The filed lawsuits and environmental claims totaling $159.6 billion against the consortiums operating the Kashagan and Karachaganak fields reflect the Kazakhstani government’s intention to revise the largest oil & gas contracts.

Kazakhstan, due to drought in Central Asia and a drop in oil production after the expiration of major oil & gas contracts by 2040, will likely look like Arrakis, the fictional desert planet from Dune: Part Two over whose valuable commodity the Great Houses struggle. Meanwhile, the Dune sandworms, which produce the spice needed by all the planets, resemble the consortiums developing the Tengiz, Karachaganak, and Kashagan fields – just as huge and just as rare, with almost no such production sharing agreements (PSAs) with 40-year stabilization contracts left in the world. In Kazakhstan, the three operators are known as the “three whales.”

What’s going on

At the beginning of April 2024, Bloomberg published an article about the claims exceeding $16.5 billion brought forward by Kazakhstan, through PSA LLP, against the consortiums North Caspian Operating Company (NCOC), which is developing the offshore Kashagan field, and Karachaganak Petroleum Operating (KPO). The environmental regulator for the Atyrau region has additionally filed a claim for $5.1 billion against NCOC, while another lawsuit for $138 billion of lost revenue has been launched.

The total amount is possibly the largest in the world for the oil & gas sector. Since 2016, PSA LLP has been the authorized state institution in the production sharing agreements for NCOC, KPO, and the Dunga project (previously owned by Total E&P Dunga GmbH; in November 2023, the state-owned KazMunayGas bought the TotalEnergies stake for an estimated $300 million).

Kazakhstan’s Ministry of Energy is currently entrusted to run PSA LLP, while the stakes in Karachaganak and Kashagan are held by KazMunayGas (KMG) and the sovereign wealth fund Samruk-Kazyna (SK).

The international arbitration claims followed inspections in 2013-20 that revealed costs not agreed upon with the Kazakhstani government (costs are reimbursed from oil revenues), along with failure to hit planned oil production targets and violations during tenders, etc. The initial amount of the lawsuit against NCOC was raised from $13 billion to $15 billion.

The new claim for $138 billion relates to lost revenue “reflecting the calculation of the value of oil production that was promised to the government but not delivered by the field developers,” Bloomberg reported, citing sources familiar with the matter.

The $5.1 billion fine levied by regional environmental regulators against NCOC has to do with the storage of excessive amounts of sulfur on site (more than a million tons more than permitted), as well as 10 other Administrative Code violations. Later, however, a court partially satisfied the consortium’s appeal.

Deputy General Director of PSA LLP Nurlan Serik has made clear that Kazakhstan intends to challenge the consortium’s costs and failure to fulfil plans only through courts.

According to various estimates, about $60 billion has been invested in the Kashagan field, so the $15 billion figure means the state is calling into question about a quarter of the total investment by NCOC.

The new claim for $138 billion – considering the total investment of $60 billion – would, if granted, mean that the stakeholders must hand over the project to the Kazakhstani government for free and pay about $78 billion on top.

A complex project

The NCOC stakeholders are KMG Kashagan (16.88% stake), the Anglo-Dutch Shell Kazakhstan Development (16.81%), the French Total EP Kazakhstan (16.81%), the Italian Agip Caspian Sea (16.81%), the American ExxonMobil Kazakhstan (16.81%), the Chinese CNPC Kazakhstan (8.33%) and the Japanese INPEX North Caspian Sea (7.56%). The initial agreement was signed in November 1997 for 40 years, followed by a final PSA, with the end date pushed back to 2041. Commercial oil production began in 2016.

In 2023, oil and gas condensate production at the field amounted to 19 million tons (about 450 thousand barrels per day). Meanwhile, Phase 2 and Phase 3 of Kashagan’s development seem to have been postponed indefinitely. The former entailed an increase in production to 700-900 thousand barrels per day and the latter to 1.2 million barrels per day, which on a global scale would have been a big boost to production and Kazakhstan’s role. However, the price tag was $150 billion, with oil prices needing to be over $100 per barrel to recoup that investment.
Kashagan turned out to be a difficult field, and the Caspian Sea turned out to be very unfriendly to such projects.

The sea level of the Caspian Sea, which is in fact a lake, drops every year, creating difficulties for oil platforms and cargoes. Currently, the depth is about 3-7 meters in the production area (the oil itself is about 4 km below that), and the consortium has considered digging “marine access channels” in the seabed to artificial islands, as well as a multi-billion-dollar bridge.

Proven offshore oil reserves are estimated at 13 billion barrels, while geological reserves are put at over 35 billion barrels.

Stable Karachaganak

The production sharing agreement for Karachaganak was signed in 1997, also for 40 years. The KPO consortium is made up of Shell (29.25%), the Italian Eni (29.25%), the American Chevron (18%), the Russian Lukoil (13.5%) and KMG (10%). Kazakhstan received its 10% stake only in December 2011, after tax and other claims against the consortium were raised and settled.

The final PSA is effective until 2038. Karachaganak, one of the largest gas condensate fields in the world, has reserves estimated at more than 8 billion barrels of oil and about 1.4 trillion cubic meters of gas.

Unlike Kashagan, the operator has a solid record, without various accidents and delays in project implementation. In 2023, production amounted to 142.7 million barrels of oil equivalent.

KPO is currently implementing the Karachaganak Expansion Project Phase 1 (KEP1), with the goal of maintaining the stabilized liquid production plateau. Kazakhstan is disputing approximately 10% of the total investment made by the consortium, which exceeds $31 billion.

The Tengiz diamond

The Tengiz field has been called the diamond in the crown of Chevron’s international projects. Besides Chevron (50%), Tengizchevroil’s stakeholders include ExxonMobil (25%), KMG (20%), and Lukoil (5%).

The stabilization contract for Tengiz was one of the first signed at the dawn of Kazakhstan’s independence in 1993, also for a term of 40 years, meaning it should be the first to expire in 2033. This month, Chevron CEO Mike Wirth said “Tengizchevroil will certainly be in discussion with the government over the potential extension.”

My sources indicate that the American companies have been negotiating for several years to extend the contract for another 20 years until 2053. The field turned out to be much more lucrative than originally estimated. Initial oil reserves were 15 billion barrels.

Over the 30 years of Tengizchevroil operations, payments to the state and Samruk-Kazyna, as well as the purchase of local goods and services, have exceeded $176 billion.

Its $48.5-billion Future Growth Project (FGP) is currently being implemented and planned to boost production to 900,000 barrels per day. American companies spend several times less on similar projects.

It remains a mystery how the American companies are investing $48.5 billion in the next phase of an onshore project with ready infrastructure, while $60.0 billion was invested in the offshore Kashagan, which produces about 50% more oil than Tengiz with the FGP.

A reason for the lack of claims against Tengizchevroil (TCO) could be that Kazakhstan’s stake is owned and managed not by PSA LLP, but directly by KMG. Perhaps the stake will be transferred to PSA LLP, as KMG is not seen as active in defending Kazakhstani national interests at Tengiz.

Revision of the PSAs

Despite Kazakhstan’s reputation as an oil power and its participation in the OPEC+ oil production cuts, it accounts for only a small share of global production.

The country’s oil and gas condensate production in 2023 came to 89.9 million tons (about 1.8 million barrels per day), with TCO, NCOC, and KPO accounting for 67% of that: Tengiz with 28.9 million tons, Kashagan with 18.8 million tons and Karachaganak with 12.1 million tons. The production of the “whales” rose 12% in 2023, while that of other companies was down 3%.

The “whales” extract oil in Kazakhstan on preferential terms and do not supply oil to the domestic market (Kazakhstani companies supply 50-70% of the crude they produce to domestic refiners at $20-25 per barrel).

Kazakhstan does not have the crude oil it needs for refining to meet the needs of its growing population, so leaning on the large consortiums seems logical and reasonable given the country’s budget deficit – currently, tax revenues are half the size of expenditures (the difference is covered by borrowing and transfers from the National Fund).

Whether the consortiums are ready to make concessions, or whether many years of international arbitration proceedings are in front of us – only time will tell. In any case, Kazakhstan is sending a clear message: the country is dissatisfied with the work of NCOC and KPO and is keeping quiet about Tengiz for now.