Identifier
Created
Classification
Origin
06ALMATY2301
2006-06-28 09:33:00
CONFIDENTIAL//NOFORN
US Office Almaty
Cable title:  

KAZAKHSTAN: PARKER DRILLING'S LEGAL WOES

Tags:  ENRG EPET KZ PGOV PREL 
pdf how-to read a cable
VZCZCXRO2911
PP RUEHDBU
DE RUEHTA #2301/01 1790933
ZNY CCCCC ZZH
P 280933Z JUN 06
FM AMEMBASSY ALMATY
TO RUEHC/SECSTATE WASHDC PRIORITY 5961
INFO RUCNCIS/CIS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 002301 

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/FO (MANN); SCA/CEN (MUDGE)

E.O. 12958: DECL: 06/26/2016
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: PARKER DRILLING'S LEGAL WOES


Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 02 ALMATY 002301

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/FO (MANN); SCA/CEN (MUDGE)

E.O. 12958: DECL: 06/26/2016
TAGS: ENRG EPET KZ PGOV PREL
SUBJECT: KAZAKHSTAN: PARKER DRILLING'S LEGAL WOES


Classified By: Pol-Econ Chief Deborah Mennuti; reasons 1.5 (b) and (d).


1. (C) Summary: On June 22, Parker Drilling updated Econoff
on the company's years-long tax dispute with Kazakhstani
authorities. The Supreme Court recently ruled that Parker
owed roughly $100 million in back taxes and penalties
stemming from work done by Parker's "Sunkar" drilling rig on
behalf of operators of the Kashagan offshore field. Parker
executives told Econoff that they believe that "KazMunaiGaz
insiders" engineered the adverse court ruling in order to
facilitate their own purchase of the Sunkar rig. Parker has
asked for a supervisory ruling on the Supreme Court ruling,
and requests that the USG not/not get involved at this point.
End summary.

Supreme Court Assesses $100 Million in Back Taxes and Fines
-------------- --------------


2. (SBU) Econoff met with Houston-based Parker Drilling VP
for Operations, Mike Drennon, along with other Parker
executives, in Atyrau on June 22, following an adverse
Supreme Court ruling in May which ordered Parker to pay
approximately $100 million in back taxes and fines.


3. (C) Drennon explained that the Court's ruling had actually
aggregated two separate tax issues. Parker was not
contesting one: a ruling that Parker owed approximately $50
million in value-added tax (VAT),due to Kashagan operator
AGIP KCO's incorrect interpretation that its own VAT
exemption applied equally to AGIP KCO contractors. Parker
was not concerned with this ruling, Drennon said, because
AGIP had already agreed to indemnify Parker should Parker
lose the case.


4. (C) The second $53 million assessment arose from a 2001
Ministry of State Revenue audit of Parker, in which the
Ministry claimed that in 1997 Parker miscategorized $99
million received from then-Kashagan operator OKIOC. (As part
of its original contract with OKIOC, Drennon explained,
Parker had spent $135 million to modernize the Sunkar rig.

OKIOC had reimbursed Parker for $99 million, an amount which
Parker categorized as a (nontaxable) "capital contribution"
rather than "taxable income." The assessed $53 million
consists of tax on the $99 million, plus interest and fines.)
Parker appealed the 2001 audit results, and in 2002 the
Supreme Court ruled in Parker's favor. The case then lay
dormant, Drennon said, until 2005, when AGIP revealed that it
intended to claim the $99 million expense as "cost oil" once
Kashagan production began -- an action that would have
reduced the State's tax revenue and profit share. Drennon
explained that this announcement provoked the tax authorities
to take the case back to court, where, once again, the
Supreme Court ruled in Parker's favor in April 2005.

Suspicions of Manipulations of Justice
--------------


5. (C) The State tax authorities once again appealed the
Supreme Court's ruling, Drennon explained, and by May 2006
the case had returned to the Supreme Court, which, for the
first time, ruled against Parker. Drennon told Econoff that
the company was disturbed by the fact that one of the three
ruling justices had been replaced in the middle of the
hearings -- a sign, in Drennon's mind, that someone had
engineered the unfavorable outcome. The company had
subsequently received indications, he said, that "KMG
insiders" had manipulated the court decision in order to
pressure Parker to accept their earlier offer to buy the
Sunkar rig. (Note: Due in large part to the difficulties of
shipping rigs to the Caspian, drilling rigs are in high
demand in the offshore Caspian. End note.) Drennon said
that the Supreme Court's ruling placed the company under
substantial pressure, as a $53 million assessment would "wipe
out thirteen years of company profits in Kazakhstan." The
company had also been told by those presumed to be close to
KMG that Parker's tax problems would "go away" if the rig
were sold to the prospective buyers.


6. (C) Drennon told Econoff that Parker had already won a
"stay of execution" of the Supreme Court ruling, and had
appealed the decision to a Supervisory Panel of judges.
Parker remained optimistic about the possibility of a
favorable ruling, he said, and that -- combined with the
delicacy of doing battle with KMG insiders -- had led the
company to decide not to seek USG assistance at this time.
Drennon admitted, however, that even if the Supervisory Panel
ruled in Parker's favor, there was nothing to prevent the
authorities from advancing the case again whenever "new

ALMATY 00002301 002 OF 002


circumstances" emerged. A set of "new" circumstances would
naturally be created a few years in the future, Drennon
acknowledged, whenever Kashagan began production and AGIP
began allocating its $99 million Parker payment to "cost
oil," thus reducing State tax revenues and KMG's share of
Kashagan profits.


7. (C) Comment: Despite the length of the court case --
which to date has cost Parker $2.5 million in legal fees --
and the company's current suspicions of judicial
manipulation, the Parker executives seemed bullish on
Kazakhstan, acknowledging that the company is seeking
additional business here. This seeming paradox is, in fact,
the key to understanding Kazakhstan's investment climate,
where the challenges and risks take a second seat only to the
promise of world-class profits. End comment.
ORDWAY