Kazakhstan to lose $20 billion from 'greedy' oil contract

New report reveals causes of dispute over Kashagan, the world’s largest undeveloped oilfield

Download the report (pdf, 560 kB)

(Update, 18 January 2008)

Kazakhstan is set to lose up to $20 billion in the next 10 years, due to an unfair contract to extract the world’s largest undeveloped oilfield. These are the findings of a report released today by development and environment organisations, as a dispute between the Kazakhstan government and oil companies failed today to reach its conclusion.

Earlier this year, the Kazakhstan government announced that it wanted a better deal from the international oil companies developing the Kashagan field. The government and companies had set a deadline of today to complete the negotiations, but have failed to reach agreement.

The argument was originally sparked when Eni, the Italian company leading the oil project, announced that costs would spiral, whilst startup of production would be delayed to 2010. Eni admitted that it had underestimated the costs in its earlier plan. [1]

Today’s report, entitled ‘Hellfire Economics’, for the first time reveals the causes of the dispute. It finds that [2]:

It is Kazakhstan rather than the companies that must pick up the bill for Eni’s mistakes. Kazakhstan will lose $20 billion in the period up to 2017, nearly 40% of its annual GDP.
The oil companies will continue to make very high profits – with returns of 14.5% - whilst Kazakhstan pays the costs.
The contract is structured such that Kazakhstan carries most of the project risks, while company profits are effectively guaranteed.

The report is published by PLATFORM, Center Globus, CEE Bankwatch Network, Friends of the Earth Europe, Campagna per la Riforma della Banca Mondiale, Crude Accountability and Amis de la Terre.

Greg Muttitt, an oil analyst at London-based PLATFORM, authored the report. He comments:

“This research shows that the real reason for the current controversy was that oil companies took advantage of Kazakhstan’s weakness in the 1990s to sign a highly profitable deal lasting 40 years. It seems the real culprit of the dispute is not the ‘wave of nationalism’ so often moaned about, but old-fashioned corporate greed.”

The government of Kazakhstan has called for a $7 billion penalty to be paid by the consortium, or for the state-owned KazMunaiGas to increase its share in the project. Today’s report, however, finds that:

None of the proposed measures will restore Kazakhstan’s economic position. In fact, most of the $7 billion payment would go straight back to the companies through reallocation of profits, according to the terms of the contract.
All of the proposed measures would still leave the project highly profitable for the oil companies, with returns above 13%.

Yet the companies have fought with the government over the compensation for nearly six months, with consortium member ExxonMobil refusing to compromise at all.

Although emerging best practice in the oil industry is for such contracts to be published, Eni and the Kazakhstan government have refused to do so. Yet there is no commercial reason for them not to do so, since such contracts are easily available to their competitors, but priced beyond the reach of civil society groups and Kazakhstan citizens. [3]

Greg Muttitt added,

“Seeing how extremely unbalanced this contract is, it’s perhaps not surprising that they are embarrassed to publish. But transparency is one of the best defences against unfair deals and against corruption.”

The project has also been highly controversial for its environmental and health impacts, including the unsafe storage and release of toxic sulphur.[5] Darek Urbaniak, on behalf of Friends of the Earth Europe commented,

"We have reasons to believe that the development of the Kashagan oil field is causing unacceptable levels of pollution in the Caspian Sea region, which can only get worse once oil extraction begins. Fish, birds and mammals are dying and local people's health is suffering as a result of exposure to toxic chemicals from oil extraction in the region. On top of this, the field operator is refusing to disclose crucial information about its social and environmental impacts. It must release this data immediately."

Notes for editors

1: Startup of production is delayed from 2008 to 2010; costs of just the first phase are increased from $10 billion to $19 billion, whilst reducing the scope of that phase from three development ‘tranches’ to two.
Eni has stated that the causes were economic factors (weak dollar, high input costs), underestimation of the costs, and broadening scope of the project – with these three factors being of roughly equal significance.

2: The analysis is based on a discounted cashflow model, using the oil price projections of the US government’s Energy Information Administration (ranging from $55 to $60 per barrel).

3: For example, the contract is published in ‘Basic Oil Laws and Concession Contracts’, a directory held in all oil company legal libraries, published by Barrows Company and available for $7,200 for the volume on the former Soviet Union

4: The report "Kashagan oil field development" can be found at: www.foeeurope.org/publications/2007/KashaganReport.pdf

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