Publication: Eurasia Daily Monitor Volume: 2 Issue: 189

The Canadian firm Nelson Resources, currently developing the Kozhasay field, protests Lukoil's bid

After two fruitless years exploring the Tyub Karagan deposits, Russia’s Lukoil refuses to remain a bystander while major Western and Chinese companies battle for Kazakhstan’s oilfields.

The most persuasive indication of the Russian drive to regain lost positions in Kazakhstan is the announcement of Lukoil’s $2 billion bid to acquire all of the shares of the Canadian company Nelson Resources. The final decision will be taken as early as October 12. Few observers doubt that the deal will be concluded, despite weak protests from minority shareholders of the Canadian company, which is currently developing the Alibekmola and Kozhasay fields in Aktobe region and, jointly with the Chinese National Petroleum Company (CNPC), working on the Karakuduk, North Buzachi, and Arman fields in Mangistau, western Kazakhstan.

Nelson Resources, with proven reserves of 269.6 million barrels, is therefore a very lucrative portion of the global oil market, if not for handsome profits, then for its role in advancing the Russian government’s relentless pursuit of Kazakhstan’s oil wealth. The regional director of Lukoil Overseas, Boris Silbermints, disclosed to the press that the Russian plan to purchase Nelson’s assets was prompted by Kazakhstan’s vital role in advancing Lukoil’s strategy on an international scale. “The acquisition of Nelson Resources very strongly strengthens our position in the Caspian region,” commented Silbermints. With Nelson’s resources, Lukoil will be able to take on the millions of dollars of investments required to develop the Alibekmola and Kozhasay fields (Panorama, October 8).

The most puzzling aspect of the expected Lukoil deal is that Nelson Resources is the second Canadian company to abandon Kazakhstan’s oil bonanza within a year. News of the deal has set off speculations that unnamed, but influential, persons from Kazakhstan stand behind Nelson Resources and PetroKazakhstan, which is also officially registered in Canada. The Nelson Resources group includes Kazakh investment companies such as Central Asia Industrial Holdings, Energy Investments International, and Cott Holdings, which own 57% of the company’s shares.

Paradoxically, in Kazakhstan giant deals shrouded with the veil of secrecy often involve officials that advocate openness and transparency. Lately the Kazakh government has taken decisive steps to protect the country’s national interests in the oil market, spearheading new parliamentary amendments to the law on oil resources. These amendments restrict the rights of non-resident oil producers operating in Kazakhstan to sell their assets to a third party, and they grant the state priority rights in purchasing shares in non-resident companies. Under the new law the Ministry of Energy and Mineral Resources can block any deal between a foreign company and a third party. The newly adopted state policy involves buying back assets previously sold to foreign companies and becoming involved in new major oil projects that restrict non-resident companies to holding no more than half of the assets. It remains an open question, however, whether the state will draw any benefits from Lukoil’s deal. In any case, the deal fully corresponds to the regulations. The Kazakh government would like to see numerous small companies gobbled up by transnational giants, be it Lukoil or CNPC, to make it easier to divide Kazakhstan’s oil markets between transnationals and the state monopoly, KazMunayGaz (Novoye pokolenie, October 7).

The Kazakh government sees the involvement of as many players as possible into the national oil business as a welcome development for the diversification of the industry. But the implementation of major projects is often complicated by clashes of economic and political interests. Even such strategic partners as Russia and China are torn apart by many differences of opinion on the Atasu-Alashankou oil pipeline from western Kazakhstan to China, an immense project to be completed in December. Kazakh officials have frequently reiterated that west Siberian oil would be pumped through the pipeline. But at this year’s Kazakhstan International Oil and Gas Exhibition, Minister of Energy and Mineral Resources Vladimir Shkolnik revealed that there were serious disagreements between the Chinese and Russian sides on the issue. Kazakhstan and Russia have also failed so far to reach an agreement on establishing a joint venture to develop the Khvalynskoye and Tsentralnoye oil fields and the Imashev condensed gas deposits in the border area. The Kazakh side insists on a product-sharing agreement. Lukoil, however, demands partial compensation for the financial expenditures used to explore the Khvalynskoye deposits (Panorama, October 8).

Nevertheless, Russia is putting its full effort behind responding to challenges from Western companies active in Kazakhstan’s oil market. The Kremlin cannot afford to ignore the vital importance of the Atasu-Alashankou pipeline in implementing its global oil policy. The recent opening of a Lukoil office in Beijing suggests that Moscow is targeting markets in the Asian- Pacific region. For Russian companies, Kazakh oil fields are not only the source of hydrocarbons but also, more importantly, a gateway to outside markets.