Kazakhstan confirms $16bn lawsuits filed against oil field operators

The Kazakh state company PSA, which represents the country’s interests in production sharing agreements (PSA; preferential treatment for attracting foreign investment in the development of subsoil), has filed claims in international arbitration against the operating companies developing the Kashagan and Karachaganak oil fields. This was announced on April 11, 2023 by the Minister of Energy of Kazakhstan Almasadam Satkaliyev. In total, PSA filed claims for $ 16.5 billion. The minister added that claims against operators were filed for $ 3.5 billion and $ 13 billion. According to him, we are talking about “execution of a production sharing agreement, and not about tax disputes.”

“Unfortunately, I am limited in comments. The only thing I can say is that these lawsuits were filed in the interests of the people of Kazakhstan,” Satkaliyev explained (TASS quote).

The operator of the Kashagan project is the North Caspian Operating Company (NCOC). The operator acts on behalf of the PSA participants: KMG Kashagan BV (16.9%), Shell Kazakhstan Development BV (16.8%), Total EP Kazakhstan (16.8%), AgipCaspian Sea BV (16.8%), ExxonMobil Kazakhstan Inc. (16.8%), as well as CNPC Kazakhstan BV (8.33%) and Inpex NorthCaspian Sea Ltd. (7.56%).

Karachaganak Petroleum Operating BV is developing Karachaganak. The project is being implemented by Shell and Eni (each owning a 29.25% stake), Chevron (18%), the RussianLukoil“(13.5%) and Kazakhstan’s “Kazmunaigas” (10%).

Bloomberg sources reported on the filing of lawsuits against the operators of Kashagan and Karachaganak on April 5. According to them, we are talking about “unauthorized expenses” that the operators supposedly should not have deducted from the taxable base. Violations were recorded in 2010–2018. at Kashagan and in 2010-2019 at Karachaganak. The interlocutors of the agency specified that the plaintiff points to violations of tender procedures by PSA operators on both projects and failure to complete the work of contractors at Kashagan. The claim on Kashagan will be considered in Geneva, on Karachaganak – in Stockholm.

Kashagan is considered one of the largest oil fields in the world discovered in recent decades. Recoverable reserves are estimated at 9-13 billion barrels. oil. Commercial oil production began in 2016. Karachaganak is also considered one of the largest in the world, with reserves of 1.2 billion tons of oil and 1.35 trillion cubic meters. m of gas.

Forward Legal lawyer Lyudmila Lukyanova explains that the Kazakh authorities actually accused field operators of overstating costs, which led to Kazakhstan’s losses or lost profits on these PSA projects. But establishing an overstatement of costs, according to the lawyer, “will not be easy,” especially if these costs arose and were taken into account in the financial result of the project many years ago. “The outcome of the dispute will depend on what documents Kazakhstan has in support of the claim,” adds Lukyanova.

Igor Yushkov, a leading analyst at the National Energy Security Fund, believes that the main reason for Kazakhstan’s claims against the operators of Kashagan and Karachaganak is that the country’s authorities “want to improve their positions within the PSA.” “This is actually an attempt to revise the production sharing agreement in order to redistribute the profitability of projects in the coming years,” he explains.

As Yushkov recalls, the PSA is outside the scope of national tax legislation. The filing of lawsuits also fits into the internal political agenda of Kazakhstan: the country’s president, Kassym-Jomart Tokayev, is now actively pursuing reforms and has promised to increase the profitability of hydrocarbon projects in the country, the analyst adds.

Vedomosti sent inquiries to the participants of the PSA projects for the development of Kashagan and Karachaganak.

Recall that earlier the Russian authorities revised the terms of work under the PSA projects for oil and gas production in the country. In 2022, after the strengthening of anti-Russian sanctions, foreign oil companies announced their withdrawal from Russia. Among them were also ExxonMobil and Shell, which acted as operators in the PSA projects Sakhalin-1 andSakhalin-2” respectively. By decrees of the President of Russia, the operating companies of these projects were transferred to Russian jurisdiction. Foreign companies were given the opportunity to stay in the projects – for this they had to declare their desire to stay in the project within a month after the transfer of the operator to Russia. The shares of other companies will be put up for sale.