Oil foam

The prehistory is well-known: as from January 1 have been introduced by changes and amendments in the Tax Code new taxation models. We won't go into their essence, it's not so important actually. The reaction of investors is what's important. And it was unprecedented in the Kazakhstani history.

First representatives of investor companies tried to counteract the government point of view at a round table in Astana, where the presentation of new model of taxation was carried out by three government members (obviously to eliminate any illusions that the investors could have about the readiness of the authorities to hold fast to their legislative norms). There was a zero result. The main thing that the foreign companies heard was the government's opinion that those who didn't wish to work as per new taxation models could as well stop working at all. It was suggested that there will be enough wishing to work even under new conditions.

A sort of an answer from the investors was their own conference - New model of subsurface users taxation and its influence on investments in the oil & gas industry of Kazakhstan - in Almaty, in financial-informational centre of the country. Words of one lawyer: "We feel investors anxiety" were a refrain thereof.

Many remarks and pretensions to the novelties were reflected in a speech by one participant of the discussion: changes can be negative, seriously influencing the economy of future projects, because geologic and other risks are great on Caspian shelf. It would impede the flow of investments and, as a result, it will postpone the state realisation of the shelf development programme.

As a confirmation that the situation is serious, such fact was quoted: the absence of new contracts inked under the new taxation regime. Although by the moment of that discussion, on 19 March, this argument "did not work" because too little time had passed since January 1 when the changes and amendments came into effect.

To say that it was due to them that there was a pause in the appearance of new investors in the Kazakhstani oil & gas industry was early. But several experts were predicting that the companies negotiating on the projects on the shelf, who had not inked contracts yet, could recall their applications.

The discussions ended there. Temporarily. It seemed that there still was a possibility to analyse the parties' arguments, their positions, maybe even their moral points of view calmly.

The Kazakhstani position was based on the fact that the foreign investors were reaping very big, unheard of, profits. And it was logical and just if they shared them. Moreover, it is well-known that the stability of contracts, concluded before 1 January, 2004, was unbreakable, they were paying taxes as they were used to. And virtually all oil in Kazakhstan today is extracted as per those contracts. That is, the new legislation would not bring fast, and moreover, immediate effect for the replenishment of the budget. And if the moral position about the must to share one's superprofit is not indisputable, but is well-grounded, the practical effect from the new rules is doubtful.

It is suggested that the idea to introduce new taxation rules emerged in approximately the following way. Lately, since when the long phase of oil prices growth started in 1999, the Kazakhstani authorities constantly wanted to increase the country share of profits for the oil extracted by the investors. But how to approach them, if the stability of contracts is guaranteed? Russian neighbours are well-off - there in the 1990-s the oil resources were not sold out to the foreigners, but given away to the oligarchs. When they decided that it was time they resolved the issue of replenishing the budget with oil dollars with the help of general prosecutor's office. In Kazakhstan oil is extracted mainly by big Western companies so here it won't work.

As a result it was decided to create a precedent of changed legislation. Maybe the ideologists of that step wanted to check the reaction of investor society at this "pilot balloon"? So far it doesn't touch direct interests of the oil grandees. Maybe Kazakhstani economic policy ideologists received courage from an opinion that with such high oil prices that remain there for four years already and keep growing and with the world famous image of the Caspian Sea as an oil storage of world history significance taken into consideration no legislative changes would scare investors away from it. And as a result they will make the old ones more agreeable? If they were led with such ideas in Astana, they are not totally illogical, but they are quite brave. Maybe even too much.

Up until last week the last issue could be discussed, and here comes the first call, quite a loud one: the Russian company "Rosneft" declared that it wouldn't participate in the "Kurmangazy" shelf structure development on new tax conditions. This project figured as one of the most advanced and important in the Caspian shelf development and its destiny was resolved on the interstate level.

In its political and informational aspects it was after the Kashagan development the main "locomotive" of national oil ambitions. And here comes the result. Let us remember expert opinions expressed on the conference in mid-March that applications submitted by companies can be resolved.

An important and unpleasant precedent was created for Kazakhstan. If now other companies even slow down their speed of movement towards shelf projects it will put under big doubt the terms of realisation of the Caspian shelf development state programme. And it is exactly with this programme that the plans of an abrupt oil production increase are related, because the onshore fields will not be able to give a bigger growth.

What next? Now, perhaps, nobody knows an answer to this question. In our view the chance that the government will start to seek a sort of compromise with investors gradually leaving its hard line position expressed in March is quite big. Another option is that the authorities will stick to their current position. Here they can win, as well as lose. If the world oil prices keep growing, it is not excluded that as a result there will be investors who will agree to come to the Caspian under new conditions. It would be a political triumph of Kazakhstan. But the disadvantage of this option is that here nothing depends on Kazakhstan.