Draft Law. Dossier On The Draft Code Of The Republic Of Kazakhstan "On Subsoil And Subsoil Use"

On December 22, 2016, a dossier on the Draft Code of the Republic of Kazakhstan "On Subsoil and Subsoil Use" ("Draft Code") was submitted for consideration to the Mazhilis of the Parliament of the Republic of Kazakhstan.

Kazakhstan Energy and Natural Resources

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The Draft Code introduces the following key new amendments:

1. A special licensing regime for the geological study of subsoil; use of subsoil space; and the prospecting, exploration, and extraction of solid minerals.

2. Conditions for Mineral Extraction:

No extraction volume and limitation requirements;
Statutory fixed payments for social and economic development of the region, Kazakhstan personnel training, research and development works;
Mandatory registration of the title to the land plot located within the extraction area;
The duration term for solid mineral production is set for up to 20 consecutive years with unlimited opportunities for extension for no more than 20 years per extension.

In addition to the foregoing general terms, exploration of hydrocarbons provides for the following:

Production term is set for up to 25 years or up to 45 years on large-scale and (or) unique fields;
Extension of the exploration term requires the subsoil user to file an application with the competent body absent any unfulfilled contractual obligations;
De minimis requirement for annual production expenses is set in the MCI 1

3. New Method of Mineral Extraction

The Draft Code introduces the manual extraction concept, which is a manual method for extracting minerals and solid minerals by permitted means of mechanization and other equipment in the designated areas. The use of chemical reagents for extraction of useful substances is not permitted.

4. Exploration

The Draft Code envisages the following general conditions for carrying out exploration works:

Hydrocarbons and solid minerals are separately regulated by the law;
Exploration areas will be formed by blocks;
There is an annual increase of lease rates per block;
Periodic reporting on contract fulfillment by subsoil users;
There is unlimited scope of exploration works;
Test samples and mineral materials can be taken outside of Kazakhstan for only analysis and laboratory research purposes;
There is no financial obligation for social and economic development of the region, Kazakhstan personnel training, or research and development works unless directly related to the exploration operations.

Exploration of solid minerals provides for the following aspects:

general increasing requirements to the minimum annual exploration expenses calculated in MCI per one block;
Exploration term constitutes 6 consecutive years with the possibility of extension for up to 5 consecutive years.

5. Geological Subsoil Study

The Draft Code suggests attracting private investments in geological subsoil study. Along with the state geological study of subsoil, whereby the state bears all charges and geological risks, the Draft Code envisages a possibility for individuals to carry out the state geological subsoil study based on licenses for the geological study of subsoil issued by the authorized body.

6. Improvement of Subsoil Use, Object Liquidation, and Conservation Process

After the completion of exploration works (determining contour of resources) or during the field development (production) phase, the Draft Code entitles a subsoil user to apply for "retention status" with respect to the whole field or a part thereof. A subsoil user is entitled to opt for such status subject to the consent of the competent body (the competent body's refusal must be justified and it may be challenged in court).

The retention status may be granted in case of temporary impossibility or unprofitability of exploitation of the field (or its part) due to reasonable unrecoverable and steady circumstances of economic, technological, and (or) ecological character. The status may be claimed for up to 5 consecutive years with further extension of up to 5 years and a total duration of no more than 10 years.

During the retention status term:

A competent body may at its own discretion require the subsoil user to prepare and agree on the work program outlining works and other activities aimed at seeking opportunities for the commencement or renewal of field development (or its part);

Minimum annual expenditure requirements for production works are not applicable.

7. Subsoil Management Program

A proposal has been made to empower the competent body to develop and adopt a mineral resources management program, which will outline the main directions and priorities of the public policy with respect to geological study and granting subsoil use rights.

8. Other Proposed New Amendments:

Setting the criteria and grounds for qualifying subsoil use deposits as strategic deposits according to the size of reserves, type of mineral, and geographical location;
Appealing to the international arbitration subject to minimum investment value threshold(8,000 MCI);
Introducing changes to project documents, including changes to names, content, and obligations regarding periodic changes depending on the stage of work and (or) market conditions;
Changing the term "granting a subsoil use right by way of competition" to "granting a subsoil use right by way of a tender or an auction";
Dividing oil operations into sections depending on the type of operation whereby each type of oil operation is specified in detail; for example, a section is devoted only to exploration and production of hydrocarbons;
Introducing a presumption of good faith when using subsoil and its resources, as a new principle of legal regulation of the subsoil use sphere;
Replacing the principle of transparency when carrying out subsoil use operations with the principle of transparency of government authorities and access to information.

Footnote

1. Monthly calculated index (MCI) is KZT 2,269 for 2017.

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