KAZAKHSTAN, the landlocked central Asian country larger than the whole of Western Europe, grabbed the attention of the world's biggest oil companies in 2000 with the discovery of the giant Kashagan oil field.

As the biggest discovery in the world for three decades, the field in the Caspian Sea – the world's largest lake – instantly became the jewel in the crown of ­Kazakhstan's vast oil and gas reserves.

Shell eagerly joined the rush to develop the huge find. Since those heady days much has changed.

Extracting the oil from Kashagan has proved geologically complicated. Costs have risen from £37billion to an estimated £88billion and the project is years away from production.

The political climate in Kazakhstan has also shifted. Exiled Kazakhs warn that a culture of corruption is running rife, that those willing to pay are securing lucrative deals under the patronage of President Nazarbayev's son-in-law Timur Kulibayev.

Chinese investors now have significant stakes in seven out of its top 10 major oil fields. Earlier this month, the government ramped up pressure on Western oil partners by threatening to dissolve long-standing contracts. Shell and UK exploration firm BG Group are among those facing tax rises as a result.

For British firms a lot is at stake. Britain is Kazakhstan's third largest foreign investor, primarily in natural resources. There are 128 companies with British investors behind them registered in Kazakhstan. Shell has a 16.8 per cent stake in the consortium developing the Kashagan field.

Kazakhstan, once part of the old Soviet Union and now most famous to a majority of people for fictitious film buffoon Borat, is a presidential republic. Its communist-era leader, Nursultan Nazarbayev, became president when it declared independence in December1991. He has the power to veto legislation.
Critics of the regime say government-owned means "ruling family owned". Using a web of front companies and nominee shareholders, the family is believed to own much of the oil, gas and mining sectors and dominates the banking industry.

Questions have long been raised about how Kulibayev accumulated his fortune, estimated at £1.7billion two years ago. Much of his working life has been taken up with such public roles as running KazMunaiGaz, the state oil and gas body. He is deputy head of the government investment agency. The pay is slight compared with his fortune, which includes a large stake in the Kazakh bank Halyk, held jointly with his wife Dinara.

He was recently disclosed as the owner of Sunninghill Park, Prince Andrew's former marital home, for which he paid way over the odds. Kulibayev and the prince have a mutual friend. She is the glamorous, thirtysomething Kazakh socialite Goga Ashkenazi, whom Andrew introduced to the Queen at Royal Ascot two years ago.

Perhaps this is why Andrew is so attracted to Kazakhstan. Officially, he has been there at least five times since 2003 in his unpaid capacity as a representative of the exports agency UK Trade and Investment, which effectively makes him an ambassador for British industry. But sources suggest a number of other, more discreet trips.

When times were good, the Kazakh population of 16million people was happy with the grip exerted by Nazarbayev and his family, but the global financial crisis exposed central weaknesses in the economy.

To ease public resentment about falling living standards, the government is trying to wrest better terms from western investors who clinched favourable contracts in the Nineties when oil prices were low and the economy was reeling from the collapse of the Soviet Union.

Shell and other foreign energy companies in Kazakhstan signed production sharing agreements (PSAs) supposedly fixing the tax they pay and profit share they are allowed to take. This January, Nazarbayev ordered that foreign oil companies be stripped of their tax immunity conferred by PSAs.

Kazakh Finance Ministry recommendations will be put to the government on April 1. The moves are reminiscent of Russia's campaign to recover assets its leader Vladimir Putin considered to have been sold too cheaply in the Boris Yeltsin era.

As the production sharing agreements have come under threat, China has taken centre stage in Kazakh oil deals. It is estimated that more than 30 per cent of the country's oil is in the hands of Chinese companies. Mukhtar Ablyazov, the former chief of the largest Kazakh bank BTA who now lives in London, said: "We are concerned that the prime assets of Kazakhstan are being passed to China via corrupt deals that benefit only individuals and not the people of Kazakhstan."

Ablyazov left Kazkhstan last October after an arrest warrant was issued for alleged embezzlement and laundering money, charges which he denies.
Ablyazov, who founded an opposition party, has written to the Foreign Office and the foreign affairs select committee. He says corruption is "paralysing" Kazakhstan.

And he warned: "British businesses will be increasingly under pressure either to play by these rules or lose out to countries and companies where corrupt practices are not an issue."


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