Oil majors face multibillion-dollar liability in Kazakhstan’s Karachaganak dispute

(Bloomberg) – The oil majors that operate the Karachaganak field in Kazakhstan lost an international arbitration case, leaving them liable to pay as much as $4 billion in compensation to the country’s government, according to people familiar with the matter. 

The court has yet to determine the specific amount the field’s partners, led by Eni SpA and Shell Plc, will have to pay, the people said, asking not to be named because the the arbitration wasn’t public. The Karachaganak venture may still appeal the decision, they said.

The ruling is a partial victory for Kazakhstan, which was claiming more than $6 billion from the operators of Karachaganak. The tribunal upheld the government’s position that the companies recovered money from the state, through the field’s production sharing agreement, for cost overruns that were unapproved and other expenses that should not have been recoverable, the people said, asking not to be named because the arbitration wasn’t public.

External legal advice received by Kazakhstan suggests the arbitration ruling means the Karachaganak partners, which include Chevron Corp., Lukoil PJSC and KazMunayGas National Co. JSC, will have to pay back an estimated $2 billion to $4 billion, the people said. The mechanism for repaying this money will result in changes to the oil distribution formula in the field’s production sharing contract, they said.

The court of arbitration dismissed the oil companies’ attempt to partially cancel the case through the statute of limitations, the people said. The tribunal was held in London under Stockholm rules.

Kazakhstan’s Energy Ministry declined to comment on the confidential arbitration process. A Chevron spokesperson said the arbitration is progressing, without commenting further. KazMunayGas declined to comment. Shell, Eni and Lukoil didn’t immediately respond to requests for comment. Karachaganak Petroleum Operating BV, the joint venture that operates the field, didn’t immediately respond to requests for comment. 

Kazakhstan’s government sued the developers of Karachaganak, the country’s third-largest field, in 2023 over the cost deductions, with an initial amount of $3.5 billion rising substantially following further claims that included allegations that some expenses were inflated by corruption. Last year, the international companies proposed settling the dispute by building a plant that would process natural gas from the field for domestic use.

Kazakhstan’s largest oil and gas fields have long been dogged by disputes between international oil companies and the government. In addition to the Karachaganak arbitration, the government has made claims against the developers of the Kashagan field that topped $160 billion. The Kashagan partners are also facing a $5 billion environmental fine.

Partners in Karachaganak paid $1.3 billion in 2020 to settle dispute over revenue sharing. They have invested at least $31 billion in the development.

Pictured above: The Tengiz oil field in Kazakhstan, operated by Chevron, remains a critical supply source even as contractual disputes at the nearby Karachaganak field highlight the evolving legal and commercial landscape for international operators in the country.