Reduction of the amount of liabilities for nonperformance of obligations under subsoil use contracts
Model contracts for the exploration, production and combined exploration and production of petroleum, uranium and coal and for the types of subsoil use were approved by the orders of the Ministry of Energy of the Republic of Kazakhstan (RoK), No. 260, dated 31 March 2015, and the Ministry of Investments and Development of the RoK, No. 412, dated 31 March 2015. These model contracts contain the main terms of subsoil use and the minimum requirements for the contents of subsoil use contracts.
We would like to draw attention to the reduction of the amount of liabilities for nonperformance of obligations in subsoil use contracts. Previous model contracts enforce liability for nonperformance of obligations to local content in goods, works and services in the form of penalty amounting to 30 percent of the nonperformed obligations for a given accounting period, whereas in the new model contracts, a subsoil user’s penalty is set at an amount of 1 percent.
The amount of penalty for nonperformance of other obligations under the subsoil use contract has been also reduced. Now, in accordance with the new model contracts for subsoil use for nonperformance of obligations to local content in personnel and payments for the socioeconomic development of the region, a subsoil user will pay a penalty amounting to 1 percent of the nonperformed obligations instead of the previous 30 percent.
Approval of the new model contracts by itself is not a basis for change in the existing subsoil use contracts. However, this reflects a change in the government’s position towards enforcing subsoil users’ liability. Competent ministries receive a good number of requests for changes to the liability terms in the existing subsoil use contracts.
Entering the WTO and local content: What to expect
In the last few years, state control on issues concerning local content in goods, works and services was given much attention at a global level in the form of a state policy as well as through private relations with subsoil users.
However, in connection with Kazakhstan’s accession to the WTO through RoK law, No. 365-V, dated 27 October 2015, “On Amendments to Some Legislative Acts of the Republic of Kazakhstan in Connection to Accession to the World Trade Organization”, amendments were made to the subsoil and subsoil use legislation. Thus, the Law of the RoK “On Subsoil and Subsoil Use” provides the following main requirements concerning issues of local content in subsoil use contracts:
– New subsoil use contracts should not include requirements for local content in goods and support for local producers of goods.
– All subsoil use contracts concluded before 1 January 2015 shall be amended excluding requirements for local content in goods.
– As of 1 January 2021, any requirements for local content in goods set in the subsoil use contracts will become invalid.
– Requirements for local content in works and services in subsoil use contracts concluded as of September 2011 must be reduced to 50 percent within the next 5 years.
– Requirements for local content in personnel should not exceed 50 percent for each category of employees.
The above mentioned are just some notes on how Kazakhstan’s entering the WTO will impact on the local content requirements. We are currently preparing a separate client update on the frequently asked questions and will publish it as soon as possible.
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.