Topical problems of improvement of legislation on subsoil use in the Republic of Kazakhstan

The main legislative acts in the sphere of subsoil use are the Law of the Republic of Kazakhstan "On Petroleum" dated 25 June 1995 (hereinafter referred to as the Law on Petroleum) and the Law "Оn Subsoil and Subsoil Use" dated 25 January 1996 (hereinafter referred to as the Law on Subsoil). In the beginning these laws established the granting of subsoil use rights on the basis of license-contract system. The Government issued a license (an authorized body of the Government was the Ministry of Geology of the Republic of Kazakhstan), then a competent body (the Ministry of Energy Sector and Natural Resources of the Republic of Kazakhstan) on the ground of the license concluded a contract on subject use. This was a mixed system, and for a while it effectively worked. But in due course, the lacks of this system, which were mainly consisted in extreme bureaucracy in the procedure of granting the subsoil use right, came out.

The sitiation went nonsensical after liquidation of the Ministry of Geology, which was included into the Ministry of energy sector and natural resources as the committee of geology. It happened so that the same body issued the license and then concluded the treaty.

That's why it became a necessity to choose one of two systems: license or contract. After some hesitations the Government did a choice in favor of contract systrm, and on August 1l,1999, the proper amendments were introduced to Laws concerning Subsurface and Petroleum. Since then interactions between the State and investors are created after model of civil contract.

For last year in Kazakhstan the very important amendments were introduced to legislation on Subsoil Use. Were adopted two Laws concerning the introduction of amendments and additions to Laws on Subsurface and Petroleum- dated 1 December 2004 (hereafter- Law on the introduction of amendments of 1st December, 2004) and dated 14 October 2005 (hereafter- Law on the introduction of amendments of 14th October, 2005). On 8 July the Law concerning production sharing agreements, was adopted (hereafter - Law on PSA).

We are going to consider these laws in detail.


1. Law on the introduction of amendments of the 1st December 2004

Elaboration of this draft law has long and complicated history. For the first time the draft was composed by National Juridical Service in November 2001. However it didn't satisfy the Government and the Ministry of energy sector and natural resources. On the instructions of the Government, a working group was created by Institute of Private Law: M.K. Suleimenov, Y.G. Basin, Y.B. Osipov, o.I. Chentsova, which prepared a new bill. In the Government and the Ministry There a cot of were discussions about the last draft as well, it was redone several times. Unfortunately, this draft has come out poor, and we can surely state that we do not have any guilt in its faults, as our opinions were disregarded many times (you are advisers of us, not differently-words of the vice-minister).


Kazakhstan content


The most principal notion, arousing many opposite opinions, is the clause on Kazakhstan content.

Kazakhstan content-percentage with possibility of redistribution of quantities of the following by the year:

Kazakhstani personnel engaged in the implementation of the contract, with a break-down by the category of personnel with separate indication of percentage content with regard to each category in relation to foreign personnel the number of who must be reduced by years as obligatory programs of training and enhancing qualifications of Kazahstani personnel;

Goods, work, and services of Kazakhstan origin which are purchased directly or by concluding subcontracts (subparagraph 15) article 1 of Law on subsurface). At elaboration of the draft there were so many discussions on methods of guaranteeing of Kazakhstan content. It was offered to fix certain percentage of Kazakhstan content (50-70%). But sensible approach has prevailed over, otherwise it could lead to acquisition of goods, works and services of poor quality.

That's why it was decided to turn down a direct administrative interference, keeping the former rule: goods, works and services produced in the Republic of Kazakhstan shall be purchased only if they are in compliance with the national and (or) international standards (subparagraph 7 and 8 of article 63 of Law on Subsoil).

None, certain measures, which could help increasing of Kazakhstan content, were settled.

National companies

The important point in Laws on Subsurface and petroleum is the question about national companies.

Law on petroleum has many additional clauses about national company. National Company as the contractor in subsurface use contracts gets considerable advantages:

1)     National Company has the right to receive a block for performance of petroleum
operations on the basis of direct negotiations.

2)     It has the right to perform petroleum operations in conjunction with winners of tender

3)     It has the right to choose a strategic partner. The strategic partner pays subscription
bonus, as well as finances exploration by contracts, in which national company appears as a contractor, unless otherwise stipulated by the Contract.

4)     When the competent body dissolves a contract for exploration and production with the
contractor, having made systematic violations, National Company accepts a contract territory in
its competence. National Company and the competent body introduce changes to the contract.

5)     National Company in order to represent state interests in the contracts with contractors
through obligatory shared participation in the contracts should possess not less than 50% of stocks
of operators.

These points are the main examples of enlarging of National Company competence.

Priority rights of State (right to the first night)

Article 71 of Law on subsoil was enriched by paragraph 3 with such content. "In order to reserve and fortificate energetic foundation of country economy in new concluded, as well as earlier concluded contracts on subsurface use, the state has priority right to the acquisition of disposed subsurface use right (its share) and (or) share of stocks of legal entity, having the subsurface use right, on condition not worse than offered to other buyers".

The Reporter, who introduced the draft Law on the introduction of amendments of 1st December 2004 before the Parliament, called the priority right of the state the right to the first night.

On the press and juridical literature there was the scope to develop sharp discussion on introduction of this amendment to Law on subsurface.

I would not like to go back to this dispute, considering the fact that it is always hard to contest with opponents, who are negating the basis of civil law and civil code. Particularly, in his response essay, academician Zimanov S. Z. did not turn over our arguments. He repeated the same ideas about Law on national security, although this Law does not have direct relation to considered problem.

One more objection, which I would like to add. - is that the difference between public and private legal relations was clearly ascertained even by specialists of Constitutional law. As example the statement of Malinovsky V.A. is cited below:

'The power potential of a state body does not directly depend on kind of legal relations, in which the state body is a side. For instance, when state power is executed, or in other words, the will of the state is accomplished, then the constitutional relations are arising. But when the state body appears a side of a contract, then it becomes the subject of civil legal relations. If in the first case the constitution is a legal base of activity, in the second case - civil code and civil legisla­tion. If in the first case, the state through its representatives can establish any rules of a game, in the second case - it is sound to do its obligations, observing the terms of the contract."

What is a legal essence of "priority right of the state"? Bikebaev A. thinks that this right is ana1ogous to the priority right to buying of a share in legal association. Continuing his thought, he asserts that the realization of priority right by the state is different from the compulsory confiscation of property in its essence.

I think that such a comparison is not appropriate. The priority right to buying of share ensues from the legal essence of limited liability company, where, in difference from joint stock company' personal capacity is very important, that's why shareholders of limited liability company are not interested in inclusion of outsiders into the range of participants of the .o*pu''y. The priority right to buying is civil right, ensuing from corporate civil relations.

The priority right of the state is not civil right. This right is established by the legislative acts of public law. By these acts the state has established its right to invade into civil relations. This concerns not only LLC or JSC, but also any contract on subsurface use. And this is not anything else that compulsory confiscation of property. Here absents the will of seller to dispose his or her property. The seller may wish to sell his or her share in LLC or subsurface use right to a person whom he or she likes. But the seller could not do it, since the state has the right to the fist night. Here the question must be formulated in such a way: what would have come if the owner of the share in LLC or the owner of subsurface use right the to rejected to sell his or her share or right to the state? The answer is unequivocal: the state would have got the right compulsorily (surely, having paid compensation), But the same principles are applied on nationalization of property as well.


2.         Law on PSA

At first, according to the Order of the Minister of energy sector and natural resources of the Republic of Kazakhstan dated 24 July 2003, No 140, the working group' which must have prepared this draft law, consisted of scientists engaged with issues of subsurface use (Suleimenov M.K., Basin Y.G., osipov Y.B. Chensova o.I.). But then by instructions of the Prime-Minister we were excluded from this group. That's why the draft law was prepared by specialists of the national company ''Kazmunaigas'', however we (all above-mentioned scientists) made independent legal appraisal of this draft.

Legal essence of PSA

Legal essence of PSA is not determined in Law on PSA. Moreover, Law runs counter to Laws on petroleum and subsurface, which state that all contracts on subsurface use are under regulation of civil legislation. Meanwhile, Law on PSA declares that the legislation on PSA consists of Law on PSA, legislative acts of the Republic of Kazakhstan concerning the subsurface and its use, on petroleum and other laws and regulatory legal acts of the Republic of Kazakhstan.

But PSA is determined by the model of contract. Paragraph 1 of Article 4 of Law on PSA fixed that in accordance with PSA,  the Republic of Kazakhstan shall grant the right to perform operations combining prospecting and production or production of hydrocarbon raw materials on sea blocks indicated in conditions of the tender on the paid basis and for certain term. The contractor shall oblige itself to perform conducting aforesaid operations at its cost and at its risk with unconditional fulfillment of bid proposals stated by it and compliance with the legislation of the Republic of Kazakhstan, provisions and obligations stipulated by the agreement of production sharing''.

National Company in PSA

Law on PSA fixes further enlargement of the national company competence.

Firstly, the national company is granted the right to share participation at not less than 50% as a contractor in all the production sharing agreements on the sea made by the Republic.

Secondly, functions of a plenipotentiary body may be imposed on the national company provided it transfers the right of subsurface use under the PSA to its subsidiary organization, its part in the project is sold.

Thus, the national company gets real opportunity to participate in production and to fulfill leading functions.


3.         Law on the Introduction of Amendments dated the 14th October 2005

This draft }aw was elaborated by the national company ''Kazmunaigas'', but I composed independent legal appraisal of this draft.

Mainly, this law was adopted in attempt to blockade selling 100% of stocks of the Canadian company "PetroKazakhstan" to the China National Petroleum Company (CNPC International). The meeting of shareholders of the "PetroKazakhstan" was set on 18 October, LaW was adopted on 14 October, it was published on 18 October and was in force from this day. It means that clauses of this law may be applied to the bargain with "PetroKazakhstan".

An article 71 of law on subsurface in its former wording could not affect this bargain, since it concerned the priority right on selling of stocks of Kazakhstani company- the holder of subsurface use right, located in Kazakhstan. In case of ''PetroKazakhstan'', the bargain was about selling of maternal company of Kazakhstani subsurface user, which was located in Canada. Kazakhstani law could not be applied to the bargain, made in Canada concerning the stocks of Canadian Company.

In what ways did the Government decide this task?

1)         Article 1 of Law on petroleum included new subparagraph about affiliated companies.

Then this notion was applied to rights and obligations transfer of by contracts. The full or partial transfer of subsurface use right by subsurface user to another person shall be carried out with the permitssion from the competent body. The competent body may issue motivated denial of permitssion to transfer rights and obligations by contract, also has the right not to permit a disposition of stocks of Contractor Company even if there were stocks of maternal company.

2)         Introduced the new notion, called "Concentration of rights"

Concentration of rights to perform operations of subsurface use-is possession of such share in contracts for subsurface use on the territory of the Republic of Kazakhstan by one person or group of people from one country that may create the threat to interests of the Republic of Kazakhstan

3)         Amendments were introduced to paragraph 3 of article 71 of Law on subsurface. This paragraph had fixed the priority right of the state for acquisition of disposed subsurface use right and (or) share in stocks of legal entity. Now this priority right has a force related to legal entity, if the company can directly or indirectly determine the decisions made by subsurface user.

It means that Kazakhstan has the priority right to bargains, concerning have maternal companies, made abroad. But what ways of influence does Kazakhstan got?

4)         Surely, Kazakhstan could not blockade the bargains, made abroad. But it could affect subsurface user working in Kazakhstan. That's why here the rules on unilateral termination of a treaty come into force. There is a special paragraph in a article 45-2 of Civil Code about the right of the competent body to terminate, the contract in case of non-performance of paragraph 3 of article 71 of law on subsurface about the preference right of the state.

5)           All these extraordinary measures were backed by made of contracts on use of strategic resources of the Republic of Kazakhstan to the field where "national security" operated.

6)           Paragraph 3 of an article 18 of law dated 26 June 19S8, "concerning National Security of the Republic of Kazakhstan" was amended: " guarantee Demands of National Security must be  considered at made contracts on use  of strategic resources  of the  Republic of Kazakhstan, at the implementation of these contracts and control over their implementation, at making of decision by state body on issuing of permitssion or denial of permitssion a disposition of stocks.

Observance of this term is necessary to the bargains of affiliated companies.

7) Law on national security entitled the Government by additional competence. According to paragraph 6 of an article 18 of law:" In order to guarantee national security of the Republic of Kazakhstan, the Government shall have the right to restrict transfer of rights of property on strategic resources of the Republic of Kazakhstan''.

8) Thus, as a result of latter amendments introduced to legislative acts in Kazakhstan there was created a system of measures for guaranteeing state interests. However, there is danger that the Government gets too much competence.

Law dated 14 October, 2005 played the historical role, the China National Petroleum Company (CNPC International), which had rejected all attempts of Kazakhstan to buy over stocks of the "PetroKazakhstan", signed a memorandum with the national company "Kazmunaigas", and agreed to concede 33% of stocks of the "PetroKazakhstan" to 'Kazmunaigas".

If it is necessary to talk about juridical estimation of introduced amendments, I would like to note that, in exceptional cases, when national security of the Republic of Kazakhstan is touched, the state shall have the right to undertake protective measures. The most well founded method of national interests protection, from the point of economic security guaranteeing, especially for guaranteeing of economic independence of Kazakhstan, for reservation and fortification of energetic basis of country economy, is procedure of nationalization. That's why, I think, it is necessary to elaborate and adopt the law of the Republic of Kazakhstan on nationalization.

We should mark that any confiscation of property for guaranteeing the national security, including termination of the contract on subsurface use, may be understood, from the point of international private law, as cases of nationalization. If the special law of the country on nationalization is absent, these relations will be regulated on the basis of general principles of international private law, including the principle of faithful compensation of costs of nationalized property,

At unilateral termination of contract juridical problems may arise.

Such termination will not be inhibited.

Author of the article: Suleimenov M.K. 

The article is published in the books: 1) Caspian sea: legal status and regime regional security and environmental protection, 2006;

                                                           2) Private law of the Republic Kazakhstan: History and Modernity, 2011.

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