Kazakhstan plans to open crucial talks with the shareholders of the Karachaganak oil field next year, with the scheduling contingent on the outcome of a pending $6.5 billion arbitration claim. The government is confident the London Court of International Arbitration will rule in its favor before year-end, a decision it believes will provide significant leverage to renegotiate the decades-old Production Sharing Agreement (PSA). The core objectives are to secure a higher state revenue share, establish a long-term development strategy for the brownfield, and have the project led by a single, government-approved company.

Arbitration Claim and Historical Context

The arbitration stems from allegations that the operator, Karachaganak Petroleum Operating (KPO), miscalculated reimbursable expenses from 2010 onward, reducing state profits. The claim, initially filed for $3.5 billion in 2023, was raised to $6.5 billion this year following an audit. This is part of a pattern of disputes; a 2011 settlement led to consortium shareholders ceding a 10% stake to state firm KazMunayGaz (KMG), and a 2018 disagreement resulted in a settlement over $1.1 billion and a revised profit-sharing formula. However, the 2018 agreement was not fully settled, prompting the current arbitration.

Financial Stakes and Negotiation Leverage

Karachaganak is highly profitable, currently delivering an internal rate of return of about 20%. Estimates suggest it could generate about $63 billion in net profit from 2025 until the PSA ends in 2037, with the state receiving the bulk. A successful $6.5 billion arbitration award would halve the estimated future profits for shareholders. Authorities anticipate a favorable ruling, which is final and unappealable, will strengthen their position to revise participation terms and boost state income, though they aim to balance this with maintaining Kazakhstan's appeal to future investors.

Operational Tensions and Development Challenges

Beyond finances, tensions exist over project management. The government is dissatisfied with co-operators Eni and Shell, particularly over delays in a final investment decision for a new associated gas processing plant. Currently, over half the field's produced gas is reinjected due to limited processing capacity, while some is processed in Russia's aging and vulnerable Orenburg plant. A dispute over construction costs for a new domestic plant led authorities to halt work and transfer project rights to KMG. Furthermore, the field faces mid-term challenges like replacing major equipment post-2028 and long-term strategic shifts as reservoir pressure declines, converting Karachaganak to a predominantly gas producer.

Future of the Consortium and PSA

Given the disputes, the current PSA is not expected to be extended beyond 2038. A post-2038 arrangement could involve the state taking a 50% stake, with the remainder held by an existing shareholder or a new partner. While authorities anticipate some shareholders may eventually exit, analysts note the field is a major revenue and reserve base, making a near-term sell-down unlikely. Any transaction would require government and participant approval due to pre-emption clauses. The shareholders, including Eni, Shell, Chevron, and Lukoil, largely declined to comment on the ongoing disputes.