Will Chevron sell its assets in Kazakhstan to Russia?

The Kazakh authorities were offered to acquire the shares of foreign companies in the Tengiz, Kashagan and Karachaganak fields at the expense of Russia’s gold and foreign exchange reserves frozen in the Western countries.

The Coordination Council of the Parasat Alliance of Entrepreneurs proposed that the Oil and Gas Council under the President of Kazakhstan consider the option of a trilateral deal between the Russian government, Russian oil companies, the authorized oil company of Kazakhstan and foreign oil MNCs developing Tengiz, Karachaganak and Kashagan to acquire their shares using frozen gold and foreign exchange reserves (GRE) of Russian Federation.

The authors of the initiative believe that by revising the terms of contracts for these fields Kazakhstan could earn more. Oil MNCs will not agree to change contracts voluntarily. Kazakhstan, due to lack of money, will not be able to buy them back and the Kazakhstan urgently needs funds to implement the planned reforms. This deal is beneficial to the Russian Federation in that part of the frozen gold and foreign currency reserves will be exchanged for working assets. It is estimated that it will take 1.5-2 years to complete such a deal and it can be completed by the end of 2025.

When signing contracts with new shareholders, it is also possible to agree on a signing bonus of $15 billion and use these funds to build a nuclear power plant together with Rosatom.

As Oleg Pak, Chairman of the Board of the Parasat Entrepreneurs Alliance explained, the coordination council includes 28 members: 15 are parliament members (4 senators and 11 Majilismen) as well as experts in various industries. The chairman of the council is Mazhilis deputy Ermurat Bapi.

According to Pak: ‘We have an open platform; any member of the coordination council has the right to initiate any issue. Olzhas Baidildinov initiated, we discussed and voted. In principle, this proposal was supported by a majority of votes.’

As Olzhas Baidildinov, a member of the Public Council of the Ministry of Energy of Kazakhstan explained to Petrocouncil.kz, the main objective of the proposed deal is to improve the terms of contracts for these three large fields for Kazakhstan by canceling production sharing agreements (PSAs) and stabilized contracts or revising them in favor of our country. The government will not be able to do this unilaterally because then foreign companies will file a claim in international courts, and sanctions will be imposed on Kazakhstan, gold reserves and assets of the National Fund will be seized. A revision on the part of Western companies is also unlikely; they are unlikely to abandon their privileged conditions. Therefore, the only way acceptable to everyone is to acquire the assets. Only a few countries and corporations can probably do this now. These are either the same Western corporations that have such funds as well as Russia and China. China might be interested in the assets, but it is unlikely to do so because Kazakh oil is transported through the Russian Federation. Russia may not be interested to spend $60 billion to $100 billion (Baidildinov estimates) on these shares but it will be better if the frozen funds turn into assets and begins to generate income.

Why, according to the expert, the terms of contracts need to be changed.

Firstly, the operators of Tengiz, Kashagan and Karachaganak do not supply oil to the domestic market but completely export it. Other Kazakh companies sell 40 to 70% of oil to the domestic market at low prices or even below cost, at $25 per barrel. Foreign shareholders will never supply to Kazakhstan at such prices. They are interested in exporting Kazakh oil to Europe, to refineries under their control.

Secondly, they do not pay export customs duty (ECD) and Kazakhstan is losing about $500 million a month.

Thirdly, preferential treatment for various environmental fines has been established for them. Taxes, payments, and everything else are fixed at the level of the 1990s when these contracts were signed. Kazakhstan, even if new rules are introduced, will not be able to apply them to these companies.

The expert also doesn’t like the way investors implement their capital projects. For example, the fact that TCO invested $48.5 billion to increase production at Tengiz by 12-13 million tons. These funds were spent on an onshore field where the infrastructure had already been built in previous stages of development. Even though, $60 billion was invested in the Kashagan offshore field, which is being developed from scratch, it now produces about 19 million tons.

The essence of the PSA is that until investors return half or 70% of their invested funds in oil, Kazakhstan will receive practically no profit from these fields. At Kashagan, the share of Kazakhstan’s revenues today is 2%. At the same time, the tax rates for them are different.

Also, operators are not required to procure according to local rules. They can buy anything from anyone. Those indicators for Kazakhstani content that they declare are not entirely correct. Investors believe that if a company is registered in Kazakhstan, it is a Kazakh company. In fact, the founders of these companies may be foreign companies and individuals. Accordingly, all their profits go overseas and domestic production does not develop. The share of Kazakhstani goods in the procurement of TCO, NCOC and KPO is about 5%. Almost all the goods used by operators are imported from abroad. They have a zero VAT rate on equipment imports. This automatically puts local manufacturers at a disadvantage.

Olzhas Baidildinov proposes not to wait 10-15 years when the contracts for these fields are expired and investors pump out the oil and we will have nothing left.

Why will Kazakhstan receive more benefits with new shareholders? Because contracts will be transferred to common standards and we will be able to negotiate adequate conditions for ourselves, for example, for oil supplies to the domestic market, increasing procurement of goods, works and services.

Baidildinov notes: ‘In any case, this is much better than just sitting and waiting, saying that the Americans are better than the Russians. Why are Americans better? Because they increased the cost of FGP from $12 billion to $50 billion? As a result, we will not get anything from this new oil. I am against saying and attaching any labels that some investor is better or worse. It’s about the conditions under which they work here. If investors agree to revise the terms to standard ones, then there are no questions, let them work. But they won’t agree to that. They won’t give Kazakhstan an additional $5-10 billion a year?’.

Road to Asia

The expert believes that Kazakhstan and Russia do not need to compete in the European market. Current foreign shareholders will be interested in Kazakh oil reaching Europe. We (if we buy out the assets) will guarantee supplies for the next 5 years but we will redirect the oil to Asia – China, India, and the Asia-Pacific region where demand for oil is expected to grow. The European market will reduce consumption as Europe is making great efforts to reduce its dependence on hydrocarbons.

Baidildinov says: ‘I’m not saying that these should be Russian companies or Russian state-owned companies. The point is that these contracts need to be changed. We need to make them fair, make them the same as for the entire oil industry in Kazakhstan. So that there are no benefits or exceptions, no reduced rates. There was an obligation to supply oil to the domestic market in proportion to production. And who will own it, KMG or Russian companies, makes absolutely no difference. The main thing is that these contracts switch to general conditions.’

Oleg Pak explains that Kazakhstan needs money for energy development, for upgrading networks and power plants. It is necessary to develop the industry of deep processing of raw materials. Revision of the terms of contracts with oil producing companies is the main message of the appeal. Using frozen Russian assets is one of the proposed options. It doesn’t matter who buys it. It can be beneficial with Russia since oil is exported through its territory. It is also important that the export of resources provides minimal income. Therefore, oil and gas must be processed in our country and receive large profits.

The deal is more valuable than money.

Nurlan Zhumagulov, director of the Energy Monitor public fund notes that PSAs as a contract model in Kazakhstan were abolished in 2009 and no new ones are concluded, but previously signed agreements continue to be valid. The agreements on Kashagan and Karachaganak are one of them. You need to understand that in the 1990s, investors came to a country that was unknown to them and is located between China and Russia with no access to the oceans. They took risks by investing billions of dollars, so they used the PSA regime when concluding a contract.

Nevertheless, according to the expert, Kazakhstan is gradually influencing and achieving beneficial changes in contracts. For example, the authorities negotiated with TCO shareholders in 2022 and now all commercial gas from Tengiz goes to the domestic market but was previously exported. The operator is not obliged but supplies 10 thousand tons of liquefied petroleum gas to the domestic market monthly (20 thousand tons since last fall) and sells for 80 thousand tenge ($180) per 1 ton. This is more expensive than other local producers – $100 per ton. TCO sold it for export at $400-500 per ton. In addition, the company supplies up to 550 thousand tons of liquefied gas to the polypropylene production plant of Kazakhstan Petrochemical Industries. In addition, it will also supply two planned petrochemical plants with butane and ethane.

At Kashagan, investors agreed not to claim propane-butane produced at the new gas processing plant (GPP). The entire volume – 700 thousand tons per year will be given to QazaqGaz. At Karachaganak, 700 thousand tons of liquefied gas will be supplied to the domestic market from the new gas processing plant.

As for the return of invested funds, at Karachaganak investors have already returned them and Kazakhstan receives up to 70% of the company’s income. This may change following the implementation of recent capital expansion projects.

The situation in Kashagan is completely different. The capital investments is $55 billion and with interest, perhaps, $80 billion. Now, according to the PSA, 80% of the income goes to reimbursement of costs and the remaining 20% is divided between the parties in a certain proportion. PSA, the authorized government agency is conducting arbitration proceedings with NCOC shareholders, believing that $13 billion of the $55 billion was spent in violations and is not subject to reimbursement.

It is important for Kazakhstan to reduce the consortium’s costs to increase its income. There are three main conditions in the PSA for Kashagan which gives rise to an increase in state profits. Firstly, when the profitability of the company reaches a certain level. Secondly, after reimbursement of all expenses of investors. Third, when the accumulated oil production reaches 3 billion barrels. Then, it doesn’t matter whether the investors returned the money or not, the share of the republic’s profit increases. Therefore, now the government insists on the implementation of the second phase of field development and the construction of the next gas processing plant. Over the past two years, investors have been delaying deciding which is why we lost time. Now the authorities have agreed with Qatari investors on the construction of a gas processing plant.

There are different conditions with TCO shareholders. The field is being developed under a partnership agreement between Kazakhstan and Chevron. If under a PSA all costs are accumulated and written off from future oil, TCO, which operates like a regular limited liability partnership writes off costs from annual income. Part (about $15 billion) of the $48.5 billion spent on the expansion project were loans from Chevron and ExxonMobil as well as bonds, the rest was investments from the company’s profits. The expert expects that after the launch of the FGP, at a price of $85 per barrel, Tengiz will receive $8-10 billion in net profit per year.

The company is the country’s largest taxpayer, in 2022 it paid 4.6 trillion tenge ($10 billion) to the state budget. That year, Karachaganak gave the budget 1.4 trillion, Kashagan – 239.1 billion tenge. With a good oil price, the cost of FGP will quickly reimburse.

Export duty.

Export duty (ETP) for crude oil in Kazakhstan are set by the Ministry of National Economy in US dollars per ton. Their size depends on oil prices. Kazakhstan introduced the ETP in 2008 but in 2009, due to the fall in world prices, it was reset to zero. Export duties were reintroduced in 2010.

According to Nurlan Zhumagulov, there was no ETP when agreements were concluded on three large fields. There is no point in introducing ETP at Kashagan and Karachaganak. If the government introduces this fee, investors will pay it but will include it in the total amount of reimbursable costs and even with interest. Therefore, the parties concluded that ETP is unprofitable for PSA projects.

Tengizchevroil has been paying the ETP since its introduction but “under protest” and “to avoid disruption of export supplies,” as it writes in its annual financial report. The company believes that it is exempt “from such types of duties under partnership agreements with Kazakhstan.”

In general, the expert believes that exchanging Western companies for Russia which is under sanctions is very risky. Sanctions were not imposed on the CPC precisely because it transports oil from Tengiz, Kashagan and Karachaganak where the shareholders are mainly Western companies. There are no guarantees that after they leave, they will not start bombing the pipeline and its marine terminals.

Does Russia have the technology to develop such large and complex fields, with high hydrogen sulfide content and such reservoir pressure? Today we observe that refinery repairs in Russia have been taking two months, although previously they were completed in one. This is all due to a lack of equipment, the supply is difficult due to Western sanctions.

Where are the gold and foreign currency assets frozen?

The gold and foreign exchange reserves of the Russian Federation were frozen after the start of Russia’s military invasion of Ukraine. Then, in March 2022, Russian Finance Minister Anton Siluanov announced that the Russian Federation had lost access to $300 billion in gold and foreign currency reserves.

The TASS agency, citing the Financial Times, writes those Western countries, primarily the G7 (USA, UK, Germany, Japan, France, Canada, Italy) as well as the European Union have frozen about $280 billion of Russian assets in in the form of cash and securities. The largest volume of such assets, $208 billion, is blocked on the international Euroclear platform in Belgium. France froze about $21 billion, Switzerland and the UK froze $8.8 billion and $15.6 billion, respectively. The blocking of assets was carried out based on the domestic legislation of the countries that imposed sanctions.

Western politicians and officials are looking for ways to channel Russia’s blocked reserves to Ukraine’s needs. The United States proposes to use the seized funds to “compensate Ukraine for the damage caused by Russia.

In February 2024, lawyers from Belgium, the UK, Germany, the Netherlands, the US, France and Japan, in an opinion prepared for the G7, concluded that countermeasures against Russia in the form of confiscation of its blocked assets are legal under international law, if the seized funds are considered in terms of as compensation for the damage it caused.

Belgium, which holds the EU Council presidency for the first half of 2024, has proposed using frozen assets as collateral for bonds that could be issued to finance Ukraine’s reconstruction. According to this plan, the EU countries will transfer the assets themselves to Kyiv if the Russian Federation refuses to pay reparations to Ukraine after the end of the conflict.

The European Union proposes to confiscate the profits received from the reinvestment of assets and use it for Ukraine. It is expected that in 2024-2027, Russian assets will generate income of about 15-20 billion euros.

Currently, discussions are underway about the possibility of using profits to finance the European military industry for further provision of military assistance to the Ukrainian army.

Russian authorities promise to take retaliatory measures. In response to the freezing of gold and foreign exchange reserves, the Bank of Russia blocked approximately $500 billion worth of foreign investors’ funds on the territory of the Russian Federation.

The European Commission on March 20 announced its intention to use frozen Russian assets to provide Ukraine with 3 billion euros. Moreover, the first funds can be paid as early as July.

As you can see, there are many interested parties for the frozen Russian gold and foreign currency reserves. Kazakhstan, which has nothing to do with them, is unlikely to be allowed near this money.

Taxes and payments to the Kazakh budget and the National Fund from the operators of Tengiz, Kashagan and Karachaganak for 2020-2021 (billion Kazakh tenge)

Total1 4542 485

The Big Three: field, shareholders, reserves, investments, 2021

TCOChevron (50%), KMG (20%), ExxonMobil (25%), Lukoil (5%)1993-2033$135blnTengiz, Korolevskoe3,4 bln of tons of oil
KPOShell (29, 25%), Eni (29, 25%), Chevron (18%), Lukoil (13, 5%), KMG (10%)1995-2037$22blnKarachaganak1,1 bln.tons of gas condensate
NCOCEni, ExxonMobil, Shell,Total —16,81%, KMG (16, 88%), CNPC (8, 33%), Inpex (7, 56%)1997-2041$60blnKashagan, South-West Kashagan, Aktoty, Kairan1-2 bln.tons of oil

Oil production in Tengiz, Kashagan and Karachaganak, 2020-2023, million tons

Big Three52,453,15258,3
In total, Kazakhstan85,785,984,290