Kazakhstan’s changing attitude to foreign investment

analysis

Kazakhstan’s changing attitude to foreign investment

By SRI ⋅ May 27, 2008 ⋅

Kazakhstan has attracted a significant amount of foreign direct investment, totalling $43.5-billion (U.S.) by end-2007 – equivalent to some 42 per cent of GDP. The extractive industries and associated services account for around three-quarters of total FDI stock.

During the 1990s, the authorities sought to attract foreign investors as a source of finance and technology for the exploitation of Kazakhstan’s natural resources, which remained relatively underdeveloped compared with Russia’s. Foreign investors have played a central role in developing the country’s hydrocarbon and other natural resources under the framework of production sharing agreements, concluded on favourable terms.

Yet the negotiating position of foreign investors has weakened:

Significant resources have already been committed, limiting exit options for many firms.

High commodity prices have strengthened the government’s bargaining position.

Kazakhstan still requires large investments to develop its resources. The authorities nevertheless believe that, given the current thirst for commodities, they can increase their share of economic rents without blunting the incentives for further development.

PSAs provide a defined legal, tax and regulatory environment through agreement between the parties, but the government has challenged such contractual rights in the past:

The law on oil and gas exploration was amended in 2004 to give the state a right of first refusal when one of the partners in a PSA wanted to sell its stake. This applied to future and past contracts.

In 2005, these pre-emptive purchase rights were broadened to all companies with investments in the oil and gas sector.

National security concerns were introduced as a reason for exclusion in oil and gas tenders in 2006.

More recent instances show a continuation of the trend to challenge the status quo through a combination of legal changes and administrative pressure: Renegotiating contracts. The terms of the PSA on the giant Kashagan oilfield were modified early this year, following relentless government pressure. The Agip KCO consortium agreed to pay compensation for delays and sell a further stake to state-owned Kazmunaygaz (KMG), which now has 18.1 per cent. ENI lost its role as sole operator. Crucially, Kazakhstan will receive a share of the profit even before participating companies have recovered their initial investment costs.

These changes were introduced in parliament in President Nursultan Nazarbayev’s annual address as an example of the desirable strengthening of the presence of the state in the energy sector. All parties involved welcomed the deal as bringing stability and putting an end to a long-lasting dispute – but tensions could be rekindled by further delays in reaching the production phase.

(Oxford Analytica/The Globe and Mail)