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KAZAKSTAN: Environmental Charges Unlikely to Derail Kazakstan's Chevron Contract

Environment News Service
August 23rd, 2006

Kazakstanís largest oil concessionaire, Tengiz Chevroil, has been threatened with having its license withdrawn because of accusations it breached environmental legislation. Analysts say that in reality, the Kazak government will never take such a step, since this would provoke a major crisis in relations with the United States. The largest shareholder in Tengiz Chevroil is American oil giant Chevron.

Environmental Protection Minister Nurlan Iskakov recently announced that his ministry was to initiate legal proceedings against Tengiz Chevroil, to review and possibly revoke its extraction licenses for the Tengiz deposit should the company continue violating environmental regulations.

According to the ministry, over 10 million tons of sulfur have accumulated near the Tengiz oil field, as a by-product of crude oil extraction. Only 400,000 tons a year can be used for commercial purposes, and such concentrations of sulfur are harmful to the environment.

According to experts, once second generation extraction facilities are in place, the quantity of sulfur produced will increase even further, as production rises.

Experts say the build-up of sulfur is not a result of Chevronís or Tengiz Chevroilís environmental stance, but rather of the lack of a commercial market for such large amounts of the mineral.

The ministerís announcement, which has not yet evoked a reaction from Tengiz Chevroil, is merely an attempt to strengthen ecological controls, say observers, not to derail the contract that supplies one-fifth of all the oil produced in Kazakstan.

Since Tengiz Chevroil was the first joint venture in Kazakstan financed by western capital, it is seen as being of particular political importance as a symbol of the countryís success in attracting foreign investment.

As of October 2005, Chevron had invested over US$6 billion in Kazakstan.

Since Chevronís contract with Kazakstan is not publicly available, it is difficult to assess what responsibilities the company has for environmental protection, or how the situation will develop in the wake of the ministryís statement. But analysts think any disruption of the contract with Chevron would signal a rollback from Kazakstanís policy of diversifying its oil supplies. They say the countryís leadership will not jeopardize its relationship with the United States, the largest investor in the energy sector.

Tengiz Chevroil is a multi-billion dollar, 40 year project designed to produce and export several billion barrels of oil from the Tengiz field. Joint venture shareholders are the Republic of Kazakhstan, 25 percent; Chevron, 45 percent; Mobil, 25 percent; and LukArco, five percent. The project started producing oil in 1993.

In 2001, the partners opened the US$2.7 billion, 935 mile (1,505 kilometer) Caspian Pipeline Consortium pipeline from Tengiz to the Black Sea port of Novorossiysk.

The relocation of Sarykamys village, a US$73 million project funded by Tengiz Chevroil, began in 2004. More than 3,500 residents are expected to be relocated from their village south of the Tengiz oil field by the third quarter of 2006.

The village was determined by the government to be too close to the field, where an expansion of operations is underway, and the government has made the relocation mandatory.

The families are being relocated to new homes just inside the city of Atyrau, where many residents work in the local oil industry. Chevron says the relocation is being conducted according to World Bank guidelines, which include compensation, consultation and a grievance process. The first group of families moved in during the fall of 2005.

Some residents of Sarykamys have chosen to move to a more rural location, known as New Karaton. That project is expected to be completed by the end of 2006.

Tengiz Chevroil is now finishing construction of the second generation and sour gas injection projects. These two projects will increase Tengiz Chevroil's oil production capacity from the current rate of 13 million metric tons per year to between 20 and 23 million metric tons per year. The two projects are expected to be completed shortly.

{Published in cooperation with the Institute for War and Peace Reporting.}

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