New Law of the Republic of Kazakhstan “On Gas and Gas Supply” Dated 09 January 2012: Associated Gas

New Law of the Republic of Kazakhstan “On gas and gas supply” dated 09 January 2012: associated gas

The new law of the RK “On gas and gas supply” № 532-IV was the first time officially published in media on 9 January 2012 and has later entered into legal force on 29 January 2012 with some exceptions to be entered into legal force later, up to 1 July 2013.

This Law is the result of a long lasting legal work representing an innovation of Kazakh legislation. The question arises as what are its main features? As we all know, there were only fragmentary provisions on gas and its supply in various legislative acts regulating subsurface and subsurface use sphere of the RK as well as licensing and other governmental decrees. And it is just now when the legislators have come with this important legislative act.

As per the available data from Internet resources (as at 2009) the total gas reserves in Kazakhstan were 3,7 billion CBM while 2,4 billion CBM out of these 3,7 were associated gas reserves. Thus, up to 64% of Kazakhstan gas reserves fall within associated gas.

In this regard the main goal of the present Article is review of the developments in sphere of regulation of issues connected with associated gas.

Earlier before introducing this Law the legislators have identified the main goal of this Law – introduction of new state policy in gas sphere based on detailed analysis of existing problems and foreign experience in the sphere of organization and regulation of gas industry. So what is a new state policy in gas sphere? Review of the Law has revealed that the state’s intention is to tighten its control and such policy stays within the policy as per the Law of the RK “On Subsurface and subsurface use” dated 24 June 2010.

Thus, one of the legal platforms under the Law is “pre-emptive right of the state for acquisition of crude and commercial gas”.

Pre-emptive right of the state for acquisition of crude and commercial gas

According to the Article 15 of the Law, the state enjoys its pre-emptive right for acquisition of:

• Crude gas alienated by subsurface users which own such gas based on the Law “On Subsurface and subsurface use” or subsurface use contract;

• Commercial gas produced by subsurface users when processing crude gas.

It is important to note that the Law explains the aims of such pre-emptive right in a very general terms, however it provides the exhausted list of the cases when the pre-emptive right does not apply when acquiring:

1) crude gas recovered from gas and (or) condensate fields;

2) commercial gas produced from crude gas recovered from gas and (or) condensate fields;

3) liquefied natural gas and commercial gas produced in result of its regasification;

4) crude gas realized in accordance with international treaties of Kazakhstan;

5) commercial gas, produced outside of Kazakhstan and imported for the purposes of consumption;

6) commercial gas, produced outside of Kazakhstan from crude gas recovered in Kazakhstan on the basis of Kazakhstan’s international treaties;

7) commercial gas, produced on the basis of a treaty entered in framework of private-public partnership in sphere of gas and gas supply.

In addition the Law establishes the regime of favorable pricing when the state exercises its pre-emptive right.

Notwithstanding that subsurface user determines the prices for crude and commercial gas produced from it, other provisions of Law restrict this right of subsurface user.

Firstly, prices shall be fixed in order established by the Government.

Secondly, the Law in general terms establishes the list of expenses to be considered at price formation, and restricts the level of profitability (10%).

Thirdly, in spite of the above noted restrictions the state also entrenched its right for expertise and approval of the prices “determined” by subsurface user within the authorised body.

As we can see, the state formalized dozens of mechanisms it can use for the purposes of enjoying its pre-emptive right under “comfortable” prices in accordance the Law.

Processing of associated gas

According to the Law “On Subsurface and subsurface use”, subsurface users are obliged to process associated gas.

Now under the Law, the recovered associated gas can be transferred into the ownership of investor on the basis of a treaty entered in framework of private-public partnership. Such treaty shall cover the following issues:

– processing of associated gas into commercial, liquefied oil and (or) natural gas;

– supply of certain volumes of produced commercial, liquefied oil and (or) natural gas for the first priority purposes of satisfaction of domestic needs of the RK.

Thus, the legislation now considers the possibilities of attraction of investors for processing of associated gas in framework of private-public partnership on some fields. Most probably that this mechanism will be applied to large scale deposits when processing and further realization of associated gas are economically viable.

We would also like to draw your attention to the fact of absence of protection of subsurface users processing associated gas owned by the state – there are no guarantees on compensation of expenses of subsurface users processing associated gas.

Restriction of competition when selling associated gas and commercial gas produced from it

The Law establishes that pre-emptive right for acquisition of crude and commercial gas shall be exercised by national operator established by the Government. By doing this the Law stipulates that subsurface user may have the right to sell the gas to third parties only in case when national operator has waived from its right.

Priority right of the RK for acquisition of alienated objects of commercial gas supply system

The other innovation of the Law is its provision of the state by option of governmentalization of the objects of gas supply system. The definition of such system contains such objects as gas interconnection, main gas pipeline, commercial gas storage, gas distribution systems, etc.

Under the Article 14 of the Law the state enjoys its priority right for acquisition of alienated objects of commercial gas supply system as well as shares in joint ownership for such objects except certain exceptions.

Summarizing the notes presented in this Article, we are of the following conclusion: state policy in sphere of processing of associated gas and its further turnover is built on administrative forcing of subsurface users to process and select crude/commercial gas based on the prices fixed by the state. Considering the ambition of the Law to satisfy the domestic needs, it is most probably that processing of associated gas can be turned into social project. We are afraid that this may have a negative impact on investment attractiveness as well as attraction of new technologies into gas processing in future.

Information contained in this Client Update is of general nature and cannot be used as legal advice or recommendation. Please seek for a specific advice in relation to any questions. Please note that Kazakhstan and Turkmenistan are emerging economies and their legislation and legal systems are in constant development. Should you have any questions or would like to discuss subjects addressed in this Client Update please contact us.