Kazakhstan Oil Reserves Too Rich for Tax to Deter Chevron: Energy Markets

Kazakhstan's oil reserves may be too valuable for an export-tax increase to deter companies from drilling for crude in the former Soviet republic.

The country, the world's fourth-fastest growing supplier, will tax oil leaving its territory at $20 a metric ton, or $2.73 a barrel, from next month, according to a resolution published in the government-run Kazakhstanskaya Pravda on July 16. The duty will for the first time levy exports from Chevron Corp.'s TengizChevroil venture, Kazakhstan's biggest producer.

Kazakhstan, holder of 3 percent of the world's oil, is increasing taxes and borrowing to combat a widening budget deficit. The government is gambling it can profit from last year's 78 percent gain in oil prices by squeezing cash or bigger stakes from foreign producers without hurting investment, as it did in 2008 when it doubled its equity in Kashagan, the world's fifth-largest field.

"There's a long way the government can keep increasing the fiscal burden on TengizChevroil and still keep Chevron and other shareholders perfectly interested," Petr Grishin, an analyst at Renaissance Capital in Moscow, said in an e-mailed reply to questions. "I can easily imagine the duty going higher."

Chevron is Kazakhstan's largest private producer, owning half of Tengiz, the world's deepest operating field, and 20 percent of Karachaganak, the only major Kazakh project in which the government isn't involved. Maria Karazhigitova, an Atyrau- based spokeswoman for TengizChevroil, declined to comment on the tax when contacted by Bloomberg on July 15.

Seeking Revenue

Kazakhstan, bordering Russia and China, aims to raise 60 billion tenge ($410 million) from the tax this year and as much as 177 billion tenge in 2011, the Astana-based Finance Ministry said in a July 19 e-mail. The levy won't have "any serious economic consequences for oil producers," the ministry said.

The Caspian country tapped about 40 crude exporters to raise cash amid a tightening of global credit markets in 2008, the same year it increased its stake in Kashagan after cost overruns and delays to the scheduled start of production. Kashagan, whose shareholders include Eni SpA, Exxon Mobil Corp., Royal Dutch Shell Plc and Total SA, is the world's fifth-largest field, according to the U.S. Energy Information Administration.

The 2008 levy excluded Tengiz and lasted for eight months before it was cut to zero in January 2009, from $139.79 a ton at the time, when a new tax code that included a mineral extraction duty was introduced.

Following Russia

Kazakhstan is following Russia in seeking a bigger hold over its petroleum resources. Moscow-based OAO Gazprom wrested majority control of Russia's far eastern Sakhalin-2 oil and gas project from Shell in 2007 following government pressure over rising costs and environmental lapses.

The ratio of oil-and-gas taxes to gross revenue in Russia last year was twice Kazakhstan's, Angelina Valavina, an analyst at Fitch Ratings, said in a July 16 report. While the new levy brings the burden on Kazakh ventures closer to their Russian counterparts, the "gap will still remain favorable," she said. Russia set its crude export duty at $248.80 a ton in July.

"A further increase of the tax burden may put pressure on the companies' financial profiles and hinder their ability to implement sizeable investment programs," Valavina said from London. "The state needs to find a balance between its budget goals and its ambition to tap the country's vast oil reserves and expand hydrocarbon production."

National Oil Fund

Kazakh Prime Minister Karim Massimov is seeking cash to help tackle a budget deficit the government expects to rise this year to 803.7 billion tenge, or 4.6 percent of gross domestic product, from 492.7 billion tenge in 2009. The country canceled on July 3 a plan to sell as much as $750 million of bonds to investors abroad this year after it secured a $1 billion loan from a World Bank unit, the Finance Ministry said yesterday.

The government tapped the country's National Oil Fund last year to gain control of three banks that had defaulted and sought to reorganize about $20 billion of debt.

Oil production in Kazakhstan expanded 9.9 percent last year to 1.26 million barrels a day, the fourth-largest increase worldwide after Colombia, Azerbaijan and Turkey, according to an annual statistical bulletin published by the Organization of Petroleum Exporting Countries on July 6. The country's supply has risen for 15 straight years, according to BP Plc's Statistical Review of World Energy.

The partners in TengizChevroil, which pumped more than a quarter of the country's oil last year, are prepared to invest $15.2 billion in the field, state-owned KazMunaiGaz National Co. said in January. TengizChevroil paid about $3.6 billion in dividends last year to the venture's partners, according to Bloomberg calculations using data from KazMunaiGaz.

Government Probes

The new tax comes as the government looks into allegations of company wrongdoing. Kazakhstan's economic crimes agency said July 15 it's examining 212 billion tenge of illegal oil production by TengizChevroil. Karazhigitova declined to comment on the probe.

The government is also investigating Karachaganak Petroleum Operating BV for tax avoidance and illegally pumping crude.

"There are various issues that are currently under negotiation or investigation," Francesca Ciardiello, a spokeswoman for Karachaganak in Aksai, said in April, declining to be more specific.

Reading, England-based BG Group Plc and Italy's Eni hold 32.5 percent each in Karachaganak. San Ramon, California-based Chevron's 20 percent share is the next-largest. OAO Lukoil, Russia's biggest non-state oil producer, has 15 percent.

Karachaganak Expansion

Karachaganak and its partners "have always maintained that the export customs duty should not apply to Karachaganak because of the tax-stabilization provisions" in the production-sharing agreement, Gulnara Sharibayeva, a spokeswoman for the venture, said in a July 13 e-mail. She declined to comment further.

Reading-based BG spokesman Neil Burrows declined to comment, referring questions to the venture's operating company. San Ramon-based Chevron spokesman Justin Higgs didn't return calls seeking comment.

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

"There is still a lot of room for oil companies to make money even if they start ceding bigger stakes in oil revenue to the Kazakh government," Alex Prokofjevs, an analyst at Sanford C. Bernstein Ltd. in London, said in a July 16 e-mail. "Despite the reintroduction of export tax, Kazakhstan remains a very interesting exploration area and is set to grow."


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