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Kazakhstan Government Allowed to Break Oil Contracts

Kazakh lawmakers passed a bill Wednesday allowing the government to unilaterally break contracts with foreign companies, potentially threatening an Italian-led consortium developing a giant oilfield.

Kazakhstan has already stopped operations at the huge Kashagan oilfield run by Italian energy firm Eni in a row over mounting costs and project delays but the legislation raises the stakes still further.

The unanimous vote in the lower house of parliament gave the state extra leverage over Eni and its main partners Royal Dutch Shell , Exxon Mobil and ConocoPhillips as talks over Kashagan enter their final stage ahead of an Oct.22 deadline.

"There's no way you can describe this legislation as positive from an investment perspective," said one Western investor closely watching the case who asked not to be named.

"What this means is that people will start thinking of Kazakhstan more like Russia. ... (But) what we don't want to see is for Kazakhstan to fall into the same category as Russia, because that would be negative."

The law, approved without any public debate, will come into force once passed by the upper house and signed by President Nursultan Nazarbayev. Both chambers are backed with Nazarbayev loyalists so the upper house stage is seen as a formality.

Retrospective Changes

Under the law, Kazakhstan could force retrospective changes to contracts with domestic or foreign companies or break their terms altogether, if it saw a threat to the country's national security.

"This draft law aims to strengthen the national interests of our country in the sphere of natural resources," said Yerlan Nigmatulin, a member of parliament who spearheaded the law.

"I think only dishonest companies that break our country's legislation will feel uncomfortable with regard to this law."

Kazakhstan's new-found assertiveness in the oil sector echoes Russia's row with Royal Dutch Shell which ended with the firm losing control of the giant Sakhalin-2 energy project, the world's largest liquified natural gas development.

Kazakhstan says Kashagan is an isolated case and not aimed at harming investors. But Nigmatulin praised Russia's approach, which is part of a wave of resource nationalism by developing world governments.

"It's standard practice in the world," he said. "Russia took a very firm stance on Sakhalin. I think its stance was correct."

Top Executives Talk

Eni's continued role as the main operator of Kashagan, the world's biggest oil find in three decades, is under question after Kazakhstan demanded a leading role for its state oil and gas company in the project earlier this month.

The government was angry when the consortium pushed back the start-up date for the field to 2010 from 2005.

But industry insiders say Kazakhstan is likely to stop at securing solid compensation for project delays.

"Everyone keeps saying 'they are going to start breaking all contracts'. You know, that's the last resort," said Nigmatulin.

Other key Kazakh projects which could be affected by the new legislation include the Tengiz oilfield, developed by U.S. oil major Chevron via a joint venture, and Karachaganak gasfield, co-led by Eni and BG.

Investors developing big projects have flocked to Kazakhstan in recent weeks to secure backing from top officials in the wake of the Kashagan row. Last week, Chevron CEO Dave O'Reilly met Nazarbayev in the capital Astana.

On Tuesday, BG Chief Executive Frank Chapman met Prime Minister Karim Masimov for closed-door talks. Italian Prime Minister Romano Prodi is due in Astana next month.

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