Feature: Kazakhstan's oil uncertainties

SKOPJE, Macedonia, June 23 (UPI) -- The unexpected, perhaps, was the only thing that could have been expected of the Iraq invasion. The fact that American and British forces raced to secure oil facilities as soon as possible showed plainly the importance of energy supply control to the Bush administration. The continuing dangers facing Americans in Iraq were driven home by Sunday's bombing of an oil pipeline near Baghdad -- on the day it was meant to open -- by unknown perpetrators.

American control of Iraqi oil will have all sorts of consequential effects for not only OPEC and Russia but for Caspian producers and investors as well. Yet the current problems facing investors in Kazakhstan serves to remind that oil investments, complicated enough even before the demise of Saddam, are bound to experience even more volatility.

On June 13, Kazakhstan's prime minister, Imangali Tasmagambetov, who had served 18 months in his post, stepped down. According to Eurasianet.org, Mr. Tasmagambetov was a "nationalist," one who "...had a prickly relationship with Western oil conglomerates involved in the development of Kazakhstan's natural resources." He was replaced by Daniyal Akhmetov, a politician deemed more pliable. However, Tasmagambetov did not go far -- presidential strongman Nursultan Nazarbayev soon re-appointed him as state secretary. Both men have caused consternation amongst foreign oil companies for their allegedly obstructionist and overprotective policies. The Kazakh government has been prodigiously passing new laws over the past 6 months, as Nazarbayev's "re-nationalization" policy takes effect.

The president's confidence stems in part from Kazakhstan's pre-eminent regional position as an FDI destination. It boasts the most considerable oil discovery in recent years, the undeveloped Kashagan field, believed to hold between 7-9 billion barrels of oil. In April, the IMF expressed strong confidence in the country's economy on a macroeconomic level. At the same time, U.S. rating agencies like Moody's awarded Kazakhstan a very favorable investment grade rating for honoring loan commitments. It's clear that President Nazarbayev believes he is dealing from a position of strength. According to Eurasianet.org, he would like the state to retain a majority share of future energy deals.

Such willfulness tends to vex Western interests. Underdeveloped but resource-rich countries inevitably suffer criticism over alleged human rights violations and undemocratic tendencies. The U.S. has lambasted virtually every Central Asian and Caucasus state also for lacking rule of law, enjoying corruption, and demonstrating bad governance in general.

Indeed, the unfolding kickback scandal involving two former Mobil employees could be interpreted as a shot across the bow at Nazarbayev. One of his former advisors, American investment banker James H. Giffen, has recently been indicted in New York for allegedly having paid over $78 million in bribes to senior Kazakhstan officials in 1996. At the time, the company was negotiating for a part of another large oilfield, Tengiz. The deal -- which Giffen brokered -- was closed for $1.05 billion. In an interview two weeks ago with the Financial Times, President Nazarbayev angrily rebuffed the allegations as being "provocative and baseless." But now that another Mobil employee, J. Bryan Williams, has pled guilty to charges of massive tax evasion in relation to the Kazakhstan operation, attention has refocused on the case. The U.S. Government's investigation is ongoing and may soon concentrate on the Kazakh authorities -- especially if the government's prodigious output of mercurial and restrictive new laws continues.

Several laws passed relatively recently, as well as penalties being considered, are leaving investors confused over the sanctity of their contracts. Most worrying was December's investment law that denies investors the rights to international arbitration unless the government approves. In addition, the government would like to nullify a value added tax exemption granted in 1999 to Kashagan's Agip KCO consortium, a penalty that may cost the consortium up to $500 million, according to the Financial Times. And a mysterious new sliding scale tax for "subsurface users" has recently emerged, also. The government has attempted to justify such efforts by citing past contracts that had allowed oil companies to get away with paying "unacceptable" low levels of taxes, according to a recent RFE/RL analysis.

The biggest current controversy, however, is that over Kashagan's beginning production date. The French company TotalElfFina, which owns 20.3 percent of the consortium (as do Italy's Eni and ExxonMobil), recently announced that production would not start until 2006 or 2007. However, president Nazarbayev demanded on 9 June that the consortium stick by the original plan (2005) and has promised hefty penalties for non-compliance. At the same time, however, his government has slowed progress by threatening large environmental fines for any oil spills -- thus forcing the companies to drill cautiously and slowly. The "double bind," as the RFE/RL report puts it, is bad news for the consortium: "...the message might be that Kazakhstan intends to collect, one way or the other."