Market, financial and regulatory uncertainty

We reduce the uncertainty of the subsurface (volumes, flow rates, recovery) with data: appraisal wells, studies, experience of development (Geological and technical uncertainty of a project). External uncertainty is different by nature. No study will make the oil price in five years more exact, and a government's decision on a tax does not depend on the quality of the reservoir model. We can only describe it, by a range, a distribution or scenarios. We can pass part of it to others for a fee, and we can allow for it in the decision.

External risks have three common features. They are common to all the projects of a company: a fall of the oil price hits all the fields at once, so diversification across areas does not protect against it (diversification of a company). They are linked with each other: contractors charge more when oil is expensive, the tenge strengthens when oil is expensive, and taxes grow together with the price. They do not disappear with time: technical uncertainty turns into knowledge by the end of development, while the price and the taxes stay unknown until the last year.

Oil is a world commodity: its price is made by the demand and supply of the whole world, and its changes reach almost any field at once. The demand for oil is derived: what we need is not oil itself but petrol, diesel, aviation fuel and raw material for chemicals. In a crisis, when fewer goods are carried and fewer people fly, demand falls within a few months. Efficient engines, electric cars and gas instead of oil change it slowly, over years. Supply depends on the decisions of the producing countries. These include the agreements of OPEC+ (the Organization of the Petroleum Exporting Countries and the countries that joined its decisions, among them Kazakhstan). Supply also depends on investments of past years, accidents, wars and sanctions.

The main reason why the price swings so much is that demand and supply react weakly in the short term. In other words, the price elasticity is low (consumption changes little when the price changes). The cars, aircraft and factories are already bought, and the wells are already drilled. To change equipment and habits, or to bring in new fields, takes years. So, while consumers and producers have not had time to adapt, even a small shortage or surplus of oil moves the price by tens of per cent. With time the reaction grows, and the price comes back. The mechanism and the calculation of the jump in price when supply is disrupted are covered in the lesson on the history of the oil industry. For the assessment of a project, the consequence matters: a high price itself creates forces that lower it, and a low price does too. The model of mean reversion of the price (the section below) is based on this.

Grades and delivery points. Oil is sold at the prices of benchmark grades (the standard oils that other prices are quoted against), such as Brent, WTI (West Texas Intermediate) and Dubai, with a premium or a discount. The difference, the differential, depends on quality (light low-sulfur oil is dearer, because it gives more light products), on the distance to the buyer and on what the market lacks now. It also changes. According to the National Bank's estimate, in September 2026 the Kazakhstan blend CPC Blend was sold at a premium of US$2–4 to Dated Brent (the price of physical North Sea oil for loading in the next few weeks), although it usually sells at a discount (MunaiHub weekly review, September 2026). The price at the field, the netback, is found by subtracting transport and the discount (price and revenue).

Gas. There is no single world price of gas: in Europe, Asia and North America it can differ several times over. The reason is transport. Gas goes by pipeline, or it is liquefied and carried by tankers, and per unit of energy this costs much more than carrying oil. In ordinary conditions, gas with the same energy takes about a thousand times more volume. The price risk of a gas project is largely set by the contract. If the gas price is tied to oil or to oil products, the project gets the volatility of oil. If it is tied to the exchange price of gas, it gets the volatility of its regional market. A take-or-pay condition, under which the buyer pays for an agreed share of the volume even if it did not take it, protects the seller from a fall of demand. A long contract with a fixed formula reduces the price risk, but leaves the risk that the formula will turn out unfavourable.

In Kazakhstan the price of gas for many producers is not set by the market. The state, through the national operator, the national gas company QazaqGaz, has a pre-emptive right: it can buy first the raw and commercial gas that subsoil users sell. The price covers the costs of production, processing and transport plus a profit margin of no more than 10%. For the gas of new areas under contracts after 1 January 2023, the price is set by a formula tied to the export price and to the domestic price caps. There are exceptions, for example the gas of gas and gas-condensate fields (the Law “On Gas and Gas Supply”, Article 15). The Ministry of Energy sets the wholesale price caps of commercial gas on the domestic market (the same law, Articles 6 and 20). The rules of the Ministry of Energy are on the pages of the “Legislation” section of MunaiHub. A regulated price reduces the price risk but replaces it with a regulatory one: the state can change the formula.

We measure the changeability of the price by the volatility: the standard deviation (the usual measure of spread) of the logarithmic returns $\ln(P_t/P_{t-1})$ over a chosen period. A logarithmic return is the logarithm of the ratio of two successive prices; for small changes it is simply the percentage change. We take logarithms because the price changes in per cent, not in dollars: a rise from 50 to 60 and a rise from 100 to 120 US$/bbl are the same relative change. Volatilities over different periods are brought to a year.

In calm years the volatility of Brent is about 20–30% a year, and in crises it is two to four times more. The figures of the table show something else too: in one year the price can fall several-fold (2008, 2020), or more than double (2026). A project designed for a “flat” price will go through several such years during its life.

The forward curve. Besides the price “today”, the spot price, the market gives delivery prices for future dates. They come from futures (standard contracts traded on an exchange) and from forward contracts (private agreements to deliver later at a price fixed now). The set of these prices by delivery date is called the forward curve. If the future prices are higher than the spot price, the curve is called contango, and if they are lower, backwardation.

Backwardation can be very steep. According to EIA data, on 9 October 2026 the spot price of Brent was US$130.03/bbl, and the December Brent futures on the ICE exchange (Intercontinental Exchange) cost about US$104 that evening (MunaiHub weekly review). The market was paying a quarter more for oil now than for oil in two months.

To go from one price scenario to a distribution of NPV, we need a model of how the price can change from year to year. There are two simple models. In the random walk, each year the price gets a random push, and the push stays forever: the uncertainty grows without limit. In mean reversion, the deviation of the price from its long-term level partly disappears each year, because a high price causes more production and savings, and a low price causes less investment.

Costs follow the price. When oil gets dearer, companies drill and build more, drilling rigs, vessels and crews are busy, and contractors raise their rates. After a year or two new equipment comes to the market, and the rates fall. When oil gets cheaper, services get cheaper after it, with a delay. This link partly reduces the price risk, and we need to set it explicitly in scenarios (consistent scenarios).

The tenge exchange rate. Oil is sold for dollars, but a large part of the costs (wages, local services, electricity) and the taxes are paid in tenge. A weaker tenge reduces these costs in dollars and improves the dollar flow of an exporter. A stronger tenge makes it worse. With time, local prices rise after the weakening of the currency, and part of the gain disappears (inflation and currency). For a company that sells on the domestic market for tenge but owes in dollars, the picture is the opposite: a weaker tenge increases its debt in tenge (currency risk).

The devaluations (sharp falls of the tenge) of 2009 and 2015 came after a collapse of the oil price. On 3 July 2008 Brent cost US$143.95/bbl, in August 2014 it averaged about 100, and on the days of the devaluations it was 44–46. February 2014 shows that the rate does not depend on oil alone: Brent then cost $109/bbl. The link with oil works in the other direction too: in 2026, when oil got dearer, the tenge strengthened, from 505.53 tenge per dollar on 2 January to 452.12 on 17 October, by 12% (the official rates of the National Bank). The republican budget for 2026 was calculated at a price of $60/bbl and a rate of 540 tenge per dollar, and the draft budget for 2027 at $70/bbl and 480 tenge (the forecast for the budget of 2026–2028; MunaiHub weekly review, September 2026).

Inflation. Expected inflation by itself hardly affects the real NPV, if the flow and the rate are consistent. The risk comes from unexpected inflation and from its unevenness. The tax deductions for depreciation are not indexed, long contracts with a fixed price lose their real value, and the oil price does not have to rise together with local prices (where inflation is not neutral).

The investor knows, before the investment decision, the taxes and duties, the requirements for safety, environmental protection and gas flaring, and the rules for purchases from local suppliers and for deliveries to the domestic market. It puts them into the cash flow like any other costs. What creates uncertainty is something else: the conditions may change when the money is already invested and one cannot leave the project without loss.

Why do conditions change? Before investing, the investor can choose another country. After that, the platform and the pipeline cannot be taken away, and the bargaining power passes to the state. Conditions that suited both sides at a price of $50/bbl seem to the state too soft at $100. This is called the “obsolescing bargain”: the deal goes out of date. So taxes are most often raised when oil is expensive. A windfall tax is introduced (it takes a share of the extra income that high prices bring), and rates and duties are raised. Tax breaks are given when oil is cheap and there is not enough investment. A budget deficit can raise taxes with no link to the price.

• Taxes and duties: rates, bases, scales, deductions; new windfall taxes.
• The product market: export duties and bans, compulsory deliveries to the domestic market, regulation of the prices of gas and oil products.
• Technical requirements: new standards of safety or environmental protection, applied retroactively to facilities that already operate; a ban or a limit on gas flaring (associated gas).
• Contract and law: revision of the terms, limits on selling interests, and in the extreme case the termination of the contract or nationalisation.

A stabilisation clause is a condition of a contract or a law that protects the investor from changes that make its position worse. Freezing clauses apply the law as of the date of the contract to the project. Economic equilibrium clauses let the changes apply, but the state must restore the investor's economic position, by compensation or by changing other terms. A clause does not make the risk zero. It usually does not extend to safety and to the protection of nature and health, and its enforcement may need a long international arbitration (a case heard by independent arbitrators).

In Kazakhstan the Subsoil Code protects signed contracts from changes of legislation that worsen the results of the subsoil user. This does not apply to national security, defence, environmental safety, health care, taxation, customs regulation and the protection of competition (Article 36). So the tax terms of most contracts change together with the Tax Code. A stable tax regime is kept by production sharing agreements concluded before 1 January 2009 that passed the compulsory tax examination, and by contracts approved by the President, for the taxes whose stability is directly stated in them (Article 755 of the Tax Code; in more detail). An example of a change already adopted: from 2027 the rate of the mineral extraction tax (MET) on oil will be taken from a matrix “annual production × world price”, and the oil of the payers of this tax is released from the rent tax on export (how the regime is changing).

Changes of taxes are most often linked with the price: a windfall tax is introduced when oil is expensive. Then the regulatory risk cuts off exactly the good outcomes, and in a calculation with one price it is not seen at all.

A project can be financed with the shareholders' money or with debt. Debt is cheaper than equity (the shareholders' own money; see the cost of capital), but interest and repayment are paid on a schedule at any oil price. So debt is financial leverage: it raises the return of the shareholders when the project earns more than the rate on the loan, and it lowers the return when the project earns less.

The lender looks at something else: whether there will be enough money for the payments of each year. The main measure is the debt service coverage ratio (DSCR). It is the cash flow available for debt service (CFADS), which is the revenue minus operating costs and taxes, divided by the interest and repayment of the year. The loan agreement contains covenants: obligations of the borrower, for example to keep the DSCR not below 1.2–1.4. The level is set in the agreement, and it depends on the lender and the project. If a covenant is broken, the bank may forbid dividends, demand early repayment, or demand extra collateral (assets pledged to the bank).

• The interest rate. With a floating-rate loan, the payments grow together with the market rates: a rise of the rate by 3 percentage points on a debt of 90 million dollars costs 2.7 million dollars a year extra. A fixed rate moves this risk to the lender for a fee.
• Refinancing. If the loan is shorter than the project, it will have to be replaced by a new one, maybe in a year of low prices, when banks are cautious and charge more.
• The currency of the debt. A dollar loan with dollar revenue is a natural protection. With revenue in tenge, a weaker tenge increases the debt in tenge.
• Leasing. Leased plants are also a form of debt: the payments go into operating costs and bring the economic limit closer at a low price (to buy or to lease).

Partners. Fields are more often developed together, and each participant has its own cost of capital, tax position, attitude to risk and price forecast. A small partner needs quick money, a large one needs reserves for years, and a state company must also meet its plans for production and purchases. The same figures give them different NPVs. Disagreements delay decisions. A participant who has not paid its share of the costs on the operator's request (a cash call) puts the whole project at risk. A joint operating agreement sets in advance how the participants vote, who pays for the one who refuses, and how they leave the project (working interest and partnership).

An NPV calculation with one scenario silently assumes that decisions are taken at once and forever. In reality a company can put off development until the price becomes clearer, start with a first phase and expand it if it goes well, or stop a field earlier at a low price. The right, but not the duty, to take a decision later, when more is known, is called a real option. Its value grows with uncertainty: the wider the spread of the price, the more is gained by the one who can avoid putting money into a bad outcome (Decision trees and the value of information).