US embassy cable - 05ALMATY3876

UNCLAS SECTION 01 OF 03 ALMATY 003876 
 
SIPDIS 
 
DEPARTMENT OF ENERGY FOR PRICE/PI AND SALERNO/PI 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, EINV, EPET, KZ, ECONOMIC, Energy 
SUBJECT: KAZAKHSTAN: INFORMATION REQUEST ON BARRIERS TO 
INVESTMENT 
 
REF:  State 189760 
 
1.  The following information is provided in response to 
Reftel questions. 
 
Question 1(A) 
------------ 
 
2.  By law, U.S. companies can purchase local oil 
companies.  The January 2003 Law on Investments provides 
the legal framework for foreign investment in Kazakhstan, 
and does not differentiate between the rights of domestic 
and foreign investors.  However, a December 2004 law gives 
the State a preemptive right to purchase shares in new and 
existing hydrocarbon projects.  An October 2005 law 
extends the State's preemptive right to parent companies 
of entities holding subsurface rights in Kazakhstan. 
 
3.  U.S. companies can also obtain equity oil.  However, a 
2005 law stipulates that the state-owned oil and gas 
company (KazMunayGaz, or KMG) has the right to own a 50% 
interest in new Production Sharing Agreements.  The 
December 2004 law referenced above also applies to the 
sale of consortia shares. 
 
4.  By law, a U.S. company can invest in the refining and 
petrochemical industries.  However, the Kazakhstan Law on 
National Security was amended in October 2005 to grant the 
government the authority to restrict the assignment of a 
property right in "strategic resources" of the country. 
Existing refineries are likely to be considered "strategic 
resources." 
 
5.  By law, a U.S. company may market petroleum products. 
 
Question 1(B) 
------------- 
 
6.  Post is not aware of examples of U.S. companies 
attempting to purchase local oil companies.  The more 
common forms of U.S. entry into the market are as a 
consortium shareholder, or by applying to the appropriate 
body (currently the Ministry of Energy and Mineral 
Resources) to obtain a contract for subsurface use 
(exploration and/or production). 
 
7.  U.S. companies participate in all three of 
Kazakhstan's large exploration and production consortia: 
Chevron is a 20% partner in Karachaganak KPO; Chevron is a 
50% partner, and ExxonMobil a 25% partner, in 
Tengizchevroil; and ExxonMobil is a 18.52% partner, and 
ConocoPhillips a 9.26% partner, in AGIP KCO. 
 
8.  Post can provide few specific examples of U.S. company 
involvement in Kazakhstan's petrochemical industry, which 
is not well-developed.  (To date, Kazakhstan's distance 
from markets for petrochemical products has discouraged 
outside investments.)  Chevron, as a member of both the 
Tengizchevroil joint venture and the Karachaganak 
consortium, produces limited quantities of propane and 
butane for export. 
 
9.  The Kazakhstani government has made development of a 
petrochemical industry a priority.  The 2005 Production 
Sharing Agreement law specifies that the "determining 
criterion" in the choice of future tender winners will be 
the bidder's commitment to introduce "high technology" to 
Kazakhstan, of which "petrochemical and further processing 
production" is rated as the first priority.  The GOK 
recently chose Nexant, a U.S. company, to research 
prospects for developing Kazakhstan's petrochemical 
industry and to present recommendations on how to attract 
foreign investments. 
 
10.  ExxonMobil markets gasoline and diesel at a number of 
branded service stations.  Chevron owned five service 
stations in Almaty until September 2005, when they sold 
the stations to state-owned KMG. 
 
Question 2 
---------- 
 
11.  As noted, Kazakhstan's Law on Investments provides 
equal rights to both domestic and foreign investors. 
Thus, U.S. companies are not subject to any particular 
regulatory barriers or obstacles not faced by all 
investors. 
 
12.  Subsurface users are required to conclude individual 
contracts with the government.  The commercial terms 
(royalties, taxes, etc.) differ according to the type of 
contract, with Kazakhstani law differentiating between a 
tax-royalty subsurface use contract ("Model 1" below), and 
a Production Sharing Agreement ("Model 2" below).  Details 
of the commercial terms of both types of contract are 
available on-line from the major U.S. accounting firms 
doing business in Kazakhstan.  However, the following 
chart outlines the general applicability of royalties and 
taxes to the two model contracts: 
 
Applicable Taxes                   Model 1   Model 2 
 
A. Special taxes & payments of subsurface user 
Bonuses                            Yes       Yes 
Royalty                            Yes       No 
Excess Profit Tax                  Yes       No 
Share of the production            No        Yes 
Additional payment 
under PSA "Top Up Tax" 
[the additional payment to the state 
budget to ensure that the total state's 
take will be 10% prior to the project's 
pay-back and 40% in the periods 
thereafter]                        No        Yes 
 
B. Other taxes & obligatory payments to the budget 
Rent tax on export of 
crude oil & gas condensate         Yes       No 
Excise on crude oil 
& gas condensate                   Yes       No 
Land tax                           Yes       No 
Property tax                       Yes       No 
Environmental fees                 Yes       Yes 
Other fees (e.g. fee for use 
of navigable waterways, 
radio frequency spectrum)          Yes       Yes 
Other taxes & payments             Yes       Yes 
 
Source: Ernst & Young, Kazakhstan 
 
13.  A few aspects of the Kazakhstani subsurface 
regulatory environment deserve special mention.  First, 
according to "local content" regulations, subsurface users 
in Kazakhstan are obligated to purchase goods (work and 
services) from Kazakhstan entities -- provided that the 
local goods meet minimum project standards -- and to give 
preference to the employment of local personnel. 
Prospective subsurface users are required to specify in 
their tenders the anticipated local content of their work, 
goods, and services.  The 2004 Subsoil amendments also 
require that tender proposals specify the user's 
commitment to infrastructure projects and the economic and 
social development of the relevant regions of the country. 
 
14.  Kazakhstan's legal framework governing gas 
utilization and flaring is in transition.  Gas flaring was 
prohibited altogether by 2004 law, except in emergency 
cases.  October 2005 amendments mitigate these provisions, 
providing for a transition period up to July 1, 2006 for 
subsurface users to draft and present to the government 
authorities a program for gas utilization. 
 
Question 3 
---------- 
 
15.  Post does not have data on U.S. FDI to Kazakhstan's 
oil and gas sector.  The data below, from the National 
Bank of Kazakhstan, show overall U.S. FDI to Kazakhstan 
from 1993-2005 and overall (all sources) FDI to 
Kazakhstan's oil and gas sector for the same period. 
 
U.S. FDI in Kazakhstan in 1993-2005 
 
1993 - $966.9 million 
1994 - $412.0 million 
1995 - $153.3 million 
1996 - $164.2 million 
1997 - $208.1 million 
1998 - $399.8 million 
1999 - $905.8 million 
2000 - $951.2 million 
2001 - $1460.4 million 
2002 - $1011.3 million 
2003 - $1105.5 million 
2004 - $2970.6 million 
2005, 1st Half - $412.6 million 
 
Overall FDI to oil and gas sector in Kazakhstan in 1993- 
2005 
 
1993 - $921.5 million 
1994 - $410.1 million 
1995 - $191.8 million 
1996 - $257.7 million 
1997 - $640.5 million 
1998 - $506.7 million 
1999 - $1372.5 million 
2000 - $2002.1 million 
2001 - $3059.5 million 
2002 - $2070.8 million 
2003 - $2113.6 million 
2004 - $5200.5 million 
2005, 1st Half - $761.3 million 
Ordway