CPC - Caspian Policy Center

Research

a win for big oil in kazakhstan: surprise court ruling favors investors

A Win for Big Oil in Kazakhstan: Surprise Court Ruling Favors Investors

Recent Articles

Author: Akbota Karibayeva

08/21/2025

KMG Kashagan B.V.

In a startling reversal that favors large energy companies, an appellate court ruling negated massive fines for pollution levied by the government of Kazakhstan against the country’s largest investors.  On August 4, an Astana appeals court ruled in favor of the North Caspian Operating Company (NCOC) in its long-running legal battle with the government of Kazakhstan over a $4.2 billion environmental fine related to sulfur storage at the Kashagan oil field. The judgment reverses a major financial penalty imposed in 2022 and removes a key source of tension between the consortium of foreign oil majors and Kazakh authorities—at least for now.

The ruling marks a significant win for NCOC—whose members include KazMunayGas (16,88%), Eni (16,81%), Shell (16,81%), ExxonMobil (16,81%), TotalEnergies (16.81%), CNPC (8,33%) and INPEX (7,56%)—and follows a July 2025 supreme court decision to return the case to a newly constituted appellate court. While the consortium continues to face broader arbitration claims from Kazakhstan totaling as much as $160 billion, the sulfur dispute had become a lightning rod for broader concerns about legal uncertainty and environmental enforcement in Kazakhstan’s strategic energy sector.

The Sulfur Case 

Kazakhstan’s initial fine—2.3 trillion tenge, equivalent to $5.1 billion in 2022 or $4.2 billion at current exchange rates—stemmed from an environmental inspection alleging that NCOC had unlawfully stored sulfur in open-air conditions at the Kashagan site, in violation of domestic law. NCOC denied wrongdoing, arguing its sulfur handling procedures met both Kazakhstan’s regulatory standards and international best practices. After a court initially sided with NCOC in 2023, the fine was reinstated by a lower court later that year, triggering multiple rounds of legal and political maneuvering.

In 2024, the consortium floated a proposed settlement involving $110 million in additional social investments and supplemental payments tied to liquefied petroleum gas supply—reimbursable under the Kashagan production sharing agreement (PSA). The government did not officially respond, and the case remained unresolved until the appellate court’s August 2025 decision in NCOC’s favor.

This is not the first time environmental violations have been used as leverage in negotiations between Kazakhstan and its international energy partners. In 2014, NCOC faced a $737 million fine for pipeline corrosion at Kashagan, later reduced following assurances of timely project resumption. Similar pressure tactics preceded KazMunaiGaz’s acquisition of a 10% stake in the Karachaganak field in 2011, after regulatory disputes with the Karachaganak Petroleum Operating (KPO) consortium. These episodes have reinforced perceptions that Kazakhstan sometimes uses legal tools not merely for enforcement, but also to extract concessions or restructure relationships.  This latest case comes as Kazakhstan seeks to renegotiate current PSAs on more favorable terms. 

PSA Arbitration 

The appeals court’s ruling might temporarily ease investor concerns over arbitrary enforcement, but the broader legal and political contexts remain fraught. NCOC still faces a $160 billion arbitration claim filed by Kazakhstan in 2024 at the Permanent Court of Arbitration in The Hague, alleging that consortium members have withheld billions in profit by exploiting contractual loopholes in the Kashagan PSA, misreporting recoverable costs, and violating environmental and transparency obligations. The government also accuses certain operators of mismanagement and links some disputed transactions to alleged bribery schemes uncovered in a separate Swiss civil case, which claims that funds from Kashagan and Karachaganak were misused between 2006 and 2011 to bribe Kazakh officials and remunerate Eni executives and intermediaries.

President Kassym-Jomart Tokayev ordered talks in January 2025 to secure terms more favorable to Kazakhstan ahead of the current contract expirations—2033 for Tengiz, 2037–38 for Karachaganak, and 2037 for Kashagan—a process that officials were quick to assure would be handled with care. In mid-July, Prime Minister Olzhas Bektenov stressed that the government would not pursue abrupt or retroactive changes to existing PSAs, framing the upcoming negotiations as a measured effort to secure better terms without unsettling the country’s investment climate.

Under the current PSA model, foreign operators finance development and bear the initial technical and geological risks, then recover costs from early production revenues before profit-sharing with the state begins. This structure was designed in the 1990s to attract capital to technically complex fields like Kashagan, which has so far required nearly $60 billion in investment. However, its fiscal yield for Kazakhstan has been limited: between 2016 and 2023, the state earned just $1.1 billion through the profit-sharing mechanism, alongside roughly $4.3 billion in taxes, royalties, and other payments. According to the government’s own filing in the ongoing $160 billion arbitration, the consortium currently retains about 98% of post-royalty revenue from Kashagan, leaving Kazakhstan with roughly 2%—a lopsided split that has become a central grievance in the dispute.

The PSA framework has long been contentious. The original 1997 Kashagan deal, amended in 2008 to introduce priority royalty payments, increased Kazakhstan’s revenue share by only about one percentage point. Critics argue that such terms—combined with aggressive cost recovery claims—have disproportionately benefited investors. The government is now weighing additional revenue tools, including a 1% levy on hydrocarbon production costs or investments to fund R&D, projected to raise about $30 million annually.

The stakes are not only fiscal but also strategic. Kashagan is one of the most technically challenging oil projects in the world, with high reservoir pressures and high sulfur content requiring careful processing and disposal. Environmental scrutiny is warranted, but the repeated intersection of environmental enforcement with high-stakes fiscal disputes has fueled investor concerns over predictability and blurred the line between regulation and revenue extraction.

Environmental Enforcement

Kazakhstan has tightened environmental and contractual enforcement in recent years, with a noticeable uptick in penalties since early 2023. The Ministry of Ecology and regional departments have issued a string of sanctions across the sector: in 2023 alone, Karabatan Utility Solutions was fined 7.2 billion tenge (at 2023 exchange rates, ~$16 million); Tengizchevroil 2.8 billion tenge (~$6.2 million); KPO about 50 million tenge (~$111,000); and Caspi Neft 13.3 billion tenge (~$29.6 million) in July 2023 for hazardous waste storage. In 2024, NCOC paid approximately 12.4 billion tenge ($27.7 million) for flaring and for untreated water discharge.

Enforcement, however, remains uneven. The 2023 Karaturun methane blowout—widely regarded as one of the world’s largest, lasting 205 days—resulted in just $5.6 million in fines. Critics contend that major operators are selectively targeted and that enforcement spikes often track fiscal shortfalls. Proceeds from environmental penalties are not earmarked for remediation in affected regions like Atyrau or Mangystau but, instead, flow into the National Fund to offset budget deficits.

This disparity—combined with Kazakhstan’s reliance on PSA-based contracts and state-backed arbitration filings—fuels the perception that legal tools serve both regulatory and strategic purposes. While the sulfur case was resolved on procedural grounds in NCOC’s favor, the far larger $160 billion arbitration remains unresolved. With no fixed timeline—and such disputes often dragging on for years—NCOC could find growing incentives to settle ahead of PSA renewal talks.

For energy investors across Central Asia, the takeaway is not that host states are inherently adversarial, but that political and fiscal risk is increasingly channeled through formal legal processes. This dynamic might not deter firms already committed to high-value projects, but it will weigh heavily in structuring future deals, financing arrangements, and risk premiums.

Related Articles

A UN Bet on Almaty: Kazakhstan Steps Up as Central Asia’s SDG Hub

Central Asia: The Road From Baku to Belém via Ashgabat And Samarkand

COP 29: The Caspian COP

Caspian Green Energy Corridor Moves Forward

COP29: THE COUNTDOWN STARTS