On Novelties of Subsoil Use Code

Please note that Subsoil Use Code dated 27 December 2017 № 125-VI ЗРК (further « the Code») contains critical changes to the existing Kazakhstan subsoil use legislation. We have been following the progress of the draft Code and did our best to advise you in a timely manner of the most important novelties and changes to the Code. Please click on the following references in order to see our previous publications: (1), (2) и (3).

In the present client update, we will further inform you of certain changes that, in our opinion, will affect businesses with regards to existing and potential subsoil users.

•\tSecurity of obligations of subsoil users on liquidation of subsoil use consequences after-effects;

•\tNotification on change of control over a subsoil user; and

•\tChanges in the procedure of realization of the State’s priority right.

Forms of securing of execution of liquidation commitments of a subsoil user

Under the Law on Subsoil and Subsoil Use dated 24 June 2010 № 291-IV ZRK (further the «Subsoil Use Law»), for the purposes of securing an obligation to eliminate after-effects of subsoil use operations, a subsoil user undertakes to create a liquidation fund by way of transferring financial means to a special deposit account in any bank within the territory of the Republic of Kazakhstan. The conditions of the formation of a liquidation fund, the amount of payments to the liquidation fund, and the frequency of payments shall be established in a subsoil use contract.

The Code envisions certain changes to the procedure of securing of liquidation commitments of the subsoil user.

So, the Code provides the following security mechanisms, such as:

•\ta warranty;

•\ta bank deposit of a subsoil user under pledge by the State; and

•\tinsurance.

In the case a subsoil user fails to execute the liquidation upon agreed terms, the security amount shall be withdrawn in favour of the State.

Warranty as a security of obligation for liquidation

Under warranty, a guarantor commits to be accountable to the State for execution of liquidation commitments by a subsoil user.

A 2nd–tier Kazakhstani bank, a foreign bank or an organization of which shares are issued in a securities market for the purposes of securing execution of liquidation commitments can become a guarantor. In relation to a situation where the guarantor is a foreign bank or an organization with shares that are issued in a securities market, additional terms on minimum individual credit ratings in foreign currency may be established by the Ministry of Investments and Development of Kazakhstan.

Pledge of a subsoil user’s bank deposit as a security for liquidation commitments

Upon securing liquidation commitments by pledge of a bank deposit, in the case of non-execution of liquidation commitments by a subsoil user, the State may receive compensation from the funds in the pledged (by a subsoil user) bank deposit in tenge or a foreign currency. In doing so, the State shall have an advantage over other creditors of a subsoil user.

Insurance as a security for liquidation commitments

For the purpose of securing liquidation commitments, a subsoil user can conclude an insurance agreement with an insurance company. In the case it fails to execute such liquidation commitments, the State as a beneficiary shall be paid a corresponding insurance sum.

Notification on change of control over a subsoil user

In addition to existing provisions for obtaining the permit of a competent authority for transfer of subsoil use rights and the State’s priority rights, the Code foresees a new mechanism of control over allocation of subsoil use rights in Kazakhstan.

The Code provides for an obligation of a subsoil user to notify an authorized State authority on changes in the structure of persons and (or) organizations directly or indirectly controlling activities of a subsoil user.

Please note that subsoil-use-related objects, among others, include participation stakes, participation interests, shares and other forms of equity participation; securities, confirming ownership rights or convertible into share participation interests and other forms of participation in a legal entity in a position to determine directly or indirectly decisions of an entity owning subsoil use rights. Contrary to the Law that conditions relation of the main business of an organization to subsoil use activities in Kazakhstan, the Code offers no such criterion in terms of a definition. Rather, the Code supplies a specific definition of an organization with direct or indirect control by way of determining criteria of “a direct and/or an indirect control”.

According to the Code, a direct control means the presence of any of the following ways of control:

•\tOwnership of over 25 percent of the rights of participation in an entity;

•\tRight to vote with more than 25 percent of total votes in the supreme body of an entity;

•\tReceipt of over 25 percent of the distributed net profits of a subsoil user; and

•\tRight to participate in the decision making within an entity under an agreement or Kazakhstani law.

The Code determines an “ indirect control” as an ability of an individual or entity to control another entity through third entities – single or several – provided there is direct control between another entity and the latter.

Changes in procedure of state priority rights

Unlike the Subsoil Use Law, whereby the interdepartmental commission on the State’s priority right (“Commission”) plays a significant role in realization of the State’s priority right, the Code does not refer to the Commission as a body participating in the decision-making process. According to the Code, the State’s priority right process shall be managed by a competent authority, in parallel to the process of State consent over transfer of subsoil use rights and related objects. The procedure of consideration and decision-making relating to the State’s priority right shall be determined by a competent authority.

According to the Code, the application for consent of a competent authority to transfer subsoil use rights, and, in the case of strategic objects, realization of the State’s priority right, shall be made by a purchaser. Please note that under the Subsoil Use Law, such an application is made by a seller.

Also, the Code ensures updated criteria are qualified as strategic subsoil objects. Strategic subsoil sites shall include oil and gas fields, of which reserves exceed established thresholds; reserves located in the Kazakhstani sector of the Caspian sea; and uranium fields. The list of strategic subsoil objects shall be approved by the Government of Kazakhstan.