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. Last Updated: 07/27/2016

Caspian Abuzz Over New Oil Tenders

ALMATY, Kazakhstan -- Western oil majors active in Kazakhstan are eagerly awaiting new tenders for oil exploration in the Caspian Sea but say plans to revise tax terms in existing contracts might undermine investor confidence.

Kazakhstan is fast emerging as one of the world's major new oil provinces, and all its most exciting new fields -- Kashagan, potentially the biggest of all, Tengiz and Karachaganak -- are in or near the Caspian in the southwest of the country.

The oil firms say they now hope Kazakhstan will announce at the same time as new tenders a long-term stable economic regime in its part of the Caspian Sea, which experts say could one day yield as much oil as the North Sea.

"The state has indicated it has up to 100 new offshore blocks to offer soon. This might be the most important event since the discovery of oil in Kashagan," said an official of a Kazakhstan-based international oil major.

Kazakhstan has won some $13 billion in investment from many of the world's largest firms since the Soviet Union collapsed in 1991.

The mostly long-term contracts to tap its oil and gas reserves have been the driver behind impressive economic growth.

Kashagan, Kazakhstan's first offshore project, led by Italy's Agip, is believed to be the biggest new field discovered since Alaska's Prudhoe Bay.

Kazakhstan has long been praised as having one of the best post-Soviet investment climates, but it has said it would revise the tax regime in long-term contracts with Western companies, which are currently enjoying benefits from recent cuts in other taxes.

Western oil and diplomatic sources, who spoke on condition of anonymity, expressed concern over possible changes to contracts with life spans of 25 years or more, saying talk of the move has sent a worrying message to potential investors.















"We know that several companies have been approached for tax issues, but we hope that at least there is no threat of revision of contracts themselves," a Western diplomatic source said.

Industry sources said the fact that all Western oil companies had different agreements similar to production-sharing deals with the state and were holding separate talks with no coordination on the issue was adding to the uncertainty.

But they said oil companies have recently moved closer to agreeing that more coordination would be needed when Kazakhstan offers new offshore blocks for extremely expensive exploration, which can be done only with the help of Western money.

"The future of Kazakhstan's oil industry largely depends on the Caspian. And we hope that when tenders are called the state also establishes a new stable regime in this area, or at least says it intends to do so," a source in a European oil major said.

The Kazakh government is remaining silent on the location of the new offshore blocks, but experts says they should be close to Kashagan and Russian waters, where important reserves have already been found by Russian oil major LUKoil.

Kazakhstan plans to triple oil output in 15 years from 900,000 barrels per day now as its giant onshore fields Tengiz and Karachaganak, operated by ChevronTexaco and BG, boost production and the first offshore oil comes onstream at Kashagan after 2005.

"Geological surveys show there is little hope of big new onshore discoveries in Kazakhstan, so the main focus is now on the Kazakh shelf," a source in a European oil major said.

Western analysts currently put Kazakhstan's oil reserves at 10 billion barrels and expect them to rise to 30 billion to 35 billion, including finds on the shelf, although Kazakh officials have said Kashagan alone might contain up to 50 billion barrels.

"I would not overestimate the offshore potential as happened in Azerbaijan's Caspian, where a number of huge offshore projects collapsed after exploration wells turned dry," said a Western source active in Kazakhstan and Azerbaijan.

Another source said years of dispute between Iran and Kazakhstan, Turkmenistan, Russia and Azerbaijan on how to divide the sea might cause problems when tenders for new blocks are held close to Russian waters.

Even Russia and Kazakhstan, which take a similar approach on how to divide the sea, have not managed to avoid tensions over one offshore block that is claimed both by LUKoil and Kazakh state oil company Kazakhoil.

Iranian Oil Minister Bijan Zanganeh said Wednesday that Iran would go ahead with Caspian oil and gas projects before any demarcation has been agreed and stop others exploiting what it saw as its share of the disputed sea.

"Our position is clear: We are not going to wait until the clarification of the Caspian Sea's legal regime," Zanganeh said at a signing ceremony Wednesday.

"We start our activities based on our own understanding of the sea's legal regime and will prevent the activities of others in the parts we consider to be ours."

Tensions between the Caspian coastal states flared up in July when an Iranian gunboat and a military aircraft ordered two Azeri research vessels hired by British oil giant BP to retreat from an oil field claimed by both Tehran and Baku.

BP said it had suspended exploration in the region.