Kachagan`s PSA was signed in 1997 for 40 years between the Kazakh government and investors. It guarantees the reimbursement of field operating expenses through the commercial exploitation of oil. Foreign investors are currently trying to extend the duration of contracts by 20 years because of “economic viability.” Such a scenario is extremely damaging to Kazakhstan, since, in this case, the expiry of the agreement will allow the development of the majority of the “Kashagan” oil reserves. Companies developing the project plan to begin commercial production on Kashagan in the first quarter of 2013. When the Kachagan oil field was discovered in the 1990s, it was the second largest oil lie in the world. In 1997, equity investors signed a 40-year production sharing contract (PSA) with the Kazakh government in the hope that the field would be developed at a total cost of $57 billion and injected with oil by 2005. Unlike most contracts in the energy sector, the Kashagan agreement was a “flexible PSA,” meaning that contractual terms – the allocation of risks and returns – depend on the ex post realization of things such as cost of capital and profitability. The parties included contingencies in the contract to make it fairer and more flexible and to ensure that it remains viable for the 40 years of the project. Due to a combination of problems and challenges, the project has not yet been implemented in mid-2007. On that date, sponsors led by the Italian energy company ENI announced that the project would not be completed until 2010 and that the total cost would probably be $136 billion. Although oil prices rose dramatically between 1997 and 2007, resulting in significantly higher value for the project, the Kazakh government has expressed its desire to renegotiate important provisions of the treaty. Sponsors had to decide to renegotiate the contract and, if so, which parties.
“Today, Kazakhstan does not need an agreement on production sharing. This mechanism was necessary when the country had no funding for the development of the oil and gas industry. At present, Kazakhstan has no difficulty attracting investment and cooperation with PSA investors is therefore irrelevant. In addition, Kazakhstan is trying to reconsider PSA`s conditions for foreign investors in their favour. Therefore, it will be difficult to extend PSA conditions in Kashagan, said energy expert Shtok on Saturday. A production-sharing agreement (PSA) on Kazakhstan`s Kazakh oil and gas project is unlikely to be extended, said Alexander Shtok, head of the 2K Audit – Business Consulting – Morison International due diligence division. “As far as the other project participants are concerned, given the proximity of the project launch – production is expected to begin next year – it is unlikely that shareholders will sell their stake in Kashagan,” Shtok said. Sign up as a premium teacher with hbsp.harvard.edu, plan a course and save up to 50% of your students with your academic discount.