Identifier
Created
Classification
Origin
08ASTANA2195
2008-11-07 06:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

KAZAKHSTAN: CRUDE EXPORT DUTY RAISES CONCERNS, GOVERNMENT

Tags:  PGOV EPET EINV KZ 
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UNCLAS SECTION 01 OF 02 ASTANA 002195 

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC
STATE PLEASE PASS TO USTDA DAN STEIN

E.O. 12958: N/A
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: CRUDE EXPORT DUTY RAISES CONCERNS, GOVERNMENT
CONSIDERS SOME MODIFICATIONS

REF: (A) ASTANA 01646 (B) ASTANA 01910

UNCLAS SECTION 01 OF 02 ASTANA 002195

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC
STATE PLEASE PASS TO USTDA DAN STEIN

E.O. 12958: N/A
TAGS: PGOV EPET EINV KZ
SUBJECT: KAZAKHSTAN: CRUDE EXPORT DUTY RAISES CONCERNS, GOVERNMENT
CONSIDERS SOME MODIFICATIONS

REF: (A) ASTANA 01646 (B) ASTANA 01910


1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: Kazakhstan introduced an export duty on crude
oil and oil products through a government decree issued on April 8.
The rate for the crude duty is calculated based on a formula linked
to the price of Brent crude. In the international business
community, the duty has raised concerns about the investment climate
and tax stability. On November 1, Minister of Energy Mynbayev
recommended to the Cabinet that the duty be set on a monthly basis,
rather than a quarterly one. The formula would not change, but
recalculating the rate more frequently would enable it to more
closely track with movements in crude oil prices, which have
recently been quite volatile. END SUMMARY.

DUTY LINKED TO BRENT CRUDE PRICES


3. (U) Kazakhstan introduced an export duty on crude oil and oil
products through a government decree issued on April 8. The export
duty on crude is recalculated every quarter based on the following
formula linked to the average price of Brent crude during the
previous period:

- Brent crude price of $138.60 per ton or less: no duty

- Brent crude price between $138.60 and $438.00: 5.0% of the amount
by which the price exceeds $138.60

- Brent crude price between $438.00 and $547.50: $14.97 plus 22.83%
of the amount by which the price exceeds $438.00

- Brent crude price between $547.50 and $657.00: $39.97 plus 38.21%
of the amount by which the price exceeds $547.50

- Brent crude price between $657.00 and $766.50: $81.81 plus 48.48%
of the amount by which the price exceeds $657.00

- Brent crude price between $766.50 and $876.00: $134.90 plus 55.82%
of the amount by which the price exceeds $766.50

- Brent crude above $876.00: $196.03 plus 61.34% of the amount by
which the price exceeds $876.00


4. (U) The crude duty was most recently recalculated on September
11, and was set at $203,80 per ton -- a significcnt increase over
the previous ratef$09, hih was, Qt duty. For example, the Karachaganak
Petroleum Operating consortium (KPO) has a tax stability clause in
its agreement, but KPO -- led by Italy's Eni and the British Gas

Group -- has nevertheless been forced to pay the duty. (NOTE: Eni
Resident Manager Claudio Cogliati told energy officer that KPO
should not have to pay the duty, but has done so in order to release
crude shipments from a customs embargo (reftel A). END NOTE).
Prime Minister Masimov has conversely told us that the duty applies

ASTANA 00002195 002 OF 002


to KPO because, unlike the Tengizchevroil (TCO) consortium's
contract, KPO's Production Sharing Agreement does not explicitly
exempt it from such a duty. Cogliati said that the matter is likely
to go to international arbitration. END NOTE). Bradbury noted
ironically that Kazakhstan's national oil and gas company
KazMunaiGas is among the hardest hit by the export duty, since its
contracts are not excluded from the tariff.

DUTY CREATES UNCERTAINTY


6. (SBU) Moukhit Akhanov, Kazakhstan Director of the International
Tax and Investment Center in Almaty, sees the export duty as a
relatively easy way for the government to raise revenue at a time
when credit is tight, growth has slowed, and inflation is on the
rise. Patty Graham, Director of Government Relations for ExxonMobil
Kazakhstan, told us that although TCO, in which ExxonMobil has a 25%
stake, is now exempt from the export duty, the application of the
duty to KPO "makes you wonder how they will treat our contract down
the road." Nicholas Olds, General Manager for ConocoPhillips' North
Caspian operations, said he was anxious about the general lack of
stability and certainty in the tax regime, citing the government's
plans to increase the oil rent tax, introduce a new mineral
extraction tax, and institute an excess profits tax for extractive
industries. The uncertainty surrounding these proposed changes,
said Olds, makes it very difficult to do long-range planning.

GOVERNMENT WILLING TO CONSIDER CHANGES


7. (SBU) On November 1, Minister of Energy and Mineral Resources
Sauat Mynbayev recommended to the Cabinet that the export duty be
set on a monthly basis, rather than a quarterly one, as is the
current rule. The formula would not change, but recalculating the
rate more frequently would enable it to more closely track with
movements in crude oil prices, which have recently been quite
volatile. He said at a November 1 press conference that he had
discussed the proposed change with major oil companies in
Kazakhstan. "The oil companies are in an awkward situation," he
said. He noted that the current rate was calculated based on a
quarterly average oil price of $120-$130 per barrel of crude, while
the average price per barrel is now below $70. Mynbayev explained
that as a result, "the companies are now having great difficulty"
with the duty. When the crude export duty was first announced,
Mynbayev said that it would ensure stable supplies to domestic oil
refineries and yield over $1 billion in revenue to the national
budget.


8. (SBU) COMMENT: Since the export duty is based on a published
formula, there are no surprises regarding the rate or the manner in
which it is determined. However, the recent rapid drop in oil
prices has resulted in a higher relative rate than expected, which
has increased uncertainty. Furthermore, the government's insistence
that Karachaganak pay the export duty, despite its tax stability
clause, has naturally raised questions about the government's
respect for sanctity of contract, despite its reassurances on the
issue. The government has made clear that in any event, it is
intent on capturing a greater share of the profits from the energy
sector -- to bring Kazakhstan in line with the share Norway
reportedly captures, as Prime Minister Masimov has put it. The
export duty, along with proposed changes in the tax code, is a key
component of this effort. END COMMENT.

HOAGLAND