Arbitration Proceedings with Investors: What s at Stake? Kazakhstan is in Legal Disputes with Shareholders of the Kashagan and Karachaganak Projects
Several investors involved in the development of the massive Kashagan oil field in the Caspian have informed the Kazakhstan government of their potential recourse to international arbitration. This move comes in response to a $5 bln environmental fine imposed on them, as reported by Bloomberg, citing a source.
In late March 2023, during the opening of the new term's inaugural parliament session, Kazakhstan's President, Kassym-Jomart Tokayev, expressed the possibility of increasing the tax burden on the resource sector in Kazakhstan.
According to President Tokayev, high revenue generating large businesses and companies exporting raw materials should contribute more to the national treasury. He emphasized that such an approach is fair and has been successfully implemented in other parts of the world.
He further elaborated that the new taxation model should focus on the optimal distribution of national wealth, ensure a high degree of economic activity, and offer targeted support to priority economic sectors.
Earlier this year, the Kazakhstani authorities demanded the North Caspian Operating Company (NCOC), operator of the Kashagan consortium, to pay a penalty of 2.3 trillion tenge (approximately $5 bln) for allegedly storing excessive amounts of sulfur at their facility. While the operator denies any wrongdoing and successfully contested this decision in court, the government continues to seek penalties in the appellate court.
International partners of NCOC, including Eni SpA, Shell Plc, Exxon Mobil Corp., and TotalEnergies SE, have urged the government to engage in discussions regarding the fine. They have indicated their intent to resort to international arbitration if such discussions don't transpire, as reported by Bloomberg.
Yerlan Nysanbaev, the Minister of Ecology and Natural Resources, has expressed the government's stance: "There will be no direct negotiations with the company. We will wait for the court's decision. That's a given."
Environmental claims are just one facet of a larger offensive initiated by the Kazakhstani government against NCOC and KPO shareholders, accusing them of unfair revenue distribution from field developments. The cumulative claims submitted to international arbitration against Eni and Shell companies – beyond their involvement in the Kashagan project, as they are co-operators of the Karachaganak gas condensate field consortium – amount to $16.5 bln, excluding the environmental fine.
"These are not tax disputes; it's about the execution of production-sharing agreements," emphasized Almasadam Satkaliyev, Kazakhstan's Minister of Energy. The Minister refrains from divulging case details, stating, "My comments are limited. All I can say is these claims are made in the interest of the Kazakhstani people." Satkaliyev also confirmed the amounts claimed against the Kashagan and Karachaganak field operators as $13 bln and $3.5 bln, respectively.
To date, the Kashagan field has seen an investment of over $50 billion, while Karachaganak has received no less than $27 bln. The government believes that not all project participants' expenses can be deducted from revenues under the implementation of Production Sharing Agreements (PSA). Specifically, for the Kashagan project, costs amounting to $13 bln should not be deductible, and for the Karachaganak project, it's $3.5 bln. The claims also allege that the companies violated tender procedures for both projects and did not fully execute contractual work at Kashagan.
For the Kashagan field, the claim covers the period from 2010 to 2018, and for the Karachaganak field, it spans from 2010 to 2019. In March 2023, the Kazakhstani government selected arbitrators for the Kashagan and Karachaganak cases, based in Geneva and Stockholm respectively. Should Kazakhstan succeed in these arbitration proceedings, it stands to gain a larger share of revenues from the fields in accordance with the terms of the PSA.
The scrutiny of Kashagan project shareholders began on environmental grounds. Early in March this year, the Department of Ecology for the Atyrau Region announced that it identified a series of environmental violations in NCOC's operations. These violations include the excessive storage of sulfur, discharging untreated wastewater, and the unauthorized burning of unrefined raw gas. In light of these discoveries, environmentalists initiated administrative proceedings against the company under the Administrative Offenses Code, subsequently levying fines totaling 2.3 trillion tenge (about $5 bln at current rates).
Responding to journalist inquiries in April, Olivier Lazar, Managing Director of NCOC, provided comments on the allegations from the Ministry of Ecology. He assured that the company adheres to strict environmental standards in its operations. "At the moment, I cannot say much about this issue, except that we operate under the strictest environmental standards. We currently have some disagreements with the Ministry of Ecology, but we are fully confident in the correctness of our actions," he stated. The company disagreed with the claims and decided to challenge them in court.