The shareholders of the Kashagan project were aware of the risks associated with potential fines for exceeding sulfur storage norms at the field. They discussed this issue, referencing the case of Tengizchevroil, which paid 37 billion tenge for a similar violation in 2007. However, it seems that the consortium members decided to postpone sulfur processing, believing that under low price conditions, the project would not be profitable. In 2022, the Ministry of Ecology and Natural Resources imposed a fine on the operator of the field, North Caspian Operating Company (NCOC), amounting to 2.3 trillion tenge (over $4.7 billion at current exchange rates). Currently, the company is trying to contest this decision in court. It turned out that the shareholders were aware of the potential consequences even before the fine was imposed.
Permanent sulfur storage
According to information published by Bloomberg, the Ministry of Ecology provided the court with documents containing internal letters and presentations from NCOC participants. These materials confirm that project partners had long been aware of the risks of fines for non-compliance with sulfur storage norms in Kazakhstan but took no action to address the issue, citing high costs.
It is worth noting that in 2022, the Ecology Department of the Atyrau region conducted an inspection of NCOC's production facilities and identified several violations.
In particular, it was found that at the sulfur storage site located on the territory of the Bolashak oil and gas preparation plant, more than 1.7 million tons of sulfur had accumulated by November 1, 2022, while the storage permit allowed a maximum of 730 thousand tons. Thus, the operator exceeded the quota by more than two times.
NCOC was only permitted temporary storage of sulfur, but since the start of sulfur block operation, the raw material has not been exported, meaning that all volumes remain in storage without removal, as experts note. In its annual report, the company stated that from 2018 to 2021, it exported between 1 and 1.2 million tons of sulfur per year.
The operator was required to cover the sulfur stored outdoors with a film, which was not done. Ecologists point out that with open storage, atmospheric precipitation or humidity can lead to the formation of hydrogen sulfide due to moisture entering the cracks in the sulfur combined with oxygen and organic substances.
The loading and transportation of sulfur were carried out without using dust suppression. Crushed sulfur was transported by road to the Bolashak railway station without covering, which contributed to the spread of sulfur dust in the air.
Furthermore, NCOC did not fully comply with the environmental protection action plan within the established deadlines. For example, commitments to increase water reuse in production processes were not implemented. Ecologists also found that the company discharged wastewater into an evaporation pond without prior treatment and the necessary environmental permit.
As a result, the Ecology Department imposed a fine on the Kashagan operator, but NCOC decided to contest it in court. During the court proceedings, the company claimed that it had all the necessary permits for sulfur storage, the volumes of which had been increasing annually from 2016 to 2022.
The documents presented in court do not refute this position but show that even before 2022, project partners were aware of the possibility of fines being imposed.
In 2017, one of the consortium members, Eni, pointed out the risk of exceeding sulfur storage limits. By the end of 2020, NCOC warned its partners that the new Environmental Code, which came into effect in 2021, would increase the risk of fines. According to Bloomberg, Eni managers proposed to implement a sulfur processing project for export to international markets; however, other shareholders, such as ExxonMobil, TotalEnergies, CNPC, and Inpex, did not support this idea, while KMG was still formulating its position.
Doubts in the government?
According to documents available to the editorial office of Exclusive.kz, NCOC proposed that shareholders include funding for the sulfur processing project in the budget for the next year to begin exports in 2021.
The project envisioned processing 1.2 million tons of sulfur per year, with a duration of implementation of 2 to 3 years.
However, shareholders doubted its profitability, citing the decline in the sulfur market and high transportation costs, making the project economically unfeasible.
The parties also noted that there was a potential risk of environmental fines but considered it insignificant, believing that there was no threat of punishment.
Experience gained from the TCO sulfur storage fines case at Tengiz suggested to participants that the sulfur storage permit issued to NCOC had a significant margin of safety. In 2020, a permit was issued for the storage of 720 thousand tons of sulfur, while only 69 thousand tons were actually shipped. Moreover, the proposed fine could turn out to be "insignificant," as it was in 2007 with TCO, when the fine amounted to $0.8 billion,” the documents state.
According to the Production Sharing Agreement (PSA) for the North Caspian project, consortium members are obliged to individually manage their share of hydrocarbons and by-products, including sulfur, extracted from the field.
Companies must ensure reliable and uninterrupted methods of transporting and selling their products, avoiding fines and potential disputes with authorities. Fines for storing sulfur above permissible norms in Kazakhstan can reach $3,200 per ton, as stated in the documents.
Sulfur blocks were supposed to be processed and granulated; however, due to operational difficulties, this decision was ultimately deemed unfeasible. To reduce the risks of environmental fines, NCOC receives a special permit from the Ministry of Ecology each year, allowing it to continue storing block sulfur in a specialized zone.
In the future, such permits will be issued on the condition of reducing sulfur storage volumes due to the introduction of stricter environmental standards in accordance with the new Environmental Code, which came into effect on July 1, 2021.
Therefore, NCOC proposed to start the process of grinding and exporting about 1.2 million tons of sulfur over three years, starting from the first quarter of 2022, to minimize the risks of environmental fines and sanctions for storing block sulfur. However, consortium members did not support the operator and decided not to invest in the processing and export of sulfur.
“In fact, 2.3 trillion tenge is not such a significant amount for Kashagan shareholders, who receive 94% of all revenue ($10 billion), while the republic receives only 6% (3.5% - royalties, 2% - profit oil, 1% - other taxes). Thus, this fine amounts to less than half of the annual cash flow of the shareholders. Moreover, it is tied to the MRP of 2022, and now it is already 2026,” commented Nurlan Zhumagulov, director of the public foundation "Energy Monitor."
In his opinion, in 2008, Kashagan shareholders deceived the government during the revision of the PSA and the postponement of the start of commercial oil production.
“They promised that at a price of $120 per barrel of oil, they would pay royalties (from 3.5% to 18%), but in 17 years, oil has never risen above $120, and full-scale development of Kashagan has been completely forgotten. In Western countries, concealing environmental facts can have much more serious consequences than a drop in stock prices, as there reputation is worth more than money,” the expert added.
In December 2025, a court in Astana rejected NCOC's appeal, but the decision has not yet come into force and can be appealed within two months.
Among the foreign shareholders of NCOC are companies Eni, ExxonMobil, Shell, and TotalEnergies (each with a 16.81% stake), CNPC (8.33%), and Inpex (7.56%). The Kazakh national company KazMunayGas owns 16.88% of the enterprise.
