Following statements by President Kassym-Jomart Tokayev, the intrigue surrounding the PSA agreements for Kashagan and Karachaganak and the stabilized contract for Tengiz have taken on new dimensions.

Previously, in the articles, Breaking Down Kazakhstan’s Claims Against International Oil Consortiums and Is Kazakhstan Preparing to Take on the Oil Consortium “Whales?, TCA examined the ongoing lawsuits filed by the government and the authorized body, PSA LLC, against the North Caspian Operating Company N.V. (NCOC) and Karachaganak Petroleum Operating B.V. (KPO), noting that the Ministry of Energy and KazMunayGas have not raised any claims against the joint venture Tengizchevroil LLP (TCO). While shares in NCOC and KPO are managed by PSA LLC, those in TCO are controlled by the national company, KazMunayGas.

What did President Tokayev say?

On January 28, President Tokayev held an expanded government meeting addressing the public and political debate surrounding PSA agreements. “Reforms in the subsoil use sector must continue, no matter what,” Tokayev stated. “This is a fundamental position that the government should firmly adhere to. The implementation of production-sharing agreements (PSAs) for major oil fields has allowed Kazakhstan to become a reliable supplier of energy resources to the global market. These projects make a significant contribution to the country’s socioeconomic development. However, large investments require a long-term planning horizon. Therefore, the government must intensify negotiations on extending PSA contracts, possibly on updated and more favorable terms for our country.”

This statement sparked discussions among experts; who exactly was the president referring to? The major PSAs in Kazakhstan are the Karachaganak and Kashagan projects, with contracts expiring in 2038 and 2041, respectively. In contrast, Tengiz does not operate under a PSA but rather a stabilized contract, which is set to expire much sooner, in 2033. I have repeatedly emphasized the need for an audit of Tengiz before the contract expires and have proposed that it should not be extended. Kazakhstan can independently, or with the involvement of foreign oil service companies, develop this highly profitable field under more advantageous conditions.

On January 29, Kazakhstan’s Minister of Energy, Almassadam Satkaliyev, provided clarification, confirming that the president’s directive was specifically about Tengiz.

“The directive was given quite openly within the framework of international agreements and international law to conduct consultations with consortium participants. Given the development timelines, the most relevant project for us is Tengizchevroil, which operates the Tengiz field in partnership with Chevron, ExxonMobil, and Lukoil. We plan to start certain preliminary consultations with them, and once we are ready for negotiations, we will proceed with them. The government will first develop an agenda and a list of its demands. One possible demand is an increase in Kazakhstan’s stake in these projects.”

So, is Tengiz the primary target? Or is Kazakhstan preparing for a broader offensive on all three fronts?

“There are Hardliners in the Government”

On February 16, the international industry portal Upstream Online published an extensive article titled Kazakhstan Seeks Shake-Up at Crucial Foreign-Led Oil Projects. The article primarily focuses on the production-sharing agreements (PSAs) for Karachaganak and Kashagan, which expire at a later date.

The publication cites the total investment of major players in Kazakhstan’s oil and gas projects at $185 billion and highlights a statement from a source in Astana: “There is a group of high-ranking government officials who view these deals as a legacy of Nursultan Nazarbayev’s rule. They believe they should be revised.”

The article refers to this group as the “hardliners.”

Notably, Upstream Online made an error regarding the expiration date of the Karachaganak PSA. The article states that the contract ends in 2037, whereas, in reality, after the signing of the initial PSA, a Final Production Sharing Agreement (FPSA) was introduced, extending the contract until 2038 – a fact confirmed on KPO’s official website.

Three Whales or Seven?

Here is a summary table of each project’s shareholders, Kazakhstan’s claims against them, and their financial performance in 2023:

* Includes: $13B – Unjustified/Unauthorized Expenses & Investments, $5.1B – Environmental Fines, ~$160.5B – Lost Revenue & Penalties for Underproduction
** $3.5B – Unjustified/Unauthorized Expenses & Investments
*** No claims or penalties against TCO as of now

The “First Tier” consists of five companies, Eni, Shell, KazMunayGaz, ExxonMobil, and TotalEnergies, each of which could face claims of $30-31 billion if Kazakhstan wins in court.

The “Second Tier” includes CNPC and Inpex, with potential liabilities of $13-15 billion each.

Finally, the “Third Tier,” Chevron and LUKOIL, would only have to pay a relatively small amount, $500-600 million combined, making their burden insignificant compared to the others.

Comparing Financial Impact

Considering their annual revenue and net profit:

• Eni would have to dedicate six years of net profit to cover the penalties.
• Shell (UK) and TotalEnergies (France) could settle their claims in five years.
• KazMunayGaz would have to halt dividend payments for 15 years to meet its obligations.
• ExxonMobil could recover the entire sum in less than a year.
• Inpex (Japan) would need five years, while CNPC (China) could pay it off with six months of net profit.
• Chevron and LUKOIL wouldn’t even feel the impact.

Beyond the Three Whales: Seven Key Players

In reality, Kazakhstan’s oil and gas sector isn’t driven by just three projects – Tengiz, Karachaganak, and Kashagan – but by seven major corporations. The most significant claims are against Eni and Shell.

Karachaganak has long been considered an Italian project, with the nearby town of Aksai sometimes referred to as “Little Italy,” not because of its scenery or cuisine but due to the high concentration of Italian companies, personnel, and executives.

Additionally, Kazakhstan’s oil and gas elite has long questioned the management structure of the NCOC consortium, as it fails to meet production targets and diffuses accountability among shareholders.

The General Manager of NCOC, Giancarlo Ruiu, formerly led KPO and comes from Eni. The head of KPO, Marco Marsili, previously managed Shell’s Exploration & Production division in Italy.

When analyzing the fines, consortium claims, and key personnel, it becomes evident that Eni and Shell are Kazakhstan’s primary targets.

Tengiz: “The first player to get ready”

Despite the current absence of claims against TCO, the possibility of future claims cannot be ruled out, especially considering the quadrupling of the budget for the Future Growth Project-Wellhead Pressure Management Project (FGP-WPMP) from $12 billion to $48.5 billion. This project is expected to provide an additional 12 million tons of oil per year, or approximately 240,000 barrels per day.

It is worth noting that ExxonMobil, which is also a shareholder in TCO, is investing $12.7 billion in a similar project in Guyana – “Whiptail” – to achieve production of 250,000 barrels per day, although it is an offshore project, meaning a marine operation. Clearly, the inflated investment amount in Kazakhstan’s onshore project, which already has established infrastructure, should be grounds for a thorough investigation, including an anti-corruption probe, as the purported investment in FGP is equivalent to the cost of 33 Burj Khalifa towers in the UAE.

As the contract’s expiration in 2033 approaches, Kazakhstan’s claims are highly likely to reach proportions comparable to the unjustified expenses/investments seen in Kashagan and Karachaganak.

According to unofficial reports, TCO shareholders have approached the Kazakh government with a request to extend the contract for another 20 years, until 2053, arguing that investments in FGP will not be recouped by 2033 and that even more favorable conditions are needed for continued hydrocarbon production.

Most likely, Kazakhstan will “ask” for an increased share in the project. However, the open question remains: Will this be done at the expense of a single shareholder, or will all shareholders “chip in” proportionally?

Restless Kashagan

“Kashagan” translates from Kazakh as “stubborn” or “elusive.” True to its name, the project has proven to be just that, living up to the saying, “As you name the ship, so shall it sail.” The key issue lies in the composition of shareholders and the consortium’s management structure.

Complicating matters further is the receding Caspian Sea, along with environmental challenges such as fish and seal die-offs. It seems likely that Kazakhstan will aim to push out “inconvenient” shareholders, who bear responsibility for multiple delays, accidents at facilities, and escalating costs.

A quick search for “Kashagan Phase Two” brings up news from the early 2010s. For example, one article details how the Ministry of Oil and Gas (as it was then called) expressed concern over poor planning for the Phase Two development. In 2019, approval of the second phase was expected by year-end, yet progress remains stalled.

Kashagan was at the heart of Kazakhstan’s once-rosy dreams of becoming a second Gulf of Mexico. NCOC’s average production in 2024 stood at around 360,000 barrels per day, while Phase Two was expected to boost output to 800,000–900,000 barrels per day, with Phase Three surpassing 1.2 million barrels per day.

With 16 years left on the PSA and 24 years already behind it, this timeframe is insufficient to launch and recoup investments in the second phase. As a result, the consortium will have to renegotiate with Kazakhstan soon, likely facing demands for an increased state share and the reduction or removal of one or two project shareholders.

Shell or Eni: Your Money or Your Life

In the old western movies, bandits would often approach with the words, “your money or your life,” and after getting the spoils, they would disappear without a trace. It seems that Kazakhstan, in its dispute with the shareholders of KPO, will insist on changing the management model or, in a broader sense, on the de-Italianization of the consortium.

Karachaganak’s history marks the most recent change in shareholder composition, as it wasn’t until 2012 that Kazakhstan acquired a 10% stake in the consortium; before that, the country had no share in the project. This was preceded by environmental and tax claims amounting to $5 billion, which were later reduced, and KMG received its share as a three-year loan from the shareholders.

Currently, the unresolved issue is the construction of a gas processing plant with a capacity of four billion cubic meters per year, estimated to cost $4 billion. According to media reports, the government is demanding that KPO shareholders make a final investment decision and select a general contractor by the end of the first half of 2025.

Both KPO and NCOC may be under consideration for the potential need to change one or two shareholders for their continued stable operation and/or extension of contracts.

In general, Kazakhstan’s “non-whale” oil production has continued to fall, decreasing in recent years from 38 million tons to 30 million tons per year, while the output of the three major operators is either growing or remains stable.

Against the backdrop of increasing domestic oil consumption, plans to expand the capacity of the Kazakhstan-China refinery in the southern part of the country from six to twelve million tons per year (and the need for additional oil volumes for it), Kazakhstan will inevitably need to strengthen its position vis-a-vis the major operators, which account for over 65% of oil production. The country will also have to address the issue of supplying “whale” oil to the domestic market, as since the beginning of field development, this oil has been exclusively directed for export (primarily to European refineries).

Amid the failure of the “whale” companies to meet their commitments, more and more economists are calling for a complete review of the PSA and stabilized contracts right now — while oil still has value on the global markets. In this context, the PSA and the Tengiz contract should not be extended, and for the further development of oil and gas projects, a reset may be necessary with potential new strategic partners.