BG, Eni Oil Venture Faces Kazakh Tax Claims, Contract Review

Feb. 26. Bloomberg

By Nariman Gizitdinov

BG, Eni Oil Venture Faces Kazakh Tax Claims, Contract ReviewKazakhstan is preparing tax claims against the BG Group Plc- and Eni SpA-led Karachaganak project, and may challenge the production-sharing agreement as the government seeks a stake in the oil field.

The Kazakh Finance Ministry asked Karachaganak Petroleum Operating BV to pay about 20 billion tenge ($136 million) for 2004, according to a copy of a ministry letter obtained by Bloomberg News. The Prosecutor General Office’s will analyze the tax and customs stability of the production-sharing agreement for Karachaganak, the country’s second-largest producing oil field, for compliance with Kazakh law, according to the letter.

The former Soviet republic, the largest oil producer in the Caspian Sea region after Russia and Iran, aims to boost revenue by increasing taxes, buying into projects and curbing the costs that eat into its share of profits. In 2005, Kazakhstan joined the offshore Kashagan development, its biggest oilfield by reserves, citing delays and cost overruns.

“Further tax claims may follow,” Tatyana Kalachova, an analyst at Moscow-based Renaissance Capital’s Kazakh unit, said by telephone today.

Kazakhstan’s budget has earned $7.2 billion, including $5.1 billion taxes, from Karachaganak from 1998 through last year, KazMunaiGaz National Co., the state energy producer, said last month. The venture produced 89.4 million tons of oil (about 650 million barrels) and 102.4 billion cubic meters of gas in the period, KazMunaiGaz said, without saying what the partners earned.

Energy Ministry

BG and Eni referred questions to Karachaganak Petroleum. Sergei Pushkarev, a spokesman for the venture, declined to comment by telephone and didn’t immediately respond to e-mailed questions, as did spokespeople for the Finance Ministry, Energy Ministry and Prosecutor General’s Office.

Prime Minister Karim Masimov’s spokeswoman, Ainagul Shakirova, wasn’t immediately available to comment when called by Bloomberg News today.

The Karachaganak venture is in talks to sell a 10 percent stake in the field to the government for $1 billion to resolve a dispute over export oil taxes, a person familiar with the matter said in December. Karachaganak Petroleum has sought to recover more than $1 billion in export duties from the state, Energy Minister Sauat Mynbayev said on Sept. 22.

$14.5 Billion Expansion

Kazakhstan, holder of 3.2 percent of the world’s crude, imposed the duties in May 2008 as it sought a bigger share of the nation’s oil wealth amid record prices. The duty was cut to zero as in January of last year after oil futures plunged more than $100 from July’s record $147.27 a barrel.

The venture is now considering whether to expand the field in a third phase, which will cost $14.5 billion, KazMunaiGaz said last month. BG Group Plc had estimated in 2007 that the expansion would cost $8 billion by 2012.

In 2008, BG delayed an investment decision on the third phase until this year in anticipation of lower industry costs. Only about 6 percent of the hydrocarbons that the field is estimated to contain have been pumped. The partners had planned to expand output capacity at the field by 45 percent to about 320,000 barrels of oil equivalent a day.

Reading, England-based BG and Rome-based Eni are the largest shareholders in Karachaganak Petroleum, each with a 32.5 percent stake, while Chevron Corp. has a 20 percent interest and OAO holds Lukoil 15 percent.

The 2004 tax bill includes 9.2 billion tenge in back taxes, 6.3 billion tenge in late payment penalties and 4.5 billion tenge in fines, according to the letter.