Shell pauses investment in Kazakhstan amid majors’ multibillion dollar wrangle with government

Shell has paused investment in Kazakhstan amid wrangling between oil majors and the oil-rich Central Asian nation over legal claims that could cost the companies billions of dollars.

As reported by Bloomberg on February 5, Shell (LON: SHEL) chief executive officer Wael Sawan, referring to the compensation demands, told analysts during an earnings call: “It does impact our appetite to invest further in Kazakhstan.”

Sawan was further reported as saying that while Shell sees plenty of future investment opportunities in Kazakhstan, “we will hold until we have a better line of sight to where things end up”.

Kazakhstan, an OPEC+ country, has launched multiple court and international arbitration cases against Western oil companies. In late January, it emerged that Shell, Eni (BIT: ENI) and other partners had lost an arbitration case over matters including claimed unapproved and non-reimbursable expenses at the Karachaganak gas condensate field in northwestern Kazakhstan brought by the Kazakh government. The outcome could mean they are on the hook for as much as $4bn in compensation.

The case is said to have heard that Kazakh officials allegedly accepted bribes to sign off on billions of dollars of costs claimed by shareholder companies in Karachaganak and that Kazakhstan had admitted that it had tolerated “corruption and kleptocracy” related to the field until 2022. Other disputes relate to sulfur handling.

Bloomberg said that it remained unclear whether the pause announced by Sawan related only to new investments or also affected existing projects. 

Other partners in the Karachaganak consortium include Chevron Corp (NYSE: CVX), Lukoil (MCX: LKOH) and national oil company KazMunayGas (KZ.KMGZ). The venture may still appeal the arbitration decision.

Kazakh analysts have described Kazakhstan’s victory in the Karachaganak case as significantly strengthening its position in other ongoing legal disputes, including those related to the massive offshore Kashagan oil field in the Caspian Sea, The Times of Central Asia reported on February 4.

The publication referred to how during the arbitration, Kazakhstan’s legal team put forward documents from criminal proceedings in Italy that revealed that, in 2017, several Italian contractors pleaded guilty to bribing Kazakh officials in order to obtain Karachaganak and Kashagan contracts.

Oil and gas analyst Olzhas Baidildinov was cited by the media outlet as saying that the ruling gives Kazakhstan greater leverage in negotiations and litigation over large energy projects. He noted that the country can now “firmly defend its rights in major oil and gas projects,”, with the longstanding privileged position of foreign oil majors in Kazakhstan’s oil sector coming to an end. 

Baidildinov was reported as suggesting that the operating models at both Karachaganak and Kashagan may be restructured and potentially “de-Italianised”.

He also criticised KazMunayGas for staying silent on the Tengizchevroil (TCO) expansion project at the Tengiz field, located along the shores of the Caspian Sea. Its capital expenditure has surged from $12bn to $48.5bn.

The Times of Central Asia reported Baidildinov as drawing comparisons to Uzbekistan, noting that former Uzbekneftegaz head Bahodir Sidikov was dismissed in December before being detained on corruption charges, with presidential energy adviser Alisher Sultanov also removed.

“I’m astonished that, while regional Kazakh officials are being arrested for bribes worth mere hundreds of thousands of tenge, we continue to accept the TCO budget of $48.5 billion without scrutiny,” Baidildinov told the publication, adding: “That’s 33 times the cost of the Burj Khalifa, six times the price of the Large Hadron Collider, and more than the infamous Kashagan offshore project, even though Tengiz is an onshore field with existing infrastructure.”

Top figures at KazMunayGas overseeing Tengiz should be held accountable, said Baidildinov.