New Subsoil Use Code: Oil and Gas Matters
The new code of the Republic of Kazakhstan No. 125-VI ‘On Subsoil and Subsoil Use’ (“the Code”) dated 27th December, 2017 came into force on 29th June, 2018. The document will act as a main statute for petroleum (oil and gas) and mining industries and have priority over former legislative acts which will no longer be relevant. The Code intents to improve the local investment climate and simplify procedures for obtaining subsoil use permits.
The enactment of the Code will not affect the validity of existing subsoil use contracts and will apply to relations that arise after its enactment.
The structure of the Code is rather complex with numerous references to transitional provisions. Hence, it may seem difficult to determine the effect of certain provisions on the current subsoil users. However, it is important to note that a number of provisions of the Code will have an immediate effect on the current subsoil users. Some provisions of the Code will regulate the activities of the current subsoil users; either under certain conditions or from a particular start date.
We aim at providing our clients with a smooth transition to the new regulation and in this update we would like to focus on the operational issues determined by the Code as against simply listing general provisions that will automatically apply to the activities of the current subsoil users (i.e. general provisions on subsoil, security requirements, public authorities, control and notifications, etc.).
We divided the provisions of the Code into three groups as below:
I. Provisions of the Code that have immediate effect on the current subsoil users
In other words, these provisions will guide the current subsoil users from 29th June, 2018.
Article 132 gives an exhaustive list of reports that a subsoil user must submit to the competent body during hydrocarbon exploration and production.
2) Contract termination and liability
Articles 38 – 39, 106 -109, 133 will also have an immediate effect on the current subsoil users from 29th June, 2018. In this case, one must keep in mind that the Code introduced two new grounds for unilateral contract termination by the competent body – the court’s decision on the prohibition of subsoil use activities coming into force, as well as subsoil use operations for hydrocarbons conducted in the absence of statutory review of project documents.
3) Statute of limitations
Article 80 sets the statute of limitations to 3 years.
4) Transfer of subsoil use right
Chapter 5 deals with transfer of subsoil use rights and objects related thereto. During respective alienation transactions, current subsoil users will be guided by this chapter.
5) Extension of production period
Extension of production period under current contracts will be governed by Article 120 of the Code.
All operations to conserve a hydrocarbon subsoil block will be governed by Articles 127 and 128 of the Code.
7) Procurement of goods
When procuring goods in the procedure used in subsoil use operations in accordance with the Code; for subsoil use contracts which have been concluded before 1st January, 2015; the organiser of the tender reduces the price of the competitive bid by 20%, in order to determine the winner of the contest participants, who are Kazakhstan producers of goods. Such a ‘discount’ will be applied until the expiry of the specified contracts or until 1 January 2021, whichever occurs first.
II. Provisions applied by the current subsoil users subject to certain conditions
1) Changes to project documents
Article 278, Paragraph 22, determines that current subsoil users have the right to conduct activities in the subsoil block under the project documents approved prior to the enactment of this Code. However, any changes to these project documents must be made in accordance with the Code.
‘New contractual obligations’
When changing the project documents, one should be aware that Article 143 of the Code states that changes made before 1st January, 2024 must include the following indicators in the project documents as contractual obligations of a hydrocarbon subsoil user:
➢ Grid density of production wells
➢ Ratio of production and injection wells for each operational facility
➢ Coefficient of compensation for deposits
➢ Ratio of formation and bottom hole pressure to saturation pressure or condensation pressure
➢ Ratio of formation pressure to bottom hole pressure
➢ Maximum permissible value of the gas factor in the wells
➢ Volumes of hydrocarbon production
➢ Volumes of re-injection of the working agent to increase formation pressure
➢ Indicators of production wells input
At the same time, the figures themselves are not included in the contract and are determined on the basis of project documents.
2) Excess of the initial geological reserves of the deposit during the transition to production
Article 119 of the Code determines that if the volumes of the initial geological reserves of the hydrocarbon deposit, the calculation report of which was positively reviewed by the state subsoil examination, exceed 100,000,000 tons of oil or 50,000,000,000 cubic meters of natural gas, the provisions of the exploration and production contract for such deposits must contain one of the following obligations of the subsoil user:
➢ Creation of processing facilities independently through a new legal entity or jointly with other persons
➢ Modernization or reconstruction of existing production facilities
➢ Modernization or reconstruction of existing processing facilities
➢ Delivery of produced hydrocarbons for processing to processing facilities in Kazakhstan on contractual terms
➢ Implementation of another investment project or project aimed at the regional social and economic development, independently through a new legal entity or jointly with others
III. Provisions of the code applicable from a certain start date:
1) Provisions applicable from 1st January, 2020:
The entities operating in the field of crude oil and gas condensate must equip their production facilities with metering devices and ensure operation thereof. The list and terms of equipment with metering devices and the operation mode thereof are determined by the competent body in the field of hydrocarbons.
2) Provisions applicable from 29th June, 2021:
In the event of absence of a formed liquidation fund or excess of the market value of the works; in order to liquidate the consequences of exploration and (or) hydrocarbon production operations over the available liquidation funds, the obligation to liquidate the consequences of hydrocarbon subsoil use, in the missing part must be secured by a pledge of a bank deposit and (or) full, unconditional and irrevocable warranty in accordance with the Code.
Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please note that Kazakhstan is an emerging economy, and its legislation and legal system are in constant development. Should you have any questions or want to discuss matters addressed in this Client Update, please contact us.
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