- The Washington Times - Saturday, November 30, 2002

ALMATY, Kazakhstan The surprise suspension of the biggest construction project in the former Soviet Union earlier this month has thrown into doubt Kazakhstan's attractiveness to foreign investors, bankers and oilmen here said.
Kazakhstan may be as corrupt and bureaucratic as anywhere in the former Soviet Union, foreign investors say, but it has two major advantages over Russia: There is virtually no mafia-style violence and the government which often is synonymous with the family of President Nursultan Nazarbayev has the ability to get its decisions carried out in the provinces.
But on Nov. 15, Tengizchevroil (TCO), a joint venture of leading Western oil companies and the state-owned oil company, caused consternation in Kazakhstan when it stopped work on a nine-year, $3.5 billion project aimed at nearly doubling production at the vast Tengiz oil field on the shores of the Caspian Sea.
The field is Kazakhstan's biggest single source of revenue, accounting for 15 percent of the country's budget. The planned three-year expansion was expected to boost production from 12 million tons of light crude annually to 22 million tons.
ChevronTexaco owns half of TCO, ExxonMobil (25 percent), Kazakhstan state oil company Kazmunaigaz (20 percent) and LukArco (5 percent).
In a telephone interview from TCO offices in Atyrau, director Tom Winterton declined to discuss the reasons for the suspension.
He said that the existing investment in Tengiz, estimated at more than $2 billion, had been financed mostly through sales of crude.
"This is a big project and there's going to be a need for a direct infusion of money from the partners, under the most realistic oil-price scenario," he said.
In the weeks since the startling announcement, top Kazakh officials rushed to reassure investors of the long-term viability of the project and give more details on the government's decision to take a hard line.
"All the partners are in favor of moving ahead," Deputy Prime Minister Karim Massimov told The Washington Times in an interview during a visit to Washington last week. "From my point of view, we are talking here more about accounting and taxation problems than anything else."
But the level of U.S. concern about the project snag was evident in a private meeting between Mr. Massimov and Commerce Secretary Donald L. Evans, in which Mr. Evans urged the Kazakh government to resolve the dispute quickly.
Mr. Massimov said he expected the dispute would be resolved soon.
"Whatever will be done will be done within the framework of existing contracts," he said.
Kazakh Energy Minister Vladimir Shkolnik said in a Nov. 19 press conference in the Kazakh capital of Astana that the crux of the dispute was the joint venture's handling of its tax payments. The oil companies hope to plow revenues back into the project, but the government fears that would lower its tax revenues by $1 billion over the next five years.
Mr. Shkolnik attacked those who said the impasse had dealt Kazakhstan a black eye.
"The decision to suspend the project and the investment climate in Kazakhstan are not at all connected," he said. "Those who link these two things are doing this deliberately in an attempt to spoil the investment climate in Kazakhstan."
But sources familiar with the negotiations said the Western investors had concluded the depreciation and taxation schedule offered by the government did not offer a reasonable rate of return.
The Kazakh Finance Ministry, which has said that taxes paid by foreign oil companies were about $325 million below government projections, said Monday that it hoped for a "constructive dialogue" with Western investors, but did not rule out arbitration to resolve the dispute.
The suspension of the huge project nearly double the size of Kazakhstan's annual budget comes at an awkward time for this country of 15 million.
Agip KCO, the consortium working on the even larger Kashagan field, has submitted to the government its plan to spend about $20 billion over 13 years to develop the offshore field. Kashagan is the world's fifth-largest field, with recoverable reserves estimated at 13 billion barrels. By comparison, Tengiz's reserves are estimated at 9 billion barrels.
The government, which is not a partner in the Kashagan consortium, has until the end of the year to accept or reject the development plan, and sources close to the consortium worry that the government's attitude toward Tengiz made it likelier that Agip KCO would face similar problems.
Chevron is the country's biggest single foreign investor, having taken control of the giant Tengiz field on the parched shores of the northern Caspian Sea in 1993.
Tengiz proved highly profitable for the San Francisco-based company. Chevron, now ChevronTexaco, was able to increase production tenfold and organize the world's biggest railroad-based transport system while overseeing construction of a $2.6 billion pipeline to carry Tengiz crude to the Black Sea.
But for the last two years, ChevronTexaco and other foreign investors have been complaining privately of government pressure to renegotiate existing deals and of what one oilman called "nibbling around the contracts."
Perhaps the most visible "nibble" is a $73 million-a-year fine that the government imposed on TCO for storing 5 million tons of sulfur under conditions identical to those allowed in North America. Kazakh officials say the comparison is meaningless because the Caspian climate is different.
"It's about time someone drew the line," said a source close to the Kashagan consortium. "But it's disappointing that this had to happen."
Despite the government's statements, there was also unanimity among oilmen that the suspension of the ChevronTexaco project tarnishes the country's image just as it prepares to offer, for the first time, about 100 offshore tracts for exploration.
The suspension "will be seen as a clear sign that there's something wrong with the investment climate," said one senior executive.
David R. Sands contributed to this report in Washington.


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