Communist Tax Lawyer

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Kazakhstan to Reconsider Foreign Mining Tax Privileges

Earlier this year Kazakhstani President Nursultan Nazarbaev declared that contracts signed with foreign mining companies that guarantee privileges protecting them from changes in taxation conditions should be reconsidered.

Last week Minister of Gas and Oil Sauat Mynbaev confirmed government plan to reconsider contracts with foreign mining companies with the exception of the Kashagar deposit which is being developed by joint efforts of Italy’s Eni, Royal Dutch Shell, U.S. Conoco Phillips, Exxon Mobil, Japanese Inpex and Kazakhstan’s Kazmunaigaz (KMG). KMG is the state-owned oil and gas company responsible for operating state oil and gas interests and pipelines.

The fifth largest in the world in terms of reserves, the Kashagar deposit lies off the northern shore of the Caspian Sea near the city of Atyrau. It’s being explored according to conditions of a special contract known as North Caspian Sea Production Sharing Agreement (PSA). Experts estimate that the field will start production in 2014. According to EIA data, initial production is projected at 450,000 bbl/d with peak production of 1.5 million bbl/d projected for the end of the next decade.

Another project to which the preferential taxation rule extends is Tengiz deposit which produced 377,000 bbl/d of crude oil and 38,000 bbl/d of condensate in 2008, and is the world’s deepest operating giant field at 12,000 feet deep.

The field has been developed since 1993 by the Tengizchevroil (TCO) joint venture, a 40-year US$20 billion agreement between Chevron (50 percent), ExxonMobil (25 percent), Kazmunaigas (20 percent) and LUKArco (5 percent), signed with the Kazakh government in 1993. Capacity is increasing and production is expected to peak at between 750,000 bbl/d and 1 million bbl/d by 2012. The Tengiz field is located along the northeast shore of the Caspian Sea and is the largest source of oil production in the country. Recoverable crude oil reserves have been estimated at 6-9 billion barrels by consortium member Chevron.

The minister Sauat Mynbaev refused to make comments on the situation connected with Tengiz, while noting that a negotiation on Karachaganak is in progress.

According to several reports, Kazakhstan’s economic crimes and corruption agency is now probing “illegal earnings” of 104 billion tenge ($708 million) at Karachaganak, saying that the end of the March the venture profited in 2008 from oil output that wasn’t approved by the state. In response, representatives of the consortium asserted that the venture is confident its business practices comply with Kazakhstani law.

Kazakhstan is cracking down on the Karachaganak Petroleum Operating BV venture while seeking to enter the country’s only major oil development without state participation. The government wants a stake to boost profit from the project, Kairgeldy Kabyldin, the head of state-run energy producer Kazmunaigaz National Co., said earlier to Bloomberg.

The field is operated by Karachaganak Petroleum (KPO) consortium under a production sharing agreement (PSA) which includes Agip and BG (who each own 32.5 percent), Chevron (20 percent), and Lukoil (15 percent). The PSA was signed in 1997 to develop the field for 40 years.

The Karachaganak deposit which lies close to the Russian Border produced 233,000 bbl/d of condensate in 2008 and is one of the world’s largest oil and gas condensate reserves. According to KPO data, the field holds reserves of around 8-9 billion barrels of oil and gas condensate and 47 trillion cubic feet of natural gas.

Kazakhstan’s law on subsoil and subsoil use governs the transfer of subsoil use rights and was amended in 2005 to give the state the basis to exercise pre-emption rights on any oil assets put up for sale in the country. The law was amended again in 2007 to allow the state to force retrospective changes to any existing oil contracts or even break the contracts if they are deemed a threat to the country’s security. Joint ventures are the most common type of investment; the government announced in early 2008 that no more PSAs will be awarded.

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