KAZAKHSTAN: INFORMATION REQUEST ON BARRIERS TO

UNCLAS SECTION 01 OF 03 ALMATY 003876

SIPDIS

DEPARTMENT OF ENERGY FOR PRICE/PI AND SALERNO/PI

E.O. 12958: N/A
TAGS: ECON ENRG EINV EPET KZ ECONOMIC
SUBJECT: KAZAKHSTAN: INFORMATION REQUEST ON BARRIERS TO
INVESTMENT

REF: State 189760


1. The following information is provided in response to
Reftel questions.

Question 1(A)
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2. By law, U.S. companies can purchase local oil
companies. The January 2003 Law on Investments provides
the legal framework for foreign investment in Kazakhstan,
and does not differentiate between the rights of domestic
and foreign investors. However, a December 2004 law gives
the State a preemptive right to purchase shares in new and
existing hydrocarbon projects. An October 2005 law
extends the State's preemptive right to parent companies
of entities holding subsurface rights in Kazakhstan.


3. U.S. companies can also obtain equity oil. However, a
2005 law stipulates that the state-owned oil and gas
company (KazMunayGaz, or KMG) has the right to own a 50%
interest in new Production Sharing Agreements. The
December 2004 law referenced above also applies to the
sale of consortia shares.


4. By law, a U.S. company can invest in the refining and
petrochemical industries. However, the Kazakhstan Law on
National Security was amended in October 2005 to grant the
government the authority to restrict the assignment of a
property right in "strategic resources" of the country.
Existing refineries are likely to be considered "strategic
resources."


5. By law, a U.S. company may market petroleum products.

Question 1(B)
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6. Post is not aware of examples of U.S. companies
attempting to purchase local oil companies. The more
common forms of U.S. entry into the market are as a
consortium shareholder, or by applying to the appropriate
body (currently the Ministry of Energy and Mineral
Resources) to obtain a contract for subsurface use
(exploration and/or production).


7. U.S. companies participate in all three of
Kazakhstan's large exploration and production consortia:
Chevron is a 20% partner in Karachaganak KPO; Chevron is a
50% partner, and ExxonMobil a 25% partner, in
Tengizchevroil; and ExxonMobil is a 18.52% partner, and
ConocoPhillips a 9.26% partner, in AGIP KCO.


8. Post can provide few specific examples of U.S. company
involvement in Kazakhstan's petrochemical industry, which
is not well-developed. (To date, Kazakhstan's distance
from markets for petrochemical products has discouraged
outside investments.) Chevron, as a member of both the
Tengizchevroil joint venture and the Karachaganak
consortium, produces limited quantities of propane and
butane for export.


9. The Kazakhstani government has made development of a
petrochemical industry a priority. The 2005 Production
Sharing Agreement law specifies that the "determining
criterion" in the choice of future tender winners will be
the bidder's commitment to introduce "high technology" to
Kazakhstan, of which "petrochemical and further processing
production" is rated as the first priority. The GOK
recently chose Nexant, a U.S. company, to research
prospects for developing Kazakhstan's petrochemical
industry and to present recommendations on how to attract
foreign investments.


10. ExxonMobil markets gasoline and diesel at a number of
branded service stations. Chevron owned five service
stations in Almaty until September 2005, when they sold
the stations to state-owned KMG.

Question 2
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11. As noted, Kazakhstan's Law on Investments provides
equal rights to both domestic and foreign investors.
Thus, U.S. companies are not subject to any particular
regulatory barriers or obstacles not faced by all
investors.


12. Subsurface users are required to conclude individual
contracts with the government. The commercial terms
(royalties, taxes, etc.) differ according to the type of
contract, with Kazakhstani law differentiating between a
tax-royalty subsurface use contract ("Model 1" below),and
a Production Sharing Agreement ("Model 2" below). Details
of the commercial terms of both types of contract are
available on-line from the major U.S. accounting firms
doing business in Kazakhstan. However, the following
chart outlines the general applicability of royalties and
taxes to the two model contracts:

Applicable Taxes Model 1 Model 2


A. Special taxes & payments of subsurface user
Bonuses Yes Yes
Royalty Yes No
Excess Profit Tax Yes No
Share of the production No Yes
Additional payment
under PSA "Top Up Tax"
[the additional payment to the state
budget to ensure that the total state's
take will be 10% prior to the project's
pay-back and 40% in the periods
thereafter] No Yes


B. Other taxes & obligatory payments to the budget
Rent tax on export of
crude oil & gas condensate Yes No
Excise on crude oil
& gas condensate Yes No
Land tax Yes No
Property tax Yes No
Environmental fees Yes Yes
Other fees (e.g. fee for use
of navigable waterways,
radio frequency spectrum) Yes Yes
Other taxes & payments Yes Yes

Source: Ernst & Young, Kazakhstan


13. A few aspects of the Kazakhstani subsurface
regulatory environment deserve special mention. First,
according to "local content" regulations, subsurface users
in Kazakhstan are obligated to purchase goods (work and
services) from Kazakhstan entities -- provided that the
local goods meet minimum project standards -- and to give
preference to the employment of local personnel.
Prospective subsurface users are required to specify in
their tenders the anticipated local content of their work,
goods, and services. The 2004 Subsoil amendments also
require that tender proposals specify the user's
commitment to infrastructure projects and the economic and
social development of the relevant regions of the country.


14. Kazakhstan's legal framework governing gas
utilization and flaring is in transition. Gas flaring was
prohibited altogether by 2004 law, except in emergency
cases. October 2005 amendments mitigate these provisions,
providing for a transition period up to July 1, 2006 for
subsurface users to draft and present to the government
authorities a program for gas utilization.

Question 3
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15. Post does not have data on U.S. FDI to Kazakhstan's
oil and gas sector. The data below, from the National
Bank of Kazakhstan, show overall U.S. FDI to Kazakhstan
from 1993-2005 and overall (all sources) FDI to
Kazakhstan's oil and gas sector for the same period.

U.S. FDI in Kazakhstan in 1993-2005

1993 - $966.9 million
1994 - $412.0 million
1995 - $153.3 million
1996 - $164.2 million
1997 - $208.1 million
1998 - $399.8 million
1999 - $905.8 million
2000 - $951.2 million
2001 - $1460.4 million
2002 - $1011.3 million
2003 - $1105.5 million
2004 - $2970.6 million
2005, 1st Half - $412.6 million

Overall FDI to oil and gas sector in Kazakhstan in 1993-
2005

1993 - $921.5 million
1994 - $410.1 million
1995 - $191.8 million
1996 - $257.7 million
1997 - $640.5 million
1998 - $506.7 million
1999 - $1372.5 million
2000 - $2002.1 million
2001 - $3059.5 million
2002 - $2070.8 million
2003 - $2113.6 million
2004 - $5200.5 million
2005, 1st Half - $761.3 million
Ordway