Publication: Eurasia Daily Monitor Volume: 4 Issue: 200

The unprecedented tough line taken by the Kazakh government in its row with the Italian Agip consortium may set an ominous precedent for prolonged confrontations with other Western companies. In a second challenge to Western investment, the district court in Atyrau region recently upheld the charges against Tengiz-Chevron submitted by the regional office of Kazakhstan’s Environmental Protection Agency. The court decided decision to impose a $37 million fine on Tengiz-Chevron to compensate for the environmental damage caused by storing 2.5 million tons of waste sulfur in violation of safety regulations. While the company’s reaction to the unusual court ruling remains unknown, regional Environmental Protection Agency officials think the court was unjustifiably lenient toward Tengiz-Chevron, since the estimated damage to the environment between 2003 and 2006 exceeded $72 million (Express-K, October 20).

It is still not clear whether the company will give in to the concerted pressure from the Kazakh government, ministries, environmentalists, and media. Company managers are expected to appeal to higher courts to reverse the district court decision.

The pollution accusations are not the first case to bring corporate managers into the courtroom. Last September, the Atyrau municipal court demanded that Tengiz-Chevron management stop discriminating against Kazakh employees. Reportedly, over the last eight years more than 1,500 Kazakh workers have been sacked for minor infractions of labor regulations. Very few believe that the Kazakh authorities have the legal power to compel company executives to reinstate workers fired in violation of the Labor Code of Kazakhstan. It makes economic sense for the company to import highly qualified workers rather than spending months training locals. But this economically sensible approach stirs up emotions among nationalistic forces that support parliament member Gani Kasymov’s demands that Tengiz-Chevron suspend all activities in Kazakhstan until the sulfur storage problem is settled.

President Nursultan Nazarbayev is obviously trying to avoid harsh penalties for Tengiz-Chevron and carefully differentiates between patriotic rhetoric and economic considerations. He fully understands that a wealthy foreign investor such as Tengiz-Chevron cannot be treated in the same arrogant manner as Agip KCO was treated. After his recent meeting with Nazarbayev, David O’Reilly, executive director of Chevron, announced the company’s plans to complete efforts to increase the production capacity of Tengiz oil field next year. Kazakh authorities will hardly go as far as to halt oil extraction at Tengiz. That would destroy the region’s social infrastructure (Central Asia Monitor, October 4).

Taken in a political perspective, there is no love is lost between Russian-influenced Kazakhstan and Chevron USA. Russia has an interest in regional energy issues, Therefore, it came as no surprise that the sporadic dispute with Tengiz Chevron came to the fore on the eve of the October 16 Tehran summit of the Caspian littoral states and the Novosibirsk meeting between Nazarbayev and Russian President Vladimir Putin. Kazakhstan’s Caspian sector is increasingly turning into an area where the interests of the Russian firm Lukoil and Western companies clash. Some oil experts in Kazakhstan believe Astana should prioritize good relations with Russia when shaping country’s energy policy (Turkistan, October 4).

In economic terms, however, Chevron’s presence in Kazakhstan offers more possibilities for rapid growth than can Lukoil, given its limited access to global markets, meager coffers, and obsolete technology. Since the Kazakh government and Chevron signed an agreement in April 1993 to set up Tengiz-Chevron, more than $9 billion has been added to the state budget of Kazakhstan in taxes and royalties. Residents of Kazakhstan make up 60% percent of Tengiz-Chevron’s workforce. Apart from the social benefits Kazakhstan gets from cooperation with Chevron, which Russian oil companies cannot possibly offer, Tengiz-Chevron has the best potential to help to facilitate Kazakhstan’s plans to bring Tengiz oil to world markets. Recently, Cross Caspian Oil and Gas Logistics, the biggest oil terminal operator in the Caspian region, affiliated with the State Oil Company of Azerbaijan, revealed plans to reach an agreement in October or November with Tengiz-Chevron on the shipment of Tengiz oil via Azerbaijan to the Turkish seaport of Ceyhan through the BTC pipeline and the Black Sea port of Batumi and to the Kulevi oil terminal in Georgia by railroad. Baku expects the first oil deliveries as soon as in 2008. Annual oil shipments through Azerbaijan are planned at 5 million tons. Tengiz-Chevron expects to increase oil output up to 14.3 tons in 2007, up from last year’s 13.3 million tons (Panorama, October 19).

But to ensure stable oil deliveries from Tengiz the BTC managers will have to increase the pumping capacity of the Baku-Tbilisi-Ceyhan pipeline. Arzu Azimov, deputy head of the marketing board of the State Oil Company of Azerbaijan, reports that currently 750,000 barrels of oil are pumped through the pipeline every 24 hours. If Azerbaijan reaches its planned daily output of 1 billion barrels at its Azeri-Cirag-Guneshli oilfield in 2010, then BTC will not have enough capacity to handle Kazakh oil (Panorama, October 19).

While the technical problems surrounding exports of Kazakh oil can be solved relatively easily, removing political barriers will take more time and effort. The growing pressure on Western oil companies in Kazakhstan in recent months reveals the widening gap between the much-reiterated “sound economic reasoning” and reality when dealing with foreign investors.