In recent days, a number of media outlets, citing Bloomberg, have reported on Kazakhstan’s lawsuits against partners in the Kashagan and Karachaganak fields. According to the news agency, the subject of the suit is the costs disputed by the Kazakh side, which, according to the government of Kazakhstan, the operators of the above projects, unreasonably attributed to the costs. The position of the Kazakh side and the content of claims filed by our country in international arbitration are explained in the exclusive interview to Petrocouncil.kz Oil and Gas Council by the General Director of ‘PSA’ LLP Beket IZBASTIN.
Mr.Izbastin, could you describe about the area of responsibility of ‘PSA’ LLP?
PSA LLP performs the functions of the Authorized Body in Production Sharing Agreements for the Kashagan, Karachaganak and Dunga projects. Our tasks include protecting the interests of the Republic of Kazakhstan in the North Caspian and Kashagan projects and the Dunga field. I will tell about them in more detail.
The North Caspian Project is the flagship of the oil and gas industry in Kazakhstan, the Kashagan field is located in the northern part of the Caspian Sea, about 80 kilometers from Atyrau. To date, the shareholders are: JSC NC KazMunayGas (16.88%), Eni, Total, ExxonMobil, Shell (all 16.81%), CNPC (8.33%), “Inpex” (7.56%).
The Kashagan field is one of the 20 largest oil fields, the volume of recoverable oil reserves is about 2 billion tons. The field is located in a shelf zone with ice formation in winter, high reservoir pressure and high concentration of hydrogen sulfide. Commercial production of oil and gas from the Kashagan field has been carried out since November 2016. Since then, more than 80 million tons of oil have been produced at the field.
As part of the development of Kashagan, an infrastructure to support offshore oil and gas operations has been created from scratch that meets the most advanced standards. Currently, one of the external factors influencing oil operations is the change in the level of the Caspian Sea.
The Karachaganak development was launched in 1984. The field is located in the West Kazakhstan region near the city of Aksai and 150 km from the city of Uralsk. In 1997, the Final Production Sharing Agreement was concluded until 2038. Project shareholders: Shell 29.25%, ENI 29.25%, Chevron 18%, Lukoil 13.5%, KMG 10%. Shell and ENI are the single Project Operators.
Karachaganak is the largest gas condensate field in Kazakhstan, but the lack of processing facilities at the field limits the ability to produce and market large volumes of gas.
In this connection, in order to maintain the production of liquid hydrocarbons, raw gas is partially injected back into the reservoir, partially processed at the Orenburg gas processing plant under a long-term contract with Kazrosgaz.
Thus, since the beginning, about 243 million tons of liquid hydrocarbons and 338 billion m3 of gas have been produced at the field. Re-injection of gas into the reservoir over the same period amounted to about 144 billion m3.
Finally, the Dunga oil and gas field is being developed under the Production Sharing Agreement dated May 1, 1994. The field is administratively part of the Tupkaragan district of the Mangistau region. Shareholders: Oman Oil Company Limited – 20%, PTTEP Corporation – 20%, Total E&P Dunga GmbH – 60%. From the beginning of development to 2023 the volume of oil production amounted to 7.4 million tons.
What is the current investment status in the listed projects under these production sharing agreements?
Kashagan is in Phase 1 – Pilot Development, currently oil production is about 425 thousand barrels per day or about 18 million tons per year.
Over the past 5 years, the Contractor has been implementing ongoing small capital projects:
• project for conversion of production wells into injection wells;
• project to install additional reboilers at oil treatment units;
• project for the construction of new water treatment facilities;
• D-Island Sour Gas Compressor Modernization Project;
• a project for the construction of a gas pipeline for the gas processing plant of QazaqGaz for 1 billion m3.
However, these projects do not lead to a significant increase in oil production and are more related to improving the current production infrastructure and increasing production efficiency.
The main expectations of the Republic of Kazakhstan are related to the implementation of Phase 2 and the Full-Scale Development of Kashagan which were presented by the Contractor as part of the Development Project and provided for:
– Production of 500,000 bpd by 2027 as part of Phase 2A;
– Production of 700,000 bpd by 2030 as part of Phase 2B;
– Production of 900,000 bpd by 2036 as part of Phase 2C;
– Production of 1,100 million bpd by 2042 under Phase 3.
Unfortunately, these forecasts will most likely not be fulfilled by the Contractor in the planned timeframe, due to the fact that, in our opinion, a “risky” concept for the development of Kashagan was chosen – to supply raw gas to the so-called third party.
Nevertheless, the Republic of Kazakhstan within its competence provides the necessary support to the Contractor, on which the consistency of the submitted plans and forecasts now depends.
Karachaganak is at the stage of implementing projects to maintain the oil production at the level of 11 million tons per year. Major capital projects are authorized and implemented in a timely manner. This allows for the timely modernization of production facilities and the maintenance of the economy of both the Karachaganak project and the Republic as a whole.
Recent years have been encountering serious challenges for all industries, incl. for the oil and gas industry (pandemic in 2020, since 2022 – geopolitical problems). Nevertheless, during this time a number of large investment projects were successfully and timely developed: production restrictions on gas were removed and 4th gas re-injection compressors were built. Currently, work is underway to implement the Karachaganak expansion projects: PRK-1A and PRK-1B.
In addition, the Republic of Kazakhstan assigned to the Operator the task of creating gas processing capacities at the Karachaganak field (Gas Processing Plant (GPP) with a capacity of up to 4 billion m3/year). It should be emphasized that various options for the construction of a gas processing plant based on Karachaganak oil have been studied since 2002.
However, only in 2022 this issue have moved into practice. The gas strategy is aimed at increasing the resource base of the Republic of Kazakhstan and processing an additional volume of gas to meet the growing demand of the domestic market for commercial gas. The standard schedule for the implementation of the GPP construction project takes 6-7 years with the commissioning in 2030.
At the same time, the goal is the maximum possible acceleration of the feasibility study of the project and the decision on investments much earlier compared to the standard schedules. Currently, this project is at the stage of preparation of technical specifications for basic and detailed design.
Regarding Dunga, on July 04, 2019, the Republic of Kazakhstan and the Contractor signed an extension of the Dunga project production sharing agreement until 2039. As part of the Dunga PSA extension until 2039 the Contractor assumed obligations to implement the Dunga Phase-3 project, provide investments in capital expenditures (about 300 million), finance the social infrastructure projects, increase production to the level of 850 thousand tons / year, etc.
A few days ago, the international media reported on serious disagreements between the Republic of Kazakhstan and investors. How would you comment on it?
This question is quite sensitive and confidential, but I will provide a more detailed information. According to the terms of the PSA, the Parties (the Republic and the Investors) must resolve any disputes arising on the PSA in the framework of international arbitration.
Each of the Parties under the PSA have right to do so, and a guarantee for the investor that all disputes that arise will be considered impartially, without prejudice, and a fair decision will be made on them in international jurisdiction.
Arbitration is a working practice in commercial issues as well as in Kazakhstan’s PSA projects. As you remember, since the beginning of the 2000s, several arbitration claims on PSA projects have already been initiated and successfully settled.
Currently, there are a total of 4 arbitration claims under the PSA projects, both by the Contractor against the Republic and by the Republic against the Contractor. I will list them below:
In 2020, the Shareholders of Kashagan initiated Arbitration against the Republic regarding the illegality of the tax audit conducted by the Ministry of Finance. In this lawsuit, the Contractor disputes the sovereign right of the Republic to conduct a tax inspection under the Tax Code. Arbitration continues.
In 2022, the Kashagan Shareholders initiated an expert review of the Annual Work Program and Budget for 2022. In this lawsuit, the Contractor disputes the fundamental right of the Authority and the Republic to approve the Annual Work Programs and Budgets, which will result in a significant change in the balance of interests of the PSA.
In 2023, the Republic appointed an arbitrator in a previously initiated lawsuit against Kashagan Shareholders regarding unresolved disputes for the period from 2010 to 2018 for a total of US$13 billion.
In 2023, the Republic appointed an arbitrator in a previously initiated lawsuit against the Shareholders of Karachaganak regarding unresolved disputes for the period from 2010 to 2019. for a total of $3.5 billion.
Historically, parties at various levels have attempted to resolve these issues. After a long time, it is obvious that the “legacy” of the past years requires serious decisions of both sides and not just formal expressions of positions on the issue.
In view of the lack of real initiatives on the part of the Contractor, according to the PSA procedures, we are forced to intensify arbitration on disputable issues in relation to the historical claims of the Authority.
As you know, Arbitration is a generally accepted mechanism for resolving disputes between the parties in the PSA. Filing a claim in commercial arbitration will show to the world community that Kazakhstan defends its interests in a civilized manner as it is normal in Western countries.
Thanks for the detailed answer. What are the future intentions of the Republic of Kazakhstan regarding these claims?
The above-mentioned claims are divided into 2 main groups.
1. Claims initiated by the investor and
2. Claims initiated by the Republic.
According to the first group of claims, this is related to the Kashagan project. There we see lawsuits against the Tax Authorities, the Authorized Body. As for the lawsuits initiated by the Republic, they are all related to the operational activities of PSA projects, disputes that arose during operational activities and have not been resolved. Claims from the Kazakh side relate to the periods of 2010-2018 where the Contractors did not show any desire to settle. For our part, we never closed the door to negotiations and settlement but in the absence of constructive movement we were forced to take a number of legal steps.
How does the authority think these disputes can be resolved?
The project shareholders certainly know that the Republic is open to dialogue in order to resolve disputed issues through negotiations. At the same time, two sides needed to build a constructive dialogue. Mutual respect, consideration of interests and cooperation is the key to success.
Thus, the Republic assesses the lawsuits initiated by the Kashagan Contractors as an aggressive and unjustified step since we do not observe such tactics in Dunga and Karachaganak.
With regard to Kashagan, it is necessary to emphasize one important fact that happened in 2022. In August 2022, production at the Kashagan field was completely stopped due to an accident at the gas-liquid separator (slug catcher) at the Bolashak plant.
The Republic pays special attention to the stable operation of the Kashagan field which is our strategic asset, especially, taking into account the 10-year delay in the start of commercial production at Kashagan. Questions are raised by the fact of the accident immediately after the turnaround of the Bolashak plant. Losses in oil production at that time amounted to about 2.5 million tons.
The Contractors have not yet provided a report on the causes of the accident and the repair of the slug catcher is being carried out within the framework of unapproved contracts and budgets which is a violation of the provisions of the PSA.
These circumstances create certaing misunderstanding into the current nature of the relationship between the Republic and the Contractor of the Kashagan project.
As for the claims of the Republic, given the nature of the disputed periods (2010-2018), we are talking about the lack of interest of the Contractors in a serious dialogue on these issues.
We understand that this is a lengthy and undesirable process for all parties which may last several years. However, this issue affects the fundamental principles and procedures of the PSA, so the Republic takes this issue seriously.
In turn, if there is a reasonable proposal from the Contractor, this concerns Karachaganak, then the Republic will carefully and comprehensively consider it.
Thank you for the detailed information of the status of the PSA project and information on the position of the Kazakh side. We wish you success and achievement of all your goals.