Special edition – subsoil use law

NOVELTIES IN SUBSOIL USE LAW

This review covers new amendments to the legal framework for exploration and production introduced by the Law on Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Subsoil Use dated 29 December 2014 (hereinafter – “the Law”).

The Law introduces a number of positive innovations and provides some specifications.

Along with amendments to the Law on Subsoil and Subsoil Use dated 24 June 2010, the Law also affects the following legislative acts:

• The Land Code;

• The Environmental Code;

• The Tax Code;

• The Code of the Republic of Kazakhstan on Administrative Offenses;

• The Law on the Main Pipeline.

• Overview of key changes is outlined below.

Terminology

The Law amends some older and introduces a number of newer terms and definitions to be used in the subsoil use sector, such as “under-studied subsoil area”, “auction”, “model contract for exploration”, “financial liabilities”, “physical volume of commitments”, “tender” and others.

Geological Information

Subsoil user retains the ownership right for geological information only for duration of the contract.

National companies performing state geological studies at their own expense are now considered as potential holders of geological information.

Geological information on vacant subsoil areas is available for review upon request of an interested person subject to statutory requirements on state secrets.

Geological information on subsoil use provided for exploration under simplified procedure should be divided into blocks.

Limited Priority Right

One of the landmark changes in this Law is limitation of the Government priority right. Previously, the priority right applied to nearly any disposal of rights to exploration and/or production of hydrocarbons and hard minerals or objects associated with subsoil use right. According to the changes made to Article 12 of the Law on Subsoil Use, the priority right is now limited only to subsoil areas, which are of strategic significance (so called strategic deposits). It should however be noted that the general consent of the competent body for disposal of subsoil use rights and objects associated therewith (under Article 36 of the Law on Subsoil Use) is still required.

Having said this, we would like to also note that notwithstanding the changes in Article 12 of the Law on Subsoil Use, no similar amendments have been introduced to Article 13 of the same Law, which sets forth the mechanism for exercising the government priority right.

Thus, Article 13 of the Law on Subsoil Use left the room for exercising the priority right with regard to any subsoil areas without exception. We believe that absent relevant practice this ambiguity may raise certain issues. On the one hand, the overall context and the spirit of the law suggest that requirements of Article 13 should refer to disposal of strategic deposits only. On the other hand, the letter of the law in this article suggests that the priority right may be exercised with regard to disposal of any subsoil areas (not necessarily strategic ones only). Hence, there is a risk that such ambiguity may lead to various interpretation of this important statutory requirement in the future.

We have made formal inquiries with relevant government authorities (including the competent body) in order to get official interpretation. We will keep you advised on further developments.

Strategic Deposits

In order to ensure sustainable development and security of the Republic of Kazakhstan certain subsoil areas are recognized as strategic deposits.

List of strategic deposits as well as qualification criteria are approved by the Government of the Republic of Kazakhstan.

Fast-track Procedure For Granting an Exploration Right

The Law envisages a simplified procedure for granting a subsoil use right for exploration of understudied deposits (each deposit with no more than 10 blocks). Subsoil users who obtained a subsoil use right under the simplified procedure are released from local content obligations.

Under this procedure a subsoil user independently approves the project of exploration works and is not required to have a work program in place.

Auction As A New Method

The Law introduces a signature bonus based auction as a new method of identifying a tender winner. All other terms and conditions committed to by the winner when an auction is announced, remain intact and are automatically included in the contract for granting subsoil use right.

Cure Period For Contract Breach

Cure period for contract breach with respect to physical commitments should not exceed six months; with respect to financial commitments – three months; with respect to other terms of the contract – one month from the date of receipt of the written notice.

The above cure periods may be extended upon the written request of subsoil user.

Subsoil Use Right Assignment Restriction Applies Only To Hydrocarbons

According to the Law, restriction on assignment of subsoil use rights within two years after the contract effective date now applies only to hydrocarbons.

Concept Of Conversion Of Contract Area Introduced

Subsoil user exploring solid minerals is entitled to apply for permission to convert the contract area by isolating certain areas/blocks for further exploration or production.

Oil Accounting Information System

Oil accounting information system is designed for automated collection, processing, storage and use of the information on the oil volume of production, manufacture, preparation, processing, transportation, storage, sale, shipment, loss, importation into the territory of the Republic of Kazakhstan and export from the territory of the Republic of Kazakhstan.

An Oil Spill At Sea

The Law introduces three levels of oil spills at sea and further elaborates on subsoil users’ actions during oil spills.

Subsurface user undertaking oil operations must approve plans to prevent and eliminate oil spills at sea.

Other Changes

The Law also outlines in detail the procedure for contract area assignment into trust management, which previously was rather unclear and raised certain issues.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please seek a lawyer for a specific advice. Please note that Kazakhstan is an emerging economy and its legislation and legal system are in constant development. Should you have any questions or would like to discuss matters addressed in this Client Update, please contact us.