Kazakhstan Proposes New Rules for Subsoil Use

By Aset Shyngyssov, Klara Nugaziyeva, April 18, 2013

Kazakhstan’s Ministry of Oil and Gas (MOG), as the competent authority for national hydrocarbon subsoil use contracts and licenses, drafted a set of proposed amendments to three statutes relating to energy industry activities in August 2012: the Subsoil Law (SL), the Licensing Law and the Administrative Code.
The proposed amendments have been provided to various state authorities in draft form for their consideration and comments before being submitted to the parliament. It is expected that they will be submitted within the next few months, but this is not yet certain. This article highlights the possible key changes that the proposed amendments will introduce to the subsoil use rules, and discusses the impact on the energy industry in Kazakhstan.
The key proposed changes are in relation to SL and are an illustration of the Republic of Kazakhstan government’s efforts to establish greater control over essential elements of the Kazakh economy and to fill existing gaps in the law.

The State’s Priority Right Over Strategic Objects

The SL contemplates broad priority rights for the state to acquire subsoil use rights and objects related to subsoil use rights (such as shares in a subsoil user company) prior to their alienation to a third party by the holder of such right or object.
The proposed amendments would reinforce the state's priority right with respect to subsoil assets viewed by the state as strategic. This is broadly property of strategic importance to the state that may have an impact on national security (typically major deposits). At the same time, the proposed amendments will possibly simplify the normally onerous approvals procedures necessary to offer nonstrategic subsoil assets to a third party. While the simplification of these procedures is the likely objective of the Proposed Amendments, strong opposition in Parliament cannot be ruled out.
It is a possibility that the list of strategic objects may be expanded.

Oil Spillage at Sea and Internal Water Reservoirs

The proposed amendments add new provisions dealing with oil spillage. The amendments do the following:
Include a new definition of “oil spill at sea” and set out three degrees of oil spills, differentiated by the gravity of the spill.
Impose obligations on subsoil users to develop and approve oil spill prevention and cleanup plans, and to hire a specialized oil spill cleanup organization for the purpose.
Require subsoil users to secure a stand-by bank guarantee to finance the clean-up of any oil spills.
Vest the central government and local governors with the authority to approve oil spill prevention plans.

Curing Breach of Obligations Under Subsoil Use Contracts

The current SL does not set deadlines for resolving curable breaches.
The following deadlines to cure relevant subsoil use contractual breaches are proposed, running from the date of receipt of written notice:
1)    non-fulfillment of non-financial (quantity/volume) obligations - not more than six months;
2)    non-fulfillment of financial obligations – not more than three months; and
3)    non-fulfillment of other contractual obligations – not more than one month.

Trust Management Over Forced Relinquished Assets