The foreign shareholders of the North Caspian Operating Company (NCOC), the operator of Kazakhstan's Kashagan oil field, will initiate international arbitration to resolve a dispute over a massive fine. This move follows a series of unsuccessful legal challenges within Kazakhstan's domestic courts.

Dispute Over Sulphur Storage Fine

The arbitration stems from a 2.3 trillion tenge ($4.6 billion) fine imposed on NCOC in 2023 for alleged sulphur storage permit violations. A special administrative court in Astana rejected NCOC's latest appeal in December 2023, upholding the fine but granting leave for a further appeal. NCOC asserts its operations were compliant with Kazakh law and that the country's actions violate international investment treaties, specifically the obligation to provide fair and equitable treatment to investors. After failed attempts at dialogue, the shareholders concluded arbitration was their only recourse.

Broader Context of Investor-State Tensions

This arbitration adds to significant recent tensions between international oil companies and Kazakh authorities. It follows a January ruling where an arbitration tribunal upheld claims by Kazakhstan against the consortium operating the Karachaganak field. Separately, Kashagan's foreign shareholders face a colossal $160 billion arbitration claim from Kazakhstan, initiated in 2023 over delays in starting commercial production. The sulphur fine arbitration is expected to be filed under the Energy Charter Treaty, with the International Centre for Settlement of Investment Disputes (ICSID) likely serving as the forum.

Impact on Kashagan Field Development

The arbitration is expected to delay new investment commitments to increase oil production at Kashagan. A key project, Phase 2A, aims to raise output from 450,000 to 500,000 barrels per day but requires a new onshore gas processing plant. While NCOC has completed its front-end engineering design (FEED) work for offshore adjustments and a pipeline, the plant's FEED, managed by Qazaqgaz and Qatar's UCC Holding, is not yet complete. NCOC states a final investment decision on Phase 2A can only occur after the plant's FEED is finished. NCOC has estimated its portion of the work will cost $1.24 billion.

Shareholder Stance and Investment Pause

NCOC's foreign shareholders include Shell, Eni, TotalEnergies, ExxonMobil, China National Petroleum Corporation, and Inpex, with Kazakhstan represented by KazMunayGaz. Shell corroborated NCOC's arbitration statement, confirming it represents all foreign shareholders. Shell's CEO had previously warned in February of a pause on new investments in Kazakhstan due to the ongoing multibillion-dollar arbitration cases. The Kashagan project, governed by the North Caspian Production Sharing Agreement (NCPSA) expiring in 2041, has already seen over $50 billion in investment and is expected to remain in a cost-recovery phase until 2035, with Kazakhstan indicating an extension is unlikely.