The Grand “Sawcut” of Kashagan

Kazakhstan became independent at the beginning of 1992 as a result of the USSR collapse. In half a year later, the leader of the young state, Nursultan Nazarbayev, decided to begin preparations for oil development production at the Caspian Sea region. Thus, the oil dream had officially become the national idea of Kazakhstan. The new limitless oil reserves were supposed to transform the country into Kuwait (at the very least).

 Then, there followed two decades of waiting for the bright future. The domestic and foreign policies were adjusted to those expectations especially considering that James Giffen, the Kazakh president’s adviser known in the West as the “minister of Kazakhstan: for his active role in preparing the key oil development agreements, was responsible for Kazakhstan’s international policy design.

During all this time, the bright future expectations had been determining Kazakhstan’s pollical strategy. This oil bubble, however, was destined to burst which led to the collapse of the entire economic strategy of Kazakhstan. This is the main conclusion of the recently published Crude Accountability ‘s report with a telling title “Kashagan Oil Bubble”.

In essence, this report presents Kashagan’s story as a typical colonial project. The authors primarily accuse the Western corporations of the project’s failure. They created their own Klondike without even starting to produce oil. Despite the ideologized approach, the report tells the Kazashagan story with much precision.

Of course, in reality, Kashagan did not fail. Instead, it has found itself in the capable hands of the managers of ExxonMobile (the US oil giant the former president of which is now the US Secretary of State) and the Chinese shareholders who are, most likely, interested not so much in the oil production as in delivering it to the Chinese market. Such a scenario seems much more feasible for the future of Kazakhstan.

 Deconstructing Kashagan

As a rule, structure follows strategy. This rule allows us to perform the reverse analysis. On the basis of the structural changes in Kashagan management, we will evaluate the changes in the strategy of those participating in the project. We do this in order to determine the actual (not the proclaimed) goals of the Caspian Sea oil project participants.

An actual (not proclaimed) strategy is not something the players say, it is what they do depending on the circumstances and actions of the other players. Understanding this combination of factors is much harder than analyzing how these changes reflect on the project management structure.

The first (and most obvious) peculiarity of Kashagan’s management structure is the frequency with which this structure had changed. The project management model had replaced four times, the list of the consortium members had changed six times. And every one of these changes was very significant.

The Big Game. One Hundred Years Later

The Kazakhstankaspiyshelf state company founded in February 1993 was the first operator of the project. Basically, there was nothing to operate at this time and the state concentrated on forming the list of the project members. In May 1993, the list was completed. Apart from the Kazakh government, seven private corporations were included.

Creating a legal framework for conducting the geological exploration in the shelf area that had the wildlife preserve status at the time was the main strategic goal of the participants. To do that, on September 23, 1993, the Kazakh government enacted a regulation lifting the ban for the oil production in the North Caspian region permitting the oil development but “taking into consideration the special ecological conditions”.

It is quite obvious that only a state company could run all the operational risks. However, in 1998, the state stands down and gives the managing position to the Offshore Kazakhstan International Operating Company (OKIOC).

The 1997 North Caspian Sea Production Sharing Agreement served as the formal basis for this action. All the consortium members joined the company according to their shares. Kazakhstan’s share of the project amounted to 14,3%.

Thus, the national oil wealth dream, in reality, had transformed into participating in a project that was bound to become difficult and slow-moving. Moreover, by this time, the state did not have any means to influence the project implementation. At first, the OKIOC was set up as the “collective intelligence”, all the consortium participants could be a part of the company management. In practice, however, it led to the discordance among the shareholders.

The replacement of the management company coincided with another important event that had altered the Kazakh history.

It all started with a 1997 suit filed in London by Farhat Tabbah, a British citizen of the Jordan origin. Tabbah requested that the Kazakh officials pay him $34.5 mln as his Iranian swap deals commission.

Essentially, these swap deals meant exchanging the Kazakh oil for the Iranian oil. So, the oil from Kazakhstan could be delivered to Iran and, from Iran, – to the world market. This scheme is often used to reduce transport expenditures. For the post-1979 Iran, however, such deals helped to get around the sanctions because the oil that left the Iranian harbors of the Persian Gulf was from Kazakhstan (according to the documentation). The rest, including the Kazakh oil, did not concern the Iranians. The “dry” wells were considered just as worthy provided that the owners ensured the documented confirmation of the deliveries.

Judging by the fact that Nurlan Balgimbayev, a high-rank Kazakh official who, at the time, acted as the Transoil company president, and James Giffen were on the list of the accused, we can say that Kazakhstan supported the swap scheme at the highest political level.

The swap deals agreement was signed at the beginning of 1997. Simultaneously, the Mobil company that was responsible for all the delivery coordination started lobbying the lifting of the sanctions against Iran. However, the opposing lobby turned out to be stronger in the US. Thus, not only had the sanctions not been lifted, they were toughened and Mobile and its Kazakh partners had found their business in jeopardy.

Tabbah’s suit was a trial balloon set off to the London court on purpose (by the looks of it).  In London, they did not try to understand all the intricacies of the oil business with a touch of geopolitics. The case materials, however, turned up in the US where they started the investigation against the American participants of the deals. This investigation had later resulted in the Kazakhgate scandal.

Thus, for Mobil, the swap affair turned out to be a very expensive one. Bryan Williams III, the head of the former USSR countries purchasing department, was accused of unreported income and put in prison and the Mobil company itself merged with Exxon. Once, both corporations were a part of Standard Oil, the famous Rockefeller’s trust. So, a hundred years later, once again, they found themselves under the same corporate roof.

So, Exxon, the most powerful oil company, now joins the Kashagan consortium. The appearance of this “elephant” in the Kashagan “china shop” promised nothing good to the other project participants. At first, however, Exxon preferred to keep its distance from the “radioactive” asset inherited from the devil-may-care Mobil and did not seek to be part of its management.

In 2001, BP and Statoil decided to leave the project. The reasons for that still remain in the dark. The Kashagan Oil Bubble report mentions the technological problems such as “the difficulty of the project and the unresolved issues with the sulphurated hydrogen”. However, BP, at the time, was in the process of merging with AMOCO and ARCO (the crucial for its future US assets) which, unquestionably, made it vulnerable to possible accusations of participating in the peculiar Kazakh oil affairs.

The Big Pay Off 

The appearance of the private “collective operator” instead of the state company as the project manager could easily be explained by the desire of the Kazakh authorities to share the Kashagan risks with their partners. And the fact that the replacement of the management structure stripped them of the power to have any influence on the project was of little importance to them. At that point, they needed to find the “punching bag”, a private company prepared to run all the risks of Kashagan.

This role was assumed by the Agip company. In 2001, all the OKIOC powers and authority were given to the Agip Kazakhstan North Caspian Operating Company N.V. (Agip KCO). The Crude accountability report calls this unorthodox choice a “compromise alternative”. However, regardless of the participants’ motivations, this move meant a comprehensive revision of the actual Kashagan strategy. The thing is that the Eni company that had been working in Kazakhstan under its Agip brand name is most often associated with the US corporation Halliburton.

Unlike the oil companies oriented towards the result (the number of the produced and sold black gold barrels), the Halliburton corporation usually acts as a subcontractor. Such companies favor the process rather than the result and the open foundation pit is their form of life.

Halliburton is famous for the most senseless projects in the US history such as the Cam Rahn Bay in Vietnam that the company had been constructing during the war until the North Vietnamese forces came and brought the Soviet Pacific Fleet there. Thus, as a result of the Texan builders’ endeavors, the USSR got a warm-water port on the Pacific.

The nature of the Italian project managers’ and the Texan subcontractors’ association became known from a document leak. The story, however, ended after a couple of publications.

Anyway, the Kashagan project, by that time, had turned into a case of a grand “sawcut” – the fact that was later (quite officially) confirmed by the Kazakhs. There is more. In 2005, the Kazakhstan’s share was given to the Kazmunaygaz corporation that was supposed to control the expenditures. It chose to actively participate in the spending of the funds instead.

 The New Bosses  

We would not know what the end of the story could be had it not been for the financial crisis that caused the fall of the oil prices and made the consortium members to look at the future of Kazakhstan more attentively. In it, they saw an abyss.

One of the Wikileaks dispatches dated February 2008 says that the value of the project dropped by 24.5%. This was because of the increase of the expenditures that, during the four years of the grand “sawcut”, had grown from $8.7 bln to $57 bln. The state had humbly authorized this turning these funds into the subcontractors’ earnings. And only when the increase reached $136 bln, the authorities gave way and created… a new collective structure.

In 2009, there appeared the North Caspian Operating Company (NCOC) that differed from its former version by the stipulation that now each consortium member was responsible for their own particular part of the project and their own pool of subcontractors. This was reminiscent of the famous Krylov quartet. The difference from the fable was that each member could purchase the instruments independently using the common funds. The “collective work” resulted in the 2013 launch of Kashagan. The production, however, was soon suspended.

After that, the ExxonMobil team took over the command bridge of this sinking ship. This team knows only two models of management – the ExxonMobil one and the wrong one.

At the same time, China’s CNPC was already on the list of the shareholders. It bought the share previously belonging to ConocoPhillips. The Chinese oilers tended to trust the big and serious player. By that time, the Kazakh shareholders had turned into this vehicle’s “passengers” who could only hope to get contracts from their big bosses.

Kashagan’s Legacy

What conclusions can be made on the basis of the management structure and the oilfield development strategy analysis? Here is our view.

  1. The Kazakh government did not attempt to consider alternative scenarios when choosing the Caspian Sea development strategy. For instance, they did not calculate possible earnings that could have been received from the capture and world market distribution of the acipenserids endemic to the region. At the beginning of the 90s such a scenario could perhaps seem a “green utopia”, nowadays, however, it looks much more realistic compared to the unclear earning perspectives of the oil affair.
  2. Any attempts to implement an independent economic strategy will unavoidably meet the strong opposition on the part of the close (and not so close) neighbors. Formally, the era of imperialism and realpolitik has perhaps ended but, in the actual world, it is still very real and now plays a much more significant role than at the time of the cold war when it was clear who your allies and enemies were.
  3. Counting on a small player in the hope that it could balance the giants’ interests is futile. Usually, insignificant figures hide behind themselves big players whose interests are radically different from the national ones. They can, however, coincide with private interests of selected state officials.
  4. No matter what, the Chinese unavoidably appear on the list of the powerful players.

Whether we are right or wrong is up to the reader to decide.

See also Kazakhstan is Neither Kuwait nor Venezuela and The Kashagan Oil Bubble .


Add comment

Your e-mail will not be published. Required fields are marked with *