Kazakhstan showed that renegotiation is possible

Jan 19, 2025 Features / Columnists, Peeping Tom

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Peeping Tom…

Kaieteur News– Bharrat Jagdeo is fond every week of criticizing the PNC/R as not having persons with the requisite experience in policymaking. It is his way of saying that the leaders of the PNCR are inexperienced when it comes to managing a country.

But one must also question his experience when it comes to oil and gas. He is after all overseeing a sector over which he did not have any experience prior to taking office in 2020. This renders Jagdeo’s claim about experience sterile.

Had Jagdeo had the requisite experience he may have known about the case of Kazakhstan which renegotiated its production sharing agreement which had been signed in 2001 with a consortium of oil companies, including ExxonMobil.

Kazakhstan has renegotiated contracts with oil companies multiple times. Beginning in 2007, it sought to increase its share of revenue from the giant Kashagan oil field after deeming the initial terms unfavourable.  Kazakhstan provides an instructive example of a country renegotiating contracts with oil companies to secure better terms for its citizens and government.

There are a number of similarities between the early inexperience of Kazakhstan and Guyana. For one, there was a large discovery. The Kashagan oil field was one of the largest oil discoveries at the time.  Located in the Caspian Sea, Kashagan has estimated reserves of 13 billion barrels of recoverable oil, making it a significant resource for the country.

Second, the negotiating strength of Kazakhstan relative to the oil companies was weak. The newly independent country lacked the capital to develop its oil resources even though it had been producing oil under the Soviet Union.  Guyana found itself in the same position of not being able to match the negotiating expertise and experience of the oil companies.

Third, like in Guyana, the original PSA was heavily tilted in favour of the international consortium of oil companies. Initially, instead of royalties, Kazakhstan received equity in the venture. Cost recovery was set at 80%, dropping to 55% after payback. Profit oil was another rip-off with the oil companies initially creaming off 90% with a declining sliding scale based on a complicated factor related to rate of return.  Like in Guyana, the consortium benefitted from generous tax exemptions even though profit oil was taxable.

While these terms facilitated the initial development of Kashagan, they later became a source of discontent for Kazakhstan.  With improvements in the stability of the economy and with the country gaining more experience in managing its natural resources, the government felt it could demand better terms.  The increase in oil prices, public pressure and cost overruns on oil projects in the 2000s provided the government with the leverage it needed to push for renegotiation.

Kazakhstan’s government employed a range of strategic measures to renegotiate the terms of its agreement with the Kashagan oil project consortium. Recognizing the imbalance in the initial contract, the government applied regulatory pressure by imposing fines and penalties for project delays and environmental violations. These measures were designed to compel the consortium to engage in discussions and address Kazakhstan’s concerns.

The government in 2008 was able to increase the stake of state oil company, KazMunay Gas in the Kashagan project from 8.33% to 16.81%.  This move not only enhanced the government’s control over project operations but also secured a larger share of the profits for the nation.

Simultaneously, the government demanded revisions to the fiscal terms of the agreement. It negotiated for a higher share of project revenues, particularly after cost-recovery phases, while also securing higher royalty payments and stricter limits on cost-recovery allowances.

To buttress its negotiating position, Kazakhstan hinted at the possibility of revoking the consortium’s licence, a move that demonstrated its resolve and readiness to pursue legal avenues if necessary. Although such a step could have led to prolonged legal battles, it underscored the government’s commitment to securing a fairer deal.

The revised agreement increased the government’s share of oil revenues, particularly after the cost-recovery phase, ensuring a more equitable distribution of the project’s financial benefits. Additionally, the increased stake of KazMunayGas provided Kazakhstan with greater influence over project decisions and improved transparency in the consortium’s operations.

Beyond financial improvements, the renegotiation addressed broader economic and environmental priorities. The consortium committed to using more local labour, goods, and services, which bolstered the domestic economy and created jobs. Environmental concerns were also addressed, with the companies agreeing to implement better practices to mitigate the ecological impact of the project.

Through a combination of strategic pressure, enhanced state involvement, and fiscal renegotiation, Kazakhstan demonstrated its ability to assert national interests in a complex, high-stakes negotiation, setting an example for resource-rich nations facing similar challenges.

Kazakhstan’s experience highlights that renegotiation is not only possible but can also yield significant benefits without deterring future investment. A key lesson for Guyana is that the oil companies will not walk away from a treasure chest.

Like Kazakhstan, Guyana can leverage its growing expertise and public sentiment to demand better terms for its oil wealth. But our leaders need to show greater backbone instead of hiding behind excuses.

(The views expressed in this article are those of the author and do not necessarily reflect the opinion of this newspaper.)

(Kazakhstan showed that renegotiation is possible)

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• Environmental concerns, Kashagan oil field, oil project consortium, PNC/R, policymaking

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