Analysis: some important events took place in oil and gas sector of Kazakhstan

/IRBIS, March 30, 01/ - The GSRW informs that last week the government reviewed Kazakhstan's investments in the Karachaganak project and came to the conclusion that they are very small. This decision was based on a report submitted by a group of representatives from the Energy and Mineral Resources Ministry after a visit to Western Kazakhstan. It is obvious that Kazakhstan has invested less in the project than foreign companies. First, the statement that Kazakhstani companies have contracts worth $528 mln with foreign companies contradicts the facts. According to the Gas Industry Department of the Energy Ministry, the figure is $248 mln, whereas the official data from Kazakhstan's Statistics Agency shows that domestic companies have contracted for a mere $135 mln within the import substitution program. Such large discrepancies are bewildering. In 2000, contracts with foreign companies relating to the Karachaganak project totaled almost $1.7 bln, of which $823 mln has already been used. Kazakhstan accounts for a mere 13% of this sum. Annual salaries for foreign and domestic specialists differ a lot as well: $14,172 and $1,249 respectively. There are four times as many Kazakhstani employees as foreign ones, but their aggregate annual salaries are three times lower. The government has warned that it would take strict measures as provided by legislation unless all the breaches that were disclosed during the inspection were remedied; but this seems to be hot air. Convincing evidence for supposing this can be found in a case involving Chinese investors in Aktobemunaigas, which has recently attracted a new investor (see GSRW news, March 27, 2001). The CNPC holds a 60% share in Aktobemunaigas, the third largest Kazakhstani oil company after Tengizchevroil and Mangistaumunaigas. During the last three and a half years, CNOC's activity has been strongly criticized by both the media and officials for several reasons. First of all, CNOC has not adhered to the investment program which was set forth in the agreement. Only 85.4% of its investment program was implemented in 1998, and just 60% in 1999. The situation deteriorated still further when the company laid off 2,000 employees in spring 1999. This was necessary, it was explained, to reduce the cost of oil production. CNOC's promise to provide jobs for the redundant employees was never kept. Now we see the advent of a new investor in the shape of Access Industries- Eurasia, which is a fiduciary of the 25.12% state share for five years. Astana says this is due to its resentment about CNOC and its intention to improve the company's efficiency. This is undoubtedly a good intention. But why is the Chinese investor not being called to account for its breaches of the contract? By the way, the new investor has also been criticized in Kazakhstan for using various "uncivilized" methods of doing business. There is another interesting aspect to this. Access Industries-Eurasia has undertaken to provide $1.4 bln over five years ($280 mln per year), but only if no export quotas are applied, and has promised to produce up to 6.3 million tones of oil per year. Suppose the company exports 5-6 million tones at a price of $180 per ton - that would be $0.9-$1.1bln annually. And the government's promise to penalize Karachaganak Integrated Organization looks like the same old story. The Great Silk Road World News Agency 7, Gainsford Street, London, SE1 2NE, U.K. TEL/ FAX 44 0171 403 20 37 greatsilkroad@btinternet.com