The North Caspian PSA (NCPSA) was concluded between Kazakhstan and the international consortium in November 1997, with a contract term of 40 years. According to the official website of North Caspian Operating Company BV (NCOC), 3 the current operator of the project is NCOC and the consortium consists of the following oil and gas companies:
In the course of time, an enormous oil field – the Kashagan field – was discovered in the northern part of the Caspian Sea in 2000. The oil reserves of the Kashagan field are estimated at 4.5 billion tonnes.
The parties to the NCPSA have also discovered:
In 1979, the Soviet government discovered one of the largest oil fields and one of the largest gas condensate fields in the world – Tengiz and Karachaganak respectively. The condensate reserves of Karachaganak are estimated at 9 billion barrels, while the gas reserves are estimated at 14 trillion cubic metres (m3 ).
In 1997, the government of Kazakhstan and IOCs signed the Karachaganak Field Final Production Sharing Agreement (KFFPSA), with a term of 40 years.
According to the official website of Karachaganak Petroleum Operating BV (KPO), 4 the operator of the project is currently KPO and the consortium consists of the following IOCs:
By 2019, KPO had extracted 18 million tonnes of oil production and 8.7 billion m3 of gas production. Half of the gas produced was reinjected to maintain reservoir pressure.
On 2 April 1993, a joint venture called TengizChevrOil LLP (TCO) was established by the first president of Kazakhstan, Nursultan Nazarbayev, and Chevron Corporation. This project has all the features of the PSA, but the contract is not a classic PSA. The parties to the contract have concluded numerous agreements, but the terms of those agreements are not disclosable to the public. The licence for exploration and production was issued for a period of 40 years.
According to the official website of NC KazMunayGas JSC, which is currently the operator of TCO, the following IOCs are participants in this project:
The oil reserves in the Tengiz field are estimated at 3.4 billion tonnes. By 2017, oil production by TCO had reached 28.697 million tonnes.
Kazakhstan had great strategic plans to use the PSA to further the development of the Caspian Sea and attract IOCs to build infrastructure, discover and extract oil, and use local content at their own expense and risk. To realise these ambitions, the government adopted the Law of the Republic of Kazakhstan on the Production Sharing Agreements in Offshore Oil Operations dated 8 July 2005 (‘PSA Law’).
However, the PSAs also resulted in damage to the state economy and losses to the national budget. In a speech in 2008, former Prime Minister Karim Massimov stated that Kazakhstan needed to increase the tax burden for subsoil users and revise the procedure through which they paid taxes; he also highlighted the importance of excluding the PSA as a type of subsoil use contract. He assured investors that Kazakhstan would continue to fulfil its obligations under existing PSAs, but would not conclude any new PSAs because times and Kazakhstan – had changed. Thus, the PSA Law was abolished in 2009.
When an oil field is discovered, the state and investors negotiate on the proportions in which the oil will be shared. Once they have reached an understanding, the investors can start developing the oil field. As previously mentioned, the investors bear all capital and operating costs, and receive compensation in return. The investors calculate all of their investments and define the costs of the project, which the state must compensate by sharing oil with investors. It is thus very important for the state to monitor these costs; otherwise, the investors can increase the costs and can even provide fake invoices.
Once the oil field has been developed, the investors commence oil production. The start of commercial oil production means that investors can retain the produced oil as compensation for their investments. The proportion of this compensation is agreed between the investors and the state. This compensation is called ‘cost oil’, as it only compensates the investors for their investments. The remainder of the oil produced is called ‘profit oil’, and is divided between the parties in a certain proportion as agreed between the state and investors before the conclusion of the PSA.
Once the investors have signed the PSA, the government approves the list of blocks/sections in order to implement the PSA. After accepting the designated contract area, the investors carry out the geophysical surveys. These operations should take place only within the designated blocks. Under the PSA in Kazakhstan, the investors bear all risks and receive compensation through sharing in the oil produced. Without oil, there is no compensation. Based on the results of the survey, the investors choose a drilling site for the purpose of well exploration. If this is successful, the investors will announce the discovery of oil.
Technical and economic feasibility studies are then carried out. Based on the available data, the government will approve the field development programme. The development then begins: the investors commence construction and develop infrastructure and transportation networks. Once the necessary preparations have been made, oil wells are drilled, the development stage ends and the commercial production stage begins.
As the budgets of Kashagan, Karachaganak and Tengiz kept expanding, the government decided to impose a minimum 50% local content obligation on investors. In response, NCOC, the operator of the Kashagan field, increased its share of local content to 46.2% in 2014, 27.7% in 2015, 27.8% in 2016, 32% in 2017 and 48% in 2018. These fluctuating figures suggest that there is little stability or sustainable growth. Meanwhile, TCO, the operator of the Tengiz field, declared that in 2018 it purchased $2.5 billion of Kazakh goods and services.
However, the percentage of local content that this represented was not disclosed. KPO, the operator of the Karachaganak field, issued a report in 2018 which stated that its share of local content was 56%. However, operators do not treat local workers in the same way as they treat expats. Several incidents have resulted from these unequal work conditions. Workers have gone on strike numerous times, but the issues remain unresolved.
Under the PSA, the operator is responsible for the respective project and for all working processes. Usually, investors create a special legal entity for operating purposes. Although the operator is a separate legal entity, the investors bear joint responsibility to the state for the operator’s actions under the PSA. The operator usually does not possess funds itself. In order to maintain the project and working processes, the operator makes cash calls to the investors. The operator of the Karachaganak field is a foreign legal entity, KPO. Similarly, the operator of the Kashagan field is also a foreign legal entity, NCOC. In Tengiz, the investors created a limited liability partnership, TCO, under Kazakh law.
In order to reduce environmental pollution, IOCs endeavour to upgrade and modernise their equipment and machinery. However, environmental disasters still frequently occur. Kazakhstan needs to rethink its attitude towards its natural resources. The most badly affected area is the Caspian Sea, which includes the Atyrau and Mangistau regions. The anthropogenic impact in these areas is catastrophic, encompassing millions of hectares of technogenic zones and degraded pastures, and millions of tonnes of spilled oil.
The companies that operate under PSAs in Kazakhstan experience similar problems, such as sulphur utilisation. The increase in sulphur reserves in Tengiz and Kashagan is another red flag. TCO and NCOC claim that they cannot utilise the amount of sulphur produced and thus most of it is blown away by the wind. Environmental specialists argue that the actions of the IOCs are insufficient. TCO and NCOC would rather pay billions of dollars in fines to the government than find a way to utilise the sulphur produced without environmental consequences.
The North Caspian Sea is a delicate ecological zone. Its flora and fauna are very sensitive, and there are a lot of rare species – such as sturgeon fish and the Caspian seal – which are included on the International Union for the Conservation of Nature Red List of Threatened Species. The development of the Kashagan field is proving difficult due to the limits of the existing technical capabilities.
However, KPO always fulfils its obligations to ensure safe working conditions and protect the environment in the region in which it operates
According to the United Nations Convention against Corruption and the Organisation for Economic Co-operation and Development, ‘corruption’ is the abuse by officials of their state powers for their personal benefit by pursuing the interests of third parties. According to Article 2, part 1 of the Anti-corruption Law, ‘corruption’ is:
the acceptance of property benefits and advantages not provided for by law, in person or through an intermediary, by persons who perform state functions, and persons equated with them, through the use of their official powers and opportunities linked to them, or such other use of their powers; and
the bribery of such persons by individuals or legal entities through the illegal provision of benefits and advantages.
In the PSA context, corruption mainly arises in relation to oil extraction, tax collection, ecology protection, land use and goods procurement. Oil extraction is hard to control, as it involves ongoing examinations of licences, ecological indicators, land use, labour relations and tax payments.
Under the existing PSAs in Kazakhstan, the tax burden on investors is inadequate. Currently, investors need only pay corporate income tax and value added tax. They do not pay property tax, land tax, excess profit tax, royalties, customs fees for exported crude oil and gas condensate, or excise duties for crude oil and other minerals. Moreover, the PSA members of the Kashagan, Karachaganak and Tengiz projects need not comply with the current Tax Code, as this does not have retroactive effect.
As previously mentioned, the PSA in Kazakhstan possess no features of international law. As the subsoil has economic and strategic significance, the only applicable law is the law of Kazakhstan.
With regard to dispute resolution, we would suggest that the PSA is a civil contract. Disputes under such contracts may be addressed in accordance with the agreed conditions in the contract, whether through the Kazakh courts or through international arbitration. In general, such disputes are resolved through international arbitration, given that one party to the PSA is the state itself.
As previously mentioned, the PSA in Kazakhstan possess no features of international law. As the subsoil has economic and strategic significance, the only applicable law is the law of Kazakhstan.
With regard to dispute resolution, we would suggest that the PSA is a civil contract. Disputes under such contracts may be addressed in accordance with the agreed conditions in the contract, whether through the Kazakh courts or through international arbitration. In general, such disputes are resolved through international arbitration, given that one party to the PSA is the state itself.
The PSAs currently used in Kazakhstan appear to have facilitated the effective colonisation of the country. Kazakhstan cannot cancel the existing PSAs and investors continue to operate based on them. According to these PSAs, Kazakhstan receives a small share of the profits from the exploitation of its natural resources once the investors have been reimbursed for their investments. IOCs purposefully overestimate their expenses. Investors are aware that the Kazakh government does not have the necessary expertise to check the implied costs.
On the other hand, Kazakhstan also does not have the necessary expertise, funds and technologies to exploit its natural resources itself; and without the IOCs, it would be unable to produce oil and exploit large oil fields such as Kashagan and Tengiz. For these reasons, the PSA is both a blessing and a curse.