The Ripples of an Incompetently Managed Field
The Kazakhs are tightening the screws on the foreign developers of Kashagan, the biggest oilfield discovery of the last three decades. Today they passed a law allowing them to sever any oil contract unilaterally. Reuters storyIt's all meant to put most of the leverage on the Kazakh side in their dispute with the managers of the field. But the perhaps unintended consequence has been the impression that the Kazakhs can also apply leverage to change or repudiate any other contract they so wish in the future.
Is it also more evidence of the Caspian states going the Russian way in terms of petro-state assertiveness?
Here is an email I received today from a foreign friend in Almaty who prefers to remain anonymous: "This is a particularly sticky time here. As of the unanimous passing of the new sub surface law. Many are saying that new investment here should go stone cold. Those who have gone to the expense and trouble to set up a rep office here and try to secure licenses may pack up and go elsewhere as hopeful as they have been. This law is expected to be used as leverage in the future when they want something in any negotiation. They can always find or create an infraction giving them grounds to annul a deal whether well founded or fictional. This is generally expected. The question is will they ever actually use the law to close down an investor(s) and resell the asset?"
I've heard such grumbling before over the years in the face of perceived government high-handedness, but I know of no one substantial who ever actually pulled out. Foreign oilmen in the end are focused on the bottom line, and the stakes in terms of profit are too high for impetuousness.
That does not mean that President Nazarbayev is going to be able to allow this new law to stand in the abstract. In terms of satisfying the due diligence requirements of publicly owned foreign companies, he is going to have to explain what a multi-billion-dollar contract means when one side can just tear it up at will.
Yet this dust-up is still not of the same character as the across-the-board contract repudiation going on in Russia. I do think that down the road Kazakhstan will demand better terms from the country's two other major projects -- Tengiz and Karachaganak. But I doubt that the country will insist on majority ownership of the fields, as Russia has.
Another difference from Russia is that it's probable that none of this would have happened if Italy's ENI had not been such a poor field operator. While undeniably the world's most successful charmer of Russian and Kazakh oilmen, which has resulted in the company's friendship with otherwise obstreperous Gazprom, for instance, ENI is over its head and over-stretched when it has come to actually managing these difficult projects.
The Kashagan consortium members are meeting with the Kazakhs next Tuesday in Astana. One way to change the tenor of the discussions would be to take the initiative and announce a management change. Either Exxon Mobil, France's Total or Shell should take over operatorship, with a primary role offered to the state oil firm, KazMunaiGas.
That appears to be what the Kazakhs are looking for, in addition to an enormous compensation payment to make up for the minimum five-year delay in first oil and a bloated project budget. The oilmen should write a first money offer on a piece of paper and offer it up.
Labels: kashagan, Kazakhstan, Nazarbayev, oil contracts, Putin, repudiation, Russia
8 Comments:
There is a flurry of alarmist reports in the Western media today which betrays the intellectual laziness that afflicts so many of the Western journalists.
They all fail to put things in the broader context: there is a fundamental similarity between Russia and Venezuela which Kazakhstan doesn't share. Specifically, both of those countries are driven by highly emotional ideas of wounded national pride and the desire to push back against what they see as the US imperialist designs. That idea drives their policies in all spheres, including energy.
Kazakhstan, in contrast, has none of that. Its policies are very pragmatic. Will they push for a bigger piece of the pie given a chance? Of course. As would any country, corporation or a business executives. But the Kazakhs aren't going to act irrationally and do something as stupid as driving investors away.
By the way, how does a bill become a law in Kazakhstan? I bet Nazarbaev has a say in the matter? If so, can he veto the bill? Then all this could be a smart maneuver
whose sole goal is temporary: gain more ground in talks with Eni. And, also, to test the reaction of the investors and the world community: that knowledge can come in handy in the future. A smart game of chess, it must be.
I'd have to agree with Alex's comments above. Kazakhstan is indeed different than Russia and Venezuela with regards to not having the emotional need to be "anti-west". Kazakhstan sticks to the three neighbor policy of being Swiss-neutral with Russia, China and the USA. My question is, does America have any policy that states government reviews are required for foreign purchases of specific industries? And, does the American government have the ability (in any of its laws, including war time codes or emergency powers) to cancel contracts and take control of foreign investments/industries? Just a thought...
--Vincent
Welcome back Alex and Vincent. Thanks for the smart remarks.
I agree that much of the media has failed to differentiate between the tenor of Kazakhstan's push-back on Kashagan, and that of Chavez and Putin (I specifically wrote in the Sept. 21 posting that Nazarbayev is not Chavez).
Still, though Kazakhstan's actions are not attributable to an anti-western or insecure wounded pride, it would be a mistake I think to categorize Kazakhstan in general and Nazarbayev specifically as pragmatic in the sense of having limited objectives (meaning getting Kashagan finally on track, in control and some cash as a penalty).
The Kazakhs do have oil nationalism, and it is in the form of insisting that, down the road, KazMunaiGas will have a half-interest in any big oil deal, such as the offshore.
Nazarbayev's oil cadre question why foreigners should run all the big fields; they believe themselves (led by Timur Kulibayev and his lieutenants) should control and operate the fields (a valid point but nonetheless rooted in emotion).
While the foreigners invited the assertive action in the case of Kashagan, they also played into this barely veiled nationalism.
And, not to beat a dead horse, but look for Tengiz and Karachaganak to be targets for contract drift down the road, stemming from the same sentiment.
Nazarbayev can veto. But this is a rubber-stamp parliament. This legislation would never have been suggested and passed unless it originated in his office.
Vincent: I think the US government reserves the right to review M&As in sensitive industries: telecoms and high-tech. Typically, it's about national security considerations, for example, the IBM/Leonovo deal. Things can also be driven by emotions (Unocal/Conoco deal). However, I highly doubt the government would ever try to cancel an existing contract.
Steve: Of course, Kazakhstan's is a rubber-stamp parliament. But there is a potential benefit from the veto: that way NN would temporarily increase pressure on Eni without inflicting a longer-term damage on country's reputation. In fact, that course of action could enhance his image abroad: he'd come across as a guy who is reasonable and realistic, unlike those pesky MPs. But then the perception at home might suffer: he's not nationalistic enough. But then again: would public opinion at home matter that much? Does all that sound as too much of good ol' Kremlinology?
They will probably try again to get a bigger piece of the pie down the road. But do they really need this piece of legislation with lots of downside? After all, there will always be environment which can be found suffering. We'll see in a few days, I guess.
Correction: I meant UNOCAl/CNOOC.
A question about Kashagan. As a rule, contracts contain penalty clauses for performance failure; it's either a reduction in equity or a fine. Eni has twice failed to deliver goods on time; it is also guilty of cost overruns. Those are indisputable facts; the combination of the facts with the presumed penalty clause should make it crystal clear as to what amount and how Eni should pay, shouldn't it? Why then all these games and drawn out negotiations?
Good point? Does anyone out there know what the penalty clause enumerates?
Well, there is also "dishwasher nationalism": recall what happened to Heier's bid for Maytag.
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