The oil and gas industry is the most important sector of the Kazakhstan's economy and is the single biggest source of the country's revenues. Despite the difficulties with oil transportation, about 77% of oil produced in the land-locked country is exported. Due, among other reasons, to payment problems with domestic customers, oil producers prefer to export their products.
As a result of the preference of producers to export their products, Kazakhstan's three oil refineries have operated at less than full capacity despite an abundance of oil in the country. According to government statistics, Kazakhstan produced 26.6 million tons of oil in 1999, of which only 5.9 million tons were sent to the domestic refineries. While domestic consumption for a nation of approximately 16 million people appears to have been met, the refineries have suffered financially. All three refineries are considered politically influential: the Atyrau Refinery, located near the Caspian Sea, is controlled by the state oil and gas company Kazakh Oil and has annual capacity of 4.5 million tons; the Shimkent Refinery, recently acquired by the Canadian company Hurricane Hydrocarbons, is located in the southern part of the country and has annual capacity of 7 million tons; and the Pavlodar Refinery, located in the North, has a capacity of 7.5 million tons. Rather than making sales to the country's refineries more attractive to producers, the Kazakhstani government has chosen to increase production at the refineries through administrative mandates. On September 18 1999, the Kazakhstani government adopted Resolution No. 1412 On the Introduction of a Temporary Ban on Export of Mazut, which temporarily banned exports of mazut (fuel oil) until December 25 1999. This ban was explained as a protective measure aimed at allowing the country to restock fuel for the coming heating season. Since December, the government has decided to extend the ban twice, most recently until June 1 2000 – well after the winter heating season. In addition, on December 24 1999, the export ban imposed by Resolution No. 1412 was amended to also include diesel fuel.
Also, on December 24 1999, the Kazakhstani government adopted Resolution No. 1978 On Certain Issues in the Oil and Gas Industry, which limits the export of oil in the year 2000 to 22 million tons. Kazakhstan is expected to produce over 30 million tons of oil in 2000. To implement this measure, the Kazakhstani Customs Committee was ordered to allow oil exports only on the basis of permits granted by the Ministry of Energy, Industry and Trade. The Ministry was charged with the preparation of annual export schedules (in effect quotas) based on applications submitted by oil exporters. According to Resolution No. 1978, export schedules will be reviewed by the Ministry of Energy, Industry and Trade on a quarterly basis and will be based on the functioning of domestic refineries.
The practical difficulty with the limitation on sales abroad is that the only three available Kazakhstani purchasers, the local refineries, are unable to pay world market prices. Reportedly, the prices paid by the refineries can be as low as two thirds of the world prices. Furthermore, Kazakhstani refineries have a poor reputation for making full and timely payments. Therefore, Resolution No. 1978 has the effect of forcing the country's oil producers to subsidize the local refineries.
The government has justified the export limitation by citing the need to help the country's three refineries to operate at full capacity in order to meet the Republic's domestic needs for petroleum products. However, the unsubstantiated claim that domestic needs are not being fulfilled generally has been met with scepticism. The government also has a direct financial incentive to encourage domestic sales: exports of oil are VAT-exempt, whereas domestic sales are subject to that tax.
The government generally has sufficient legal authority to adopt oil export quotas, and it appears that Resolution No. 1978 was adopted in accordance with applicable law. Nevertheless, the limitations on exports constitutes a clear violation of the agreements reached with most big foreign oil producers, who were granted the right to export their products freely at the time they invested in Kazakhstan. Thus, Resolution No. 1978 has damaged Kazakhstan's hard earned reputation for honouring the sanctity of contracts.
Furthermore, Resolution No. 1978 arguably violates Article 6 of Kazakhstan's Law On Foreign Investments, the principal statute governing the rights of foreign investors. Under that law, foreign investors are protected from adverse changes in legislation for a period of 10 years. It is difficult to see how the adoption of Resolution No. 1978 could be viewed as not adversely affecting foreign investors who made huge investments in Kazakhstan with the expectation of being free to sell their products abroad.
These limitations on oil exports have had a very negative reception from oil companies operating in Kazakhstan, as well as other foreign investors and a number of foreign governments. However, despite heavy criticism and extreme pressure to revoke the export restrictions, the Kazakhstan government has indicated that it is not likely to do so in the immediate future. As noted above, the temporary fuel export ban has been extended until June 1. The government's position on lifting the export quotas imposed by Resolution No. 1978 is currently unclear. A number of government officials have given contradictory statements on the matter.
Curtis B Masters and Azamat Kuatbekov
© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.