Do You Plan on Transitioning to a Model Contract? Here’s a Snapshot of the Circumstances under Which Current Oil and Gas Related Contracts Apply for the Model Contract Regulation

With the enactment of the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use” on 29 June 2018 (hereinafter referred to as the “Code”), more and more currently operating oil and gas companies are raising the issue of possible transition to the terms of the model contract. The Code has vested current subsoil users with the right to opt for the model contract whenever they wish to, however there are certain cases when current subsoil user will have to choose a model contract.

We believe that when considering this matter of transition, our clients should get a thorough research and understanding done. There are pros and cons to this transition in which some of the provisions can positively affect the activities of subsoil users, while others limit them. Prior to choosing new regulation, it will be essential for current subsoil users to make calculations of certain contractual commitments since the Code sets forth the respective amounts of the commitments such as Kazakhstan citizens’ training, research & scientific development, social development of the region. It could happen that the amounts set in the current contracts would be lower than those set by the Code.

1. Mandatory transition to the Code and Model Contract’s regulation

Current subsoil users will have to make transition to the model contracts in the following cases:

1.1 When extending the exploration period

Subsoil users carrying out hydrocarbon exploration activities under contracts concluded prior to the enactment of the Code are entitled to a one-off extension of the exploration period for no more than 3 years. When applying for the extension the subsoil user must supplement the application with a duly signed model contract for combined hydrocarbon exploration and production.

One-off extension in this case will work subject to:

• Subsoil user submits the application no later than 29 December 2019

• Absence of violations of contractual commitments

• In an event where trial production was carried out prior to the extension application submitted by the subsoil user, the duration of such trial production should not have been more than 3 years

1.2 When exploration operations have been already completed

Subsoil users who have completed exploration activities under subsoil use contracts concluded prior to the enactment of the Code will conclude model production contract subject to:

• Subsoil user files the application within the validity period of the contract or within 12 months after its expiry

• Subsoil user has not entered into a model contract before the application date

• Subsoil user has approved reserves calculation and has undergone expert review

• Absence of violations of contractual commitments

If under the initial contract there has been a discovery of two or more hydrocarbon fields, the subsoil user is entitled to conclude one production contract or separate contracts for each field.

If the initial geological reserves exceed 100,000,000 tons of oil or 50,000,000,000 cubic meters of natural gas, subsoil user will have to undertake one of the following additional commitments:

• Creation of processing facilities

• Modernization or reconstruction of existing production facilities

• Modernization or reconstruction of existing processing facilities

• Hydrocarbons processing in Kazakhstan based on contractual terms

• Implementation of another investment project or local social and economic development project

2. Voluntary transition to the Code and Model Contract’s regulation

2.1 During exploration operations

Subsoil users engaged in exploration of hydrocarbons under contracts concluded prior to the enactment of the Code have the right to choose one of the following options:

a) Model contract for combined exploration and production

In this case the applicant must meet the following criteria at the submission date:

• Absence of violations of contractual commitments

• Fully pay for the signature bonus under the current contract

• Approve exploration project and undergo expert review

b) Model production contract

Subsoil users engaged in exploration for hydrocarbons under contracts concluded prior to the enactment of the Code are entitled to conclude model production contract subject to:

• Subsoil user files the application within the validity period of the contract or within 12 months after its expiry

• Subsoil user has not entered into a model contract before the application date

• Subsoil user has approved reserves calculation and has undergone expert review

• Absence of violations of contractual commitments

If under the initial contract there has been a discovery of two or more hydrocarbon fields, the subsoil user is entitled to conclude one production contract or separate contracts for each field.

If the initial geological reserves exceed 100,000,000 tons of oil or 50,000,000,000 cubic meters of natural gas, subsoil user will have to undertake one of the following additional commitments:

• Creation of processing facilities

• Modernization or reconstruction of existing production facilities

• Modernization or reconstruction of existing processing facilities

• Hydrocarbons processing in Kazakhstan based on contractual terms

• Implementation of another investment project or local social and economic development project

2.2 When carrying out production operations

Subsoil users engaged in hydrocarbon exploration activities under contracts entered into prior to the enactment of the Code (the current contract) are entitled to conclude model production contract subject to the following conditions:

• Subsoil user has approved field development project and has undergone expert review

• The production period is determined on the basis of the field development project, but does not exceed the term of the existing subsoil use contract

• Investment commitments under the current contract (if any) will be copied to the full extent into the model contract

• Absence of violations of contractual commitments

In the event there are two or more hydrocarbon deposits fixed in the existing subsoil use contract, the subsoil user will be entitled to cover such fields within one production contract.