Kazakhstan freezes NCOC assets over $4.9 bln environmental fine on Kashagan oil field

Kazakhstan's Ministry of Justice has imposed a freeze on property and transport assets owned by the North Caspian Operating Company (NCOC), the consortium developing one of the country's largest oil fields, citing failure to pay a massive environmental fine. The move could mark the first step in an acrimonious fight with foreign oil majors.

Background of the Dispute

The July 21 decision was disclosed only three days later, and it remains unclear exactly what kind of property or transport assets were affected. The freeze follows a back-and-forth between the government and NCOC, a collection of international oil companies drilling for oil at Kashagan, an offshore field in the Caspian Sea.

Also on July 21, according to Reuters sources, Kazakhstan's Ministry of Justice informed NCOC's managing director Giancarlo Ruiu that he would be held responsible for "administrative and criminal liability for non-compliance."

The Environmental Fine

In 2023, a local court imposed a 2.3 trillion tenge ($4.9 billion) fine on the consortium for improper sulfur storage. The fine, alongside a dispute over several provisions in the contract between the government and NCOC, became a central issue within much larger arbitration proceedings.

Kazakhstan's government claims the conditions of the Kashagan contract are unfair and is now seeking a recalculation of costs and a higher share of profits. According to sources familiar with the arbitration proceedings, the claim is worth approximately $165 billion.

Consortium Response and Ownership Structure

On July 20, Kazakhstan's Kazmunaigas, which owns 16.88 percent of NCOC, offered to pay its portion of the environmental fine, insiders told Bloomberg. The international partners in the consortium, however, refused.

The ownership structure of NCOC is as follows:

• Shell – 16.81%
• Eni – 16.81%
• TotalEnergies – 16.81%
• ExxonMobil – 16.81%
• Kazmunaigas – 16.88%
• CNPC (China) – 8.33%
• Inpex (Japan) – 7.65%

Legal Proceedings and Sovereign Rights

Given the complex and lengthy legal dispute, a UNCITRAL tribunal rejected Kazakhstan's request to lift restraining measures on the enforcement of the environmental fine. These measures remain in place as long as the arbitration between the parties is pending.

Kazakhstan's Ministry of Justice responded that the United Nations tribunal cannot limit its sovereign rights to enforce the fine.

"An interim order in a commercial arbitration proceeding under UNCITRAL rules does not have automatic effect in Kazakhstan and does not limit the state's exercise of its sovereign powers to protect the environment and public interests," an official note stated.

Under Kazakhstan's new Constitution, hastily approved via referendum on March 15 and in force since July 1, domestic laws take precedence over international obligations.

The foreign companies, meanwhile, stated that they "consider the sulfur fine to be without any basis and are contesting it by all available means."

Sulfur Storage Issue

In 2022, Kazakhstan levied the fine alleging that NCOC had breached its sulfur storage permits. Sulfur is a toxic byproduct of oil extraction and can be used as a component for fertilizers. NCOC sells most of its sulfur to Chinese importers, but a temporary ban on exports led to excessive amounts being stored in addition to the existing stockpile in the summer of 2022.

Historical Context and Political Analysis

Analysts argue that environmental fines have historically been used by the government of Kazakhstan as political tools to push for better conditions or revisions of existing agreements.

• 2011: Kazakhstan's government threatened an environmental fine against Karachaganak, a major gas and condensate field. The consortium sold off a 10 percent stake to Kazmunaigas, and the fine was dropped.
• 2018: The foreign consortium operating Karachaganak agreed to pay Kazakhstan $1.1 billion in compensation to end all existing disputes.
• January 2026: The government once again demanded an additional $4 billion from Karachaganak.

The Kashagan Contract

The Kashagan deal was struck in 1997 and further amended in 2008. The contract, much like the one signed for Karachaganak, is a production sharing agreement (PSA), which legal experts deem favorable toward private investors.

According to the International Consortium of Investigative Journalists, Kazakhstan's 2023 arbitral claim stated that NCOC "currently receives 98 percent of all post-Priority Payment revenue from oil production."

Kazakhstan's President Kassym-Jomart Tokayev has repeatedly urged the government to renegotiate better terms for the PSA and joint venture contracts concerning the largest oil fields.

According to analysts, there are ongoing talks of contract overhauls for the three largest oil fields, including Tengiz and Karachaganak. Together, these fields produce the vast majority of Kazakhstan's oil and represent major tax and hard currency contributors to the country's budget.