• NOV Downhole

 

Tax return: reinstatement of the Kazakh oil export duty motivated by domestic political uncertainty

Why now?

The reintroduction of Kazakhstan’s oil export duty on 13 July was largely expected by both analysts and investors given Astana’s economic reliance on energy revenues, and previous tendency towards resource-nationalist policies. Despite the inherent possibility of emergency taxes being introduced during times of financial crisis, in Kazakhstan the return of oil duties was always more likely to coincide with a period of relative stability or prosperity, as it is when commodities prices are on the rise that the state has traditionally sought to extract further financial gain from this industry. The first oil export tax was introduced in mid-2008 as prices for crude soared to record highs, and was based on a banded system ranging from 1% - 33%, with the maximum rate applied once the price reached over US$ 40/bbl. The system was modified in 2009 before being scrapped completely as the commodities market came crashing down. This time around, a flat fee of US$ 20/t has been set, and even though this is only around one tenth of the cost of the previous tax at the market’s peak in 2008, it is hoped to bring in an additional US$ 406 million before the end of 2010 to help plug the budget deficit, which could be around US$ 5.5 billion.

Foreign investors lose out

The main bone of contention with this tariff system is that key foreign-led consortiums have lost their exemption status; whilst fields such as Kashagan, which is part owned by state firm KMG and still requires extensive investment will enjoy an extended tax holiday, BG’s Karachaganak and Chevron’s Tengizchevroil will have to pay this tax because they did not have a stability clause in their contract. The revocation of Tengiz and Karachaganak’s status is merely the latest example of state intervention in foreign investment. Over the years these firms have faced allegations of illegal overproduction, tax evasion, immigration violations, and in Tengizchevroil’s case, forced contract renegotiation. In the past 12 months Karachaganak’s key shareholders have repeatedly been threatened with court orders and government investigations, which many have interpreted as not so subtle state pressure to gain a stake in Kazakhstan’s only independent energy project. Whilst these two companies appear to have been singled out by the Kazakh government, such behaviour is part of a wider strategy announced in June which will see the current PSA structure abandoned in favour of a potentially much more lucrative royalty system. The majority of the existing PSAs were drawn up in the 1990s when Kazakhstan’s economy was immature and the main goal was to attract foreign capital, fast. As a result, these agreements have since been criticised for allowing profits from the country’s natural resource sector to be claimed by large multinationals based abroad. However, bolstered by increased experience in international business and a decade of solid economic growth, Kazakhstan is increasingly aware of its investment appeal and more importantly, value, emboldening a cavalier and sometimes confrontational attitude to overseas investors.

Domestic political discord

President Nursultan Nazarbayev who has ruled Kazakhstan since independence in 1991 turned 70 in July and amid the pomp and circumstance of the national birthday celebrations, there is an underlying sense of uncertainty as he is yet to openly appoint a successor. Despite the fact that Nazarbayev has previously imprisoned and exiled those believed to be closest to him - as his former son-in-law Rakhat Aliyev would testify, there is no shortage of candidates for this position. Attempts to attract the leader’s endorsement have resulted in rival factions developing within the government who are all competing for his attention. A simple way to score points with the boss is with promises of increasing state revenues. Although it may seem short-sighted to repeatedly target foreign oil majors with increased taxes and more stringent regulations to make some quick cash, over the past decade various Kazakh governments have fallen back on this tactic for the simple reason that it is effective. It has essentially become a reliable and cyclical mid-term economic strategy for the Kazakh state. Kazakhstan is home to the 11th largest proven oil and gas deposits in the world, and despite the operational and economic difficulties, these firms openly want to stay for the long-term and are prepared to weather the occasional storm to make sure they are still there when the blue skies return.

Author: Samantha Wolreich – AKE Senior Risk Consultant, Eurasia Specialist

Published on 15/07/2010


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