Oil Major Shell to Pause Investment in Kazakhstan

Shell’s CEO said on February 5 that the company will pause its investment plans in Kazakhstan, in light of a recent legal defeat in an arbitration dispute with the government over alleged contractual violations.

Shell holds key stakes in consortia operating two of Kazakhstan’s largest oil and gas fields, Karachaganak and Kashagan.

In an earnings call with investors on Thursday, CEO Wael Sawan said that the initial loss and ongoing arbitration with the government “does impact our appetite to invest further in Kazakhstan,” Bloomberg reported.

Shell’s pause is apparently linked to an arbitration court issuing a partial ruling last week that could force the company alongside several oil giants to pay up to $4 billion to compensate for both contractual violations and alleged corrupt deals over the Karachaganak field, in northwest Kazakhstan.

Shell holds a 29.25% stake in Karachaganak Petroleum Operating, alongside Eni (29.25%), Chevron (18%), Lukoil (13.5%), and Kazmunaigas (10%). KPO has operated Karachaganak since 1997 under a production sharing agreement, a type of contract deemed favorable to foreign investors.

Previously, Bloomberg reported that the payment of the award could take the form of a drastic change in the revenue formula included in the Karachaganak PSA.

Yesterday, Sawan said that, in light of these developments, “we will hold until we have a better line of sight to where things end up.”

While the oil companies could still appeal the arbitral decision, the administering legal panel is expected to issue a final award in March, sources familiar with the proceedings told Vlast.

Background

A $3.5 billion lawsuit in domestic courts had raised allegations that the inflated expenses were the result of corrupt practices. The legal proceedings had frozen the construction of a gas processing plant near the field.

Cost disputes are not new at KPO: in 2010, the consortium settled a dispute by allocating a 10% stake to state-owned company Kazmunaigas, while in 2020 the companies cut a $1.3 billion check as part of an accounting revision.

Kazakhstan’s government is also involved in another, much larger arbitration dispute with Kashagan operators at the North Caspian Operating Consortium, where the claim amounts to $160 billion.

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