Cancellation of PSA: the Second WaveArthur Shakhnazaryan, Atyrau
The Zone of Inviolability
The position of Ak Orda is unambiguous, and it is legally reflected in the new legislation of the RK on subsoil use: it is not envisaged the conclusion of new PSAs in Kazakhstan. In 2010, the President of Kazakhstan addressed the officials: “We should work out an issue on leaving the “zone of inviolability” so that everybody would operate under the same changes in tax legislation which will occur in future”.
The head of state also stressed: “Our tax officials come there (to foreign investors - Petroleum) and had to bring huge bags of papers of 10-year-old prescription and to seek in them how to impose taxes for the investors operating in the oil and gas and other spheres.” Also, the Minister of Oil and Gas Sauat Mynbayev echoed the president: “PSA, in our opinion, to a certain degree stimulates the increase in the costs of the projects, as they in any case are covered on the account of produced oil and, moreover, with percents. If all this is combined with weak control from the state bodies, it is easy to break a balance of interests not in favor of the republic.”
In its legislative activity and publicly the official Astana has started to more rigidly arrange the operating conditions of foreign investors by justifying its position by the protection of national interests. The majority of officials and politicians are very critical in regard to the regime of PSA (like those contracts concluded on Kashagan and Karachaganak) and the contracts of modernized concessions of taxes-royalty type (the Tengiz project), as not considering the country’s interests. Meantime, direct cancellation of production sharing agreements could entail numerous trials in the international arbitration, therefore in Kazakhstan each contract is reviewed with individual approach.
As informs to Petroleum a source at the Ministry of Oil and Gas of the RК, the subsoil use contracts with the preserved stable tax regime are conditionally divided into three groups: 1) large projects (ТCO, agreements on Northern Caspian and the Karachaganak oil and gas condensate field); 2) contracts with foreign participation (Caspy Меruerty Operating Company B.V. LLP, Kurmangazy Petroleum LLP, Zhaikmunai LLP, Maersk Oil Kazakhstan GmbH), with considerable investments (Zhambai LLP, Tyub-Karagan Operating B.V. LLP), and also with lengthy stage of exploration (Precaspian Petroleum Company LLP, Sagiz Petroleum Company LLP, Potential Oil LLP, Adai Petroleum LLP); 3) other contracts (Kolzhan Oil LLP, Tandai Petroleum LLP and others).
In the contracts of the first and second groups, where there is foreign participation, it is rather difficult to change a tax regime. Given that these are big projects, there is a high risk of lengthy arbitration trials with considerable economic and investment damage. Other part of contracts of the second group has high probability of investors’ refusal from further implementation of the project.
After adoption of the new legislation on subsoil use in 2010, the authorities have terminated 28 contracts, the main reason for which is the failure to fulfill contract obligations. As of September 1, 2011, 199 subsoil use contracts for hydrocarbons were operated in Kazakhstan, including exploration contracts - 61, combined contracts on exploration and production - 70, production contracts - 52, contracts for exploration and production conducted on the terms of production sharing (PSA) and Tengizchevroil LLP - 16.