Kazakhstan Votes Authority to Cancel Energy Contracts, According to Bracewell's Gregory J. Vojack

October 2, 2007

ALMATY, KAZAKHSTAN (October 2, 2007) -The lower house of the Kazakhstan Parliament voted unanimously to amend an existing law regarding subsoil use, granting the government the unilateral right to modify or cancel energy contracts in order to “protect the national interests … and safeguard the economic security of the Republic of Kazakhstan.”

“If the amendment is approved by the Senate and signed by the President, the amendment would have powerful, far reaching effects,” said Gregory J. Vojack, managing partner in the Kazakhstan office of Bracewell & Giuliani, a firm with long-standing connections to the region.  “The amendment does not spell out the conditions under which such action could be taken, other than to say that it could occur “in the event that a subsoil user’s actions, when carrying out operations on subsoil use, lead to essential changes of economic interests of the Republic of Kazakhstan which create a threat to national security.” 

Many believe that the amendment is a response to the long-running controversy over the development of the strategically-important Kashagan oilfield.  Located in the Kazakh section of the Caspian Sea, Kashagan is the largest oilfield outside the Middle East in terms of reserves. 

Kashagan is being developed by multinational oil companies such as Exxon Mobil, Royal Dutch Shell, and Total SA. The development has been plagued by cost overruns of more than 50 percent, and delays that have pushed the original 2005 target for pumping oil to 2010.  Kazakh officials have already expressed their displeasure over Kashagan by temporarily halting operations due to “environmental violations,” as a means of emphasizing their displeasure to the consortium.  The new legislation makes it clear that living up to economic commitments, and not environmental violations, is the Kazakh government’s primary concern in Kashagan.

According to the new amendments, contracts can be canceled in as quickly as two months in the event that a subsoil user does not consent to negotiate with the government and in four months if negotiations are not successful.

There is no definite timetable for approval of the subsoil amendments, but a late October deadline for the government accommodation with the Kashagan consortium may indicate that action could be taken in the next few weeks.

“The intent of the new legislation is to make it clear to foreign investors that they must keep their commitments if the investors want the government to do the same by respecting all contract terms,” says Mr. Vojack.  “For this reason the law does not necessarily increase foreign investors’ political and economic risks of doing business in Kazakhstan.  It does, however, make it essential that investors work diligently to make it clear to the government that they are living up to their contractual obligations.”