdf
  2. Open publication: http://issuu.com/platform-london/docs/kashagan_stitchup?mode=window&backgroundColor=%23222222
  3. publishing: http://issuu.com
  4. More extraction: http://issuu.com/search?q=extraction