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BG, Eni Venture Face $2.5 Billion of Kazakh Claims

Eni SpA operation in the Karachaganak gas condensate field
A file photo from Eni SpA shows their operation in the Karachaganak gas condensate field in northwest of Kazakhstan. Source: Eni SpA via Bloomberg

April 23 (Bloomberg) -- The Kazakh government is demanding at least $2.5 billion from an oil venture led by BG Group Plc and Eni SpA after talks stalled on the state’s entry into the project, said two people with knowledge of the matter.

The Central Asian state slapped the venture, Karachaganak Petroleum Operating BV, with tax and environmental claims last year, and sued for “illegal earnings” this year, after the producer demanded $1.4 billion in tax rebates, said the people, who declined to be identified before a settlement.

Kazakhstan is aiming to gain more revenue from resource projects developed under production-sharing agreements, which allow investors to recoup costs before the government profits. Karachaganak is the only major Kazakh oil development without state participation.

The dispute mirrors changes at the Kashagan project, the country’s biggest oil development. In 2008, partners led by Eni agreed to pay higher royalties and cede shares to state-run KazMunaiGaz National Co. after the government condemned cost overruns and delays. The phase that runs from 2002 to 2014 may cost more than $38 billion.

“Investors are getting more and more concerned,” said Ana Jelenkovic, a London-based analyst at Eurasia Group, a political risk consulting company. “There’s going to be increasing noise from international companies but ultimately it’s not that shocking anymore what the government is doing.”

Amicable Resolution

The Karachaganak partners want to understand the basis of the Kazakh claims and resolve the dispute amicably, said a person familiar with their plans, who declined to be identified before the issues are settled.

Kazakhstan expects the venture to decide on the third-phase expansion at a cost of $14.5 billion, KazMunaiGaz said in February. In 2007, BG estimated the expansion would cost $8 billion by 2012.

Francesca Ciardiello, a spokeswoman for Karachaganak Petroleum in Aksai, Kazakhstan, declined to comment on the figures in an e-mailed response to questions, saying “there are various issues that are currently under negotiation or investigation.” BG spokesman Neil Burrows referred questions to the venture. Eni spokesman Filippo Cotalini declined to immediately comment.

The government aims to eliminate many of the benefits provided by PSAs, which were signed before KazMunaiGaz was created, Jelenkovic said in a telephone interview. “There aren’t a lot of ways to influence the international consortium except by legislative and regulatory tools.”

Before the 2008 Kashagan agreement, Kazakh regulators filed environmental complaints against the project, while legislators passed amendments to the subsoil law allowing the state to annul contracts unilaterally.

‘Illegal Earnings’

Last year, the government prepared $1.8 billion of arbitration claims based on environmental damages, back taxes and fines against Karachaganak Petroleum, the two people said.

Investigators are also probing “illegal earnings” of 104 billion tenge ($709 million) for 2008 oil output that hadn’t been approved by the state, Kazakhstan’s economic crimes agency said last month.

The total claims exceed the amount the government faced paying Karachaganak in tax rebates and a possible $1 billion for a 10 percent stake in the project, the two people said. The venture suspended its tax case in December in favor of negotiations, they said.

Neither Karachaganak nor its shareholders are in talks with the government about altering the percentage ownership in the venture, Ciardiello said.

Stake or Taxes

BG Group, based in Reading, England, and Italy’s Eni are the largest shareholders in Karachaganak Petroleum, each with a 32.5 percent stake, while Chevron Corp. has a 20 percent interest and OAO Lukoil, Russia’s biggest non-state oil producer, holds 15 percent.

“You can think of it as the government paying a billion back for taxes and getting the stake essentially for free,” Jelenkovic said. The government may also forego a stake and be satisfied with changing the tax regime, she said.

The government is in discussions with Karachaganak about having the venture pay taxes under current legislation, rather than its PSA, which sets fixed rates, Novosti-Kazakhstan said April 21, citing Oil and Gas Minister Sauat Mynbayev.

Karachaganak has paid the government more than 8 billion tenge in “damages” for the period of 1999 to 2005, while two employees were under investigation for tax evasion, the Kazakh economic crimes and corruption agency said on April 12. The two women were convicted earlier this month, given suspended sentences of three years each and fined.

Expel Foreigners

Kazakhstan has also threatened to expel foreigners working at the venture. Prosecutors have taken seven people to court for receiving work permits and visas through the venture rather than their employers who are Karachaganak shareholders, and has “questions on about 270” more, Alexander Ogay, an official at the Prosecutors General’s Office in Astana, said.

The setbacks faced by Karachaganak, and Kashagan before that, echo Russia’s moves to claw back control over resources being developed by international producers under agreements signed in the 1990s.

“The situation with Karachaganak is very similar to the Russian government’s dispute over Sakhalin-2,” Tatyana Kalachova, an analyst at Renaissance Capital’s Kazakh unit, said by e-mail.

State-run OAO Gazprom gained control of the Sakhalin-2 oil and gas project from Royal Dutch Shell Plc under a December 2006 agreement, following months of threats from environmental regulators to halt the development.

While Kazakhstan may be using a “bully and buy-out” tactic, it isn’t seeking control, Jelenkovic said.

“It’s more economic than ideologically-driven,” she said. “It’s not an issue of national pride as in Russia. Kazakhstan is very dependent on the technology of the international oil companies.”

To contact the reporter on this story: Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To contact the editor responsible for this story: Steve Voss at sev@bloomberg.net

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