Kazakhstan freezes Kashagan consortium assets over $4.9 bln environmental fine

Asset Freeze Imposed Over Environmental Fine

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.

The decision, dated July 21 but disclosed only three days later, follows a prolonged back-and-forth between the government and NCOC. It remains unclear exactly what types of property or transport assets were affected.

Legal Threats and Liability

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

In 2023, a local court imposed a 2.3 trillion tenge ($4.9 billion) fine on the consortium for improper sulfur storage. The fine, along with a dispute over contract provisions between the government and NCOC, has become a central issue in broader arbitration proceedings.

Broader Arbitration Dispute

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

On July 20, Kazakhstan's Kazmunaigas, which holds a 16.88 percent stake in NCOC, offered to pay its portion of the environmental fine, Bloomberg reported. The international partners refused.

The consortium's ownership structure 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%

UNCITRAL Tribunal and Sovereign Rights

A UNCITRAL tribunal rejected Kazakhstan's request to lift restraining measures on enforcement of the environmental fine, which remain in place while arbitration is pending.

Kazakhstan's Ministry of Justice responded that the UN 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—approved via referendum on March 15 and in effect since July 1—domestic laws take precedence over international obligations.

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

Background on Sulfur Storage Dispute

In 2022, Kazakhstan levied the fine alleging NCOC breached its sulfur storage permits. Sulfur, a toxic byproduct of oil extraction, can be used as a fertilizer component. NCOC sells most of its sulfur to Chinese importers, but a temporary export ban led to excessive stockpiling in summer 2022.

Pattern of Environmental Fines

Analysts argue that environmental fines have historically been used by Kazakhstan's government as political tools to push for better contract terms:

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

Contract Terms and Renegotiation Efforts

The Kashagan deal was struck in 1997 and amended in 2008. Like the Karachaganak agreement, it is a production sharing agreement (PSA), which legal experts consider favorable to 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."

President Kassym-Jomart Tokayev has repeatedly urged the government to renegotiate better terms for PSAs and joint venture contracts concerning the country's largest oil fields. Analysts report ongoing talks about contract overhauls for the three largest fields, including Tengiz and Karachaganak. Together, these fields produce the vast majority of Kazakhstan's oil and are major contributors to the national budget in tax revenue and hard currency.