Kazakhstan: The International Comparative Legal Guide To: Oil And Gas Regulation 2014

1 OVERVIEW OF NATURAL GAS SECTOR

1.1 A brief outline of Kazakhstan's natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and re-gasification facilities ("LNG facilities"); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.

According to British Petroleum's Statistical Review of World Energy 2013, according to western standards Kazakhstan's natural gas reserves make up approximately 1.3 tcm of proven reserves (0.7 per cent of world reserves), placing Kazakhstan 21st in the world (together with China and India). In 2012 BP estimated Kazakhstan reserves under the "Soviet" standards being equal to 1.9 tcm.

The so-called "Three Wales" of Kazakhstan oil producing companies, specifically, Tengiz, Karachaganak and Kashagan perform 85 per cent of gas production in Kazakhstan.

Estimated balance gas reserves of Karachaganak comprise 1.35 tcm. Currently Karachaganak produces approximately 50 per cent of all gas produced in Kazakhstan. Kazakhstan's anticipated reserves are estimated at 5.9 tcm.

In 2012 Kazakhstan produced 40.1 bcm (an increase of 1.5 per cent over for 2011). The plan for 2013 is 40.5 bcm. The volume of gas commodities was 21.2 bcm in 2012. The volume of internal consumption in Kazakhstan was 10.5 bcm (an increase of 3.2 per cent over 2011).

The volume of exports from Kazakhstan is 8.8 bcm (3.7 per cent by 2011). Transit of gas through Kazakhstan is 96.5 bcm, as in 2011.

The production of LNG in 2012 was equal to 2.2 million tonnes (3.1 per cent by 2011). The majority of LNG is produced at the Tengiz Gas Processing Plant.

In addition to domestic consumption of the gas and re-injection of gas by subsoil users, Kazakhstan also exports gas mainly to Russia. In recent years Kazakhstan also started to export to China.

As gas pipelines cover only 11 regions of Kazakhstan out of 16, Kazakhstan imports gas from Uzbekistan and Turkmenistan (for southern regions) as well as from Russia (for northern regions).

Among the latest developments in the gas sphere are commissioning of the first part of Beineu-Bozoi-Shymkent pipeline (Kazakhstan-China gas line) (1,477 km, able to transport up to 2.5 bcm per year) in September 2013. The second part will be completed by 2015.

All gas commodities from Kashagan will be transported through this pipeline.

Also Kazakhstan plans to construct the Tobol-Kokshetau-Astana pipeline, to supply gas to the capital of Kazakhstan from western regions.

1.2 To what extent are Kazakhstan's energy requirements met using natural gas (including LNG)?

Natural gas is often used in Kazakhstan as a secondary source (approximately 10.6 per cent), as most of the country's electricity requirements are met through coal (72 per cent). Another two principal sources for generation of electricity are hydro resources (12.3 per cent) and oil (4.9 per cent).

1.3 To what extent are Kazakhstan's natural gas requirements met through domestic natural gas production?

In 2012, Kazakhstan imported 3.830 bcm (3.5 per cent by 2011) for the amount of USD 374.9 million (24.4 per cent by 2011).

Kazakhstan mainly purchases gas from Uzbekistan and Russian and small volumes from Turkmenistan.

In late 2012 Kazakhstan and Uzbekistan agreed to increase gas supply by 40 per cent to up to 3.5 bcm annually.

Kazakhstan plans that, after full commissioning of the Beineu-Bozoi-Shymkent pipeline and start of gas supplies from Kashagan, it will significantly reduce dependency on Uzbekistan gas for southern regions.

1.4 To what extent is Kazakhstan's natural gas production exported (pipeline or LNG)?

Currently, most of Kazakhstan's natural gas production is exported by pipeline to Russia. As the Beineu-Bozoi-Shymkent gas pipeline will be fully commissioned, a major amount of gas will be exported to China.

The volume of gas exports in 2012 was 8.8 bcm (3.7 per cent by 2011).

2 OVERVIEW OF OIL SECTOR

2.1 Please provide a brief outline of Kazakhstan's oil sector.

According to British Petroleum's Statistical Review of World Energy 2013, according to western standards Kazakhstan's estimated proven reserves of crude oil are 3.9 billion tonnes, which represent 1.8 per cent of total world reserves.

Kazakhstan is in the 12th place in the word and the second largest oil producer among CIS countries.

Anticipated reserves of Kazakhstan are estimated at approximately 17 billion tonnes.

In 2012 Kazakhstan produced 79.2 million tonnes of oil. Kazakhstan plans to increase oil production from approximately 80 to 140 million tonnes per year by 2020.

Kashagan is one of the world's largest oil fields. It is estimated, that the Kashagan field (approximately 75 X 45 sq. km) has from 9 to 13 billion tonnes of estimated proven oil reserves. The commercial production at Kashagan is expected to start in the first half of 2014.

The Tengiz field was established in 1993 and is operated by Chevron with KazMunayGas owning a 20 per cent stake. Crude oil reserves of Tengiz are estimated to be 245.8 million tonnes.

Tengiz currently produces about one-third of Kazakhstan's total production. Together with Karachaganak, they produce about half of the current production.

More than 90 per cent of Kazakhstan's 203 oil and gas fields are located in the northwestern region (Atyrau, Mangistau, West-Kazakhstan and Aktobe regions).

2.2 To what extent are Kazakhstan's energy requirements met using oil?

The primary source for electricity production in Kazakhstan is coal (72 per cent). Oil serves only account for 4.9% for electricity production.

2.3 To what extent are Kazakhstan's oil requirements met through domestic oil production?

Kazakhstan legislation aims to supply all domestic oil requirements. For example, the majority of subsoil users have contractual obligations to provide a certain percentage of oil produced to Kazakhstan refineries. Further, the State has the pre-emptive right to purchase oil from subsoil users. Finally, if the oil is to be transported via pipelines, one shall preliminarily approve a monthly supply schedule, the approval thereof by MOG is also subject to cover the needs of refineries.

There are three major refineries in Kazakhstan located in the north (Pavlodar), the south (Shymkent) and the west (Atyrau).

As the refineries could not make deep processing, the State initiated a programme for their modernisation to be supposedly completed by 2015.

2.4 To what extent is Kazakhstan's oil production exported?

In 2012 Kazakhstan exported 68 million tonnes for $56.4 billion (without counting for countries of Customs Union, i.e., Russia and Belarus), including to Italy – 17.7 million tonnes for $ 14.9 billion, China – 10.6 million tonnes for $ 8.7 billion, the Netherlands – 7.9 million tonnes for $ 6.7 billion, Austria – 6.4 million tonnes for $4.9 billion, and France – 6.1 million tonnes for $5.3 billion.

Kazakhstan plans to export more than 90 million tonnes by 2015.

3 DEVELOPMENT OF OIL AND NATURAL GAS

3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production ("development") of oil and natural gas reserves including: principal legislation; in whom the State's mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development.

Under the Constitution of Kazakhstan, the subsoil and minerals are owned by the State, represented in relations with subsoil users by the Ministry of Oil and Gas (the "MOG").

The principal law for the development of oil and natural gas reserves is the Subsoil and Subsoil Use Law dated 24 June 2010 (the "Subsoil Law").

MOG is entitled to organise tenders for the granting of subsoil use rights, to conclude and register subsoil use contracts, as well as to supervise compliance during the implementation of subsoil use contracts.

The State also adopted the Gas and Gas Supply Law dated 9 January 2012 (the "GasLaw"). See more detail on this Law in question 6.1.

3.2 How are the State's mineral rights to develop oil and natural gas reserves transferred to investors or companies ("participants") (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of those rights or interests under domestic law?

The State awards subsoil use rights either through direct negotiations (in certain limited cases) or on the basis of a tender (open or restricted).

Upon the results of a tender or direct negotiations, a contract (having the form of concession contract) is executed with the MOG.

PSAs were eliminated as of 1 January 2011 though a number of PSAs entered into prior to 2009, remain valid.

Earlier, Kazakhstan instead of having a contractual regime, had a two-tier regime, comprising a licence and further execution of a subsoil use contract. The licensing regime was abolished from September 1999, however, licences issued before September 1999 remain valid. Currently, licence provisions are considered in practice only with regard to the procedure of suspension and termination of subsoil use rights.

3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations).

The Subsoil Law provides for the following types of contracts:

  1. exploration contracts;
  2. production contracts;
  3. combined exploration and production contracts;
  4. contracts for construction and/or exploitation of underground facilities not connected with exploration or production; and
  5. contracts for state geological research of subsoil.

Exploration contracts are concluded for six years. For offshore oil deposits, this term may be extended for a two-year period, if the contractor applies for an extension no later than six months prior to the contract's expiry.

Production contracts are concluded for 25 years. A contract for production at a deposit with large and unique reserves may be concluded for up to 45 years. The period of contract may be extended if the contractor applies for an extension no later than six months prior to the expiration of the effective period of the contract and provided that there have been no breaches of the contract.

Combined exploration and production contracts can be granted only for deposits of strategic importance and for complex geological structures.

For the holder of an exploration contract, when a commercial discovery is made and reserves are defended in a State reserves commission, the subsoil user has exclusive rights to conduct negotiations for a production contract with the MOG.

Subsoil users under all subsoil use contracts are obliged to comply with financial and technical obligations set out in their work programmes, as well as finance tuition of local personnel (approximately 1 per cent), make annual transfers to an abandonment fund (0.5-1 per cent), reach certain percentage of local content in staff, goods, works and services, procure under governmental procurement rules for subsoil users and make payments for social economical development of the region they operate in.

3.4 To what extent, if any, does the State have an ownership interest, or seek to participate, in the development of oil and natural gas reserves (whether as a matter of law or policy)?

The State created the National Oil Company KazMunayGas, through which (including KazMunayGas's subsidiaries and affiliates) the State takes part in a number of subsoil use contracts. According to the Subsoil Law KazMunayGas shall have not less than 50 per cent of ownership interest in any oil and gas contracts in the Caspian Sea.

Furthermore, if the State decides to realise its priority right, KazMunayGas acts as the entity which buys shares alienated by their owners on the conditions not less favourable than proposed by other prospective purchasers.

3.5 How does the State derive value from oil and natural gas development (e.g. royalty, share of production, taxes)?

The State derives value from oil and natural gas developments mainly through taxes and other obligatory payments to the budget and participation of State-owned oil companies in oil and gas contracts. For the PSAs, it also receives shares in production.

Subsoil users are subject to ordinary taxes (VAT, corporate income tax, etc.) and a number of special taxes for subsoil users.

Furthermore, the State imposes obligations on subsoil users for payments for social economic development of regions, for financing of tuition of Kazakhstani staff, by imposing local content obligations in staff, procurement of goods, works and services.

Also, the State derives value from KazMunayGas which participates in all oil and gas contracts in the Caspian Sea, as well as in some onshore projects.

3.6 Are there any restrictions on the export of production?

There are the following restrictions on the export of production:

Oil produced at the exploration phase and a certain percentage of oil produced at the production stage shall be sold within Kazakhstan to ensure the needs of domestic refineries.

Export of oil is regulated by the State under export customs duties, export quotas and necessities to preliminary approve the volume of oil to be exported in monthly transportation schedules. Exports of certain oil products are from time to time restricted (normally in harvest time and when refineries are stopped for planned repairing) by the Government resolutions.

According to the Subsoil Law, the Government has also the statutory 1) pre-emptive rights to purchase production at prices not exceeding either the price agreed under a third-party sales contract or world market prices, and 2) rights to require all or part of the production during periods of emergency or military regimes.

KazTransGas being the national operator has a pre-emptive right to purchase from the producer raw gas and commercial gas under the prices calculated according to a specific formula (see question 8.1).

3.7 Are there any currency exchange restrictions, or restrictions on the transfer of funds derived from production out of the jurisdiction?

If the value of funds transferred from Kazakhstan exceeds a certain criterion, then the transferor shall either notify or register the currency operations with the Kazakhstan National Bank.

There are no other restrictions on the repatriation of capital and distribution of earnings from production out of Kazakhstan, except for the following. In case of an event that threatens the economic safety and stability of the financial system of Kazakhstan, the President of Kazakhstan is authorised to set a special currency regime, whereunder restrictions on parties involved in currency operations may be imposed by the Government.

3.8 What restrictions (if any) apply to the transfer or disposal of oil and natural gas development rights or interests?

Almost any alienation or disposal of subsoil use rights or interests in (as well as issuance of shares of) subsoil users or their direct or indirect parent companies, if principal activity of such parent company is connected to subsoil use in Kazakhstan require the waiver from the State's priority right and the MOG's consent. The execution of a transaction without the MOG's consent entitles the MOG to unilaterally terminate the subsoil use contract and is the basis of acknowledgment of such transaction as void. There are limited exceptions from the above rules, such as: no consent is needed for transfer of shares circulated on stock exchanges; transfer of not more than 0.1 per cent of shares; etc.

3.9 Are participants obliged to provide any security or guarantees in relation to oil and natural gas development?

When applicants to obtain subsoil use rights or direct or indirect shares in a subsoil apply to the MOG (which issues its consent on the transaction), one of the standard requirements is to provide evidence that they have sufficient financial resources. In some projects where Kazakshtan also takes part, new entering parties shall provide a guarantee to other participants of the project.

3.10 Can rights to develop oil and natural gas reserves granted to a participant be pledged for security, or booked for accounting purposes under domestic law?

Yes, according to the Subsoil Law subsoil use rights may be pledged provided a relevant MOG's consent (pledge certificate) is obtained (there is no exception with regard to pledge). Funds received under the pledge of subsoil use rights may be used only for the development of the applicable contract area. Enforcement of the pledged subsoil use right must be carried out through a public auction. To participate in such auction one shall preliminarily obtain the prior MOG's consent.

3.11 In addition to those rights/authorisations required to explore for and produce oil and natural gas, what other principal Government authorisations are required to develop oil and natural gas reserves (e.g. environmental, occupational health and safety) and from whom are these authorisations to be obtained?

The principal document for exploration and production of oil and gas is a duly concluded contract with the MOG together with a work programme. According to the Subsoil Law adopted in 2010, all work programmes shall be based on project documents to be approved by the MOG and the Geology Committee. Draft subsoil contract and project documents are subject to a number of positive conclusions of mandatory State expertise from the Ministries of Environmental Protection, Industry and New Technologies, Emergency Situations, Finance and Health.

Furthermore, operational activity of subsoil users are also subject to numerous licences and permits, such as environmental permits, industrial safety permits, permits on the use of certain equipment and materials, work permits for foreign staff, etc. Drilling operations are subject to a licence (either of a subsoil user or its contractor).

3.12 Is there any legislation or framework relating to the abandonment or decommissioning of physical structures used in oil and natural gas development? If so, what are the principal features/requirements of the legislation?

Yes, the abandonment and decommissioning of wells and other facilities used during subsoil use operations are regulated in general by the Subsoil Law, the Environmental Code, and specifically by the Government Resolution dated 6 June 2011 No. 634.

All subsoil users shall create an abandonment fund (a liquidation fund) on an escrow account in a Kazakh bank, the value of which is established in the subsoil user's contract (normally 1 per cent of annual expenses). The subsoil user may use funds for liquidation of the subsoil use project upon the MOG's consent and approval of the Geology and Subsoil Use Committee of the Ministry of Industry and New Technologies.

Once operations are terminated, a subsoil user shall elaborate a project on termination (conservation) and obtain an official act signed by the special commission validates, which confirms that all necessary works have been completed.

3.13 Is there any legislation or framework relating to gas storage? If so, what are the principle features/requirements of the legislation?

According to the Subsoil Law, construction and/or use of underground gas storage facilities are subject to subsoil use contract with the MOG on the basis of direct negotiations.

The construction and operation of underground and above ground gas storage facilities requires a licence and is subject to a number of permits and approvals, similar to those required for the construction of pipelines and related infrastructure, as discussed in question 6.2.

By law, gas storage is considered as a natural monopoly, and, therefore, tariffs for gas storage must be approved by the NMA.

4 IMPORT / EXPORT OF NATURAL GAS (INCLUDING LNG)

4.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of natural gas (including LNG).

According to the Gas Law only the following entities may transport commercial gas by trunk pipelines for export outside of Kazakhstan, specifically:

  1. the national operator (KazTransGas);
  2. producers of commercial gas;
  3. subsoil users being owners of commercial gas produced during processing of their raw gas; and
  4. entities which transit gas produced abroad through the territory of Kazakhstan.

A gas transportation company shall refuse to transport gas if: (i) the gas does not comply with requirements of technical regulations or national standards; or (ii) the subsoil user cannot provide documentary evidence that the commercial gas was first offered for purchase by the national operator.

There is a special order of priority of access to trunk pipelines (see question 6.6).

Export of LNG by rail, water or motor transport can be conducted only by:

  1. producers of LNG;
  2. owners of LNG processed from their own raw materials;
  3. entities, which transit LNG produced outside of Kazakhstan through the territory of Kazakhstan; and
  4. gas network organisations.

There is currently no export duties for natural gas or LNG, however, the Government is authorised to set them by its resolution.

Import of natural gas in a gaseous condition is subject to zero rate duties. Import duties for LNG are 5 per cent of the customs cost of the LNG imported.

5 IMPORT / EXPORT OF OIL

5.1 Outline any regulatory requirements, or specific terms, limitations or rules applying in respect of cross-border sales or deliveries of oil and oil products.

The Government regulates exports of oil and oil products by setting custom duties and by establishing a requirement to preliminarily book capacities for transportation in annual and monthly transportation schedules to be approved by the MOG.

Customs duties for the export of crude oil from April 2013 is USD 60 per tonne. The duties do not apply to exports of oil produced under the Production Shares Agreements and those subsoil use contracts which set out exemption from the payment of duties for the export of crude oil.

Furthermore, the authorities are entitled to apply provisions of the transfer pricing legislation, which regulates both oil export sales and sales on the domestic market, which relate to international transactions, regardless of whether the international transaction is between related parties. In case tax authorities find out a difference between the price of sales and an acceptance acceptable market price range, they are entitled to adjust the tax base accordingly.

As Kazakhstan, Russia and Belarus have created the Customs Union, they are in the process of preparation and execution of the legislative acts for operation of that Union, which potentially may also affect oil and gas exports in the future.

6 TRANSPORTATION

6.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities).

The issues related to transportation pipelines and associated infrastructure are governed by the Trunk Pipelines Law dated 22 June 2012 (the "Pipelines Law") and the Gas Law.

Pipeline Law regulations

The Pipeline Law does not apply to relationships arising out of international agreements executed by Kazakhstan until the adoption of the 1995 Constitution, as well as associated subsequent agreements signed by the Kazakhstan Government. Individuals and foreign companies are prohibited from owning trunk pipelines. If a new construction of a trunk pipeline is initiated, the Government has a priority right to participate, with not less than 51 per cent interest. Furthermore, trunk pipelines as well as shares in their owners and in entities that may directly or indirectly influence the decisions adopted by such owners are deemed to be strategic assets. Accordingly, any transactions (alienation, encumbrances) with strategic assets require prior consent of the Government. If the State owns 50 per cent or more of a trunk pipeline, it shall be operated by the national operator (KazTransOil JSC).

Gas Law regulations

The Gas Law sets out as one of the major principles in the gas and gas supply sphere the principle of priority of domestic demand satisfaction with commercial and LPG produced in Kazakhstan, and establishes as one of the objectives to create a unified commercial gas supply system (the "UCGSS") and conditions for uninterrupted supply to satisfy the domestic demand for commercial gas and LPG.

The UCGSS includes, inter alia, trunk and connection gas pipelines, gas storage facilities, gas distribution systems, gas consuming systems, and gas compressor stations and shall be operated by the national operator KazTransGas. Field pipelines, gas use systems for household and domestic consumers, facilities dedicated for production and re-gasification of LNG, as well as facilities dedicated for storage, transportation, sale and use of LPG are not included into the UCGSS.

Objects related to the UCGSS may be privately owned, but in case of transactions with such objects or shares in their owners, KazTransGas has a priority right to acquire them.

KazTransGas is authorised to set the tariffs for gas transit and gas storage within Kazakhstan upon approval of the Natural Monopolies Agency (the "NMA"). Tariffs for gas transit for exports are subject to agreement by the parties.

6.2 What Governmental authorisations (including any applicable environmental authorisations) are required to construct and operate oil and natural gas transportation pipelines and associated infrastructure?

As discussed in question 6.1 above, the Government has a priority right for any new construction of a trunk pipeline. Under the Gas Law the issues on construction of gas transit and (or) export pipelines is adopted by the Government. The entity intending to construct a trunk pipeline shall forward a commercial proposal to the MOG. Either after obtaining the waiver of the priority right or upon expiration of 45 days since the date when the commercial proposal was filed, one can start preparation for construction. Firstly, a design estimate shall be elaborated and approved with the State's expertise. Design estimate is done by a licensed organisation.

Furthermore, licences are also required for the construction and operations of trunk pipelines, processing plants, and other infrastructure. Depending on the type of licence, they are issued by the Committee for Construction and Housing and Public Utilities under the Ministry of Regional Development (design and construction), Ministry of the Environment, the MOG and the NMA.

During the construction one shall also obtain: (i) technical conditions on connection from the operators of pipelines, to which the constructed object is connected; (ii) authorisation for land use; as well as (iii) other permits and approvals from authorities responsible for construction, environmental, industrial safety and health protection.

6.3 In general, how does an entity obtain the necessary land (or other) rights to construct oil and natural gas transportation pipelines or associated infrastructure? Do Government authorities have any powers of compulsory acquisition to facilitate land access?

Access to oil and natural gas transportation pipelines and associated infrastructure is secured on the basis of an agreement with the trunk pipeline owner or operator. According to Kazakh law, connections to existing trunk pipelines are based on an equal access principle. Certain priorities are granted to specific categories of users set out in the Pipeline Law (see more detail in question 6.6 below). The owner of the connection pipeline is responsible for all costs related to such connection.

6.4 How is access to oil and natural gas transportation pipelines and associated infrastructure organised?

Access to oil and natural gas transportation pipelines and associated infrastructure is secured on the basis of an agreement with the trunk pipeline owner or operator. According to Kazakh law, connections to existing trunk pipelines are based on an equal access principle, with priorities granted to certain categories of users set out in the Pipeline Law (see more detail in question 6.6 below). The owner of the connection pipeline is responsible for all costs related to such connection.

6.5 To what degree are oil and natural gas transportation pipelines integrated or interconnected, and how is co-operation between different transportation systems established and regulated?

Most of the oil and gas pipelines in Kazakhstan were constructed during the Soviet era (30-40 years ago) and are operated by KazTransOil. The major exception is the Caspian Pipeline Consortium oil pipeline.

There are currently two gas distribution networks, i.e., the west one and the southern one. The southern primarily uses the imported gas for consumption of population and significantly depends on gas supplies from Uzbekistan. As there is currently no link between the country's gas-producing areas and its main industrial centres in the south and the city of Almaty, according to the General Scheme of Gasification of Kazakshtan to be adopted in the near future, Kazakhstan will construct gas pipelines from the north to the south and from the west to the east. Certain work has already commended in southern regions.

When the State adopted the Gas Law in 2012, one of the primary goals was to establish the UCGSS (including all trunk gas pipelines) to integrate all gas distribution systems of Kazakshtan.

See also questions 6.3 and 6.4 regarding interconnection.

6.6 Outline any third-party access regime/rights in respect of oil and natural gas transportation and associated infrastructure. For example, can the regulator or a new customer wishing to transport oil or natural gas compel or require the operator/owner of an oil or natural gas transportation pipeline or associated infrastructure to grant capacity or expand its facilities in order to accommodate the new customer? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated?

The regime of access to oil and natural gas transportation and associated infrastructure by third parties is based on the principle of equal rights to regulated transportation and associated infrastructure.

A. Access to oil and oil product pipelines: According to the Pipelines Law in case of insufficient pipeline capacity, access shall be granted in the following order:

  1. to entities which supply oil to Kazakhstan oil refineries;
  2. to owners/title holders of trunk pipelines for transportation of oil and oil products of such owners/title holders and its affiliated entities;
  3. to entities which transport products for the fulfilment of the decisions of the Kazakhstan Government or for the fulfilment of obligations under international treaties to which the State is a party;
  4. to entities which have invested into the construction of a trunk pipeline (or for increasing the capacity of a trunk pipeline);
  5. to entities which have accepted obligations to supply minimum mandatory volumes of oil (oil products) pursuant to agreements with the trunk pipeline owner/operator; and
  6. to entities which supply oil meeting certain quality requirements of the transported oil with mandatory technical requirements.

B. Access to gas pipelines: In case of limited capacity of a gas trunk pipeline, access is granted according to the Kazakhstan Law on Natural Monopolies and Regulated Markets dated 9 July 1998 (the "Natural Monopolies Law"). This Law is based on the principle of equal access for natural monopoly services, such as pipeline transportation. There are also Rules for Providing Equal Access to Regulated Services in the Area of Natural Monopolies approved by the Government Decree dated 19 January 2012 No. 107, which state that in case of limited capacity of a gas pipeline, access shall be granted to the following entities which supply gas to:

  1. the general public for household needs;
  2. public utilities;
  3. entities which use gas as raw material or as fuel in continuing technological processes;
  4. electric power stations and industrial facilities; and
  5. to other consumers.

C. Swaps: Swap operations are permitted for the transportation of oil, gas and oil products by trunk pipelines. For example, Kazakhstan's national company KazMunayGas annually signs an agreement with Russian company Gazprom for swap-supplies of Karachaganak gas.

6.7 Are parties free to agree the terms upon which oil or natural gas is to be transported or are the terms (including costs/tariffs which may be charged) regulated?

As trunk pipelines are deemed to be natural monopolies, then agreements with the pipeline operator are based on a model agreement approved by the Government and are subject to regulated tariffs and conditions.

7 GAS TRANSMISSION / DISTRIBUTION

7.1 Outline broadly the ownership, organisational and regulatory framework in relation to the natural gas transmission/distribution network.

Relationships connected to natural gas transmission and distribution network are regulated by the Gas Law. There is no special requirement for ownership of gas distribution and gas network companies, provided they do not own trunk pipelines. Possession of trunk pipelines by individuals and foreign entities is prohibited.

7.2 What Governmental authorisations (including any applicable environmental authorisations) are required to operate a distribution network?

Under the Gas Law gas distribution and network companies shall obtain accreditation with the MOG.

Furthermore, as distribution facilities are categorised as industrial hazardous facilities, then their owner shall obtain construction and operations approvals, including, inter alia, from authorities on industrial safety, environmental and fire services.

7.3 How is access to the natural gas distribution network organised?

Access to the natural gas distribution system is regulated in the general order for construction activities set out by the Kazakshtan Law on Architecture, Urban Planning and Construction dated 16 July 2001. The entity planning to connect its facility to the gas distribution system must request the local executive body to require the owner of gas distribution facilities to issue technical requirements for such connection. Also relevant approvals for land plots for construction and positive conclusion of State expertise on design estimates shall be obtained. The design estimates and construction shall be performed by a licensed organisation.

7.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers?

It depends on whether a distributor has free capacities or not. If there are free capacities, then the regulator is entitled to require the gas distributor to provide access to third parties. If there are no free capacities, the regulator cannot make the distributor to expand its system for accommodation of new customers. However, interested new customers can agree on the expansion of the distribution system (enlarging its capacity) by agreement with the owner. In such case the parties agree for which part of the expenses spent for such expansion the customer will be responsible.

7.5 What fees are charged for accessing the distribution network, and are these fees regulated?

The operation of a gas distributor is acknowledged as a natural monopoly and regulated by the NMA. The price for each gas distributor is finally approved by the relevant territorial division of the NMA.

7.6 Are there any restrictions or limitations in relation to acquiring an interest in a gas utility, or the transfer of assets forming part of the distribution network (whether directly or indirectly)?

It depends on whether a gas utility or assets forming part of the distribution network (directly or indirectly) form strategic objects or not (see more detail on strategic objects in questions 6.1 and 11.4). In case of strategic objects, the owner intending to sell its asset shall preliminarily obtain the waiver of the State's priority right and Government consent. Any transaction in violation of this requirement will not be valid.

Furthermore, KazTransGas, the national operator of the UCGSS (see question 6.1), has a priority right to acquire any UCGSS facilities or shares/interests in entities possessing UCGSS facilities.

8 NATURAL GAS TRADING

8.1 Outline broadly the ownership, organisational and regulatory framework in relation to natural gas trading. Please include details of current major initiatives or policies of the Government or regulator (if any) relating to natural gas trading.

The Gas Law adopted in 2012 introduced substantial State control over gas sales in Kazakhstan.

For example, taking into consideration, that the State has the pre-emption right to acquire gas offered to third parties, the price of such gas which might be sold to the State is determined as follows.

The subsoil user can determine the prices for crude and commercial gas only within the framework of the following formula:

The final cost shall be the addition of the following costs:

1) production costs of the raw gas (on a per-unit basis) plus;

2-1) for raw gas: expenses for transportation of raw gas to the place of transfer to the national operator; and

2-2) for commercial gas:

  1. expenses for the processing of raw gas into commercial gas; and
  2. expenses for transporting the commercial gas to the place of transfer to the national operator; plus

3) profits from the sale of raw or commercial gas not exceeding 10 per cent.

Besides, the State authorities are entitled to perform expert evaluation of gas prices and to approve them.

Accordingly, subsoil users may not set prices that exceed the prices for raw and commercial gas approved by the MOG.

The State's pre-emptive right does not apply to:

  1. raw gas extracted from gas and/or gas and condensate deposits;
  2. commercial gas produced from raw gas extracted from gas and/or gas and condensate deposits;
  3. LNG and commercial gas obtained as a result of its re-gasification;
  4. raw gas which is sold pursuant to Kazakhstan's international obligations;
  5. commercial gas produced abroad and imported for use in Kazakhstan;
  6. commercial gas produced abroad from raw gas extracted in Kazakhstan based on Kazakhstan's international treaties;
  7. commercial gas produced pursuant to an agreement executed under a partnership in the area of gas supply; or
  8. raw or commercial gas, extracted (produced) by the subsoil users under the Production Share Agreements.

8.2 What range of natural gas commodities can be traded? For example, can only "bundled" products (i.e., the natural gas commodity and the distribution thereof) be traded?

The Gas Law stipulates the following range of gas commodities: crude gas; natural gas commodity; LNG; and LPG. All of them can be traded in Kazakhstan. There is no requirement that only "bundled" products can be traded.

9 LIQUEFIED NATURAL GAS

9.1 Outline broadly the ownership, organisational and regulatory framework in relation to LNG facilities.

LNG facilities have the same ownership, organisational and regulatory framework as a pipeline and its infrastructure and there is no specific regulations on their ownership, organisational and regulatory framework (see question 6.1).

9.2 What Governmental authorisations are required to construct and operate LNG facilities?

See questions 6.1 and 6.2.

9.3 Is there any regulation of the price or terms of service in the LNG sector?

See question 8.1.

9.4 Outline any third-party access regime/rights in respect of LNG Facilities.

See questions 6.1 and 6.6.

10 DOWNSTREAM OIL

10.1 Outline broadly the regulatory framework in relation to the downstream oil sector.

Oil processing in Kazakhstan is regulated primarily by the Petroleum Turnover Law. This Law regulates the issues of production and sale of such oil products as gasoline, aviation fuel, diesel fuel and oil fuel.

The MOG exercises State control over the production of oil products.

The Petroleum Turnover Law sets the requirements for oil origins and quality certificates, approval of annual oil processing and oil products supply plans and approval of investment programmes.

Producers and sellers of oil products are also obliged to submit oil products turnover declarations to the MOG.

10.2 Outline broadly the ownership, organisation and regulatory framework in relation to oil trading.

Requirements of oil trading are mainly connected to:

  • obligations for supplying oil to the local markets; and
  • obligations to have documents and declarations for the oil produced, the certificate of quality and relevant transportation documents.

If the oil will be sold abroad, then limitations for export shall apply (see questions 3.6 and 5.1).

Exporters of oil pay a rent tax at a rate ranging from 7 per cent to 32 per cent, depending on the market price for oil (transportation costs or other deductions excluded). Export transactions must be registered with, or notified to, the National Bank.

11 COMPETITION

11.1 Which Governmental authority or authorities are responsible for the regulation of competition aspects, or anti-competitive practices, in the oil and natural gas sector?

The competency to regulate competition aspects, or anti-competitive practices, in the oil and natural gas sector belong to the NMA and the Agency for the Protection of Competition ("Antimonopoly Agency"). The NMA is empowered to regulate prices of natural monopolies and the Antimonopoly Agency is responsible for the protection of competition.

11.2 To what criteria does the regulator have regard in determining whether conduct is anti-competitive?

Determination of whether a certain conduct is anti-competitive is made by officials of the Antimonopoly Agency pursuant to the Competition Law, which prohibits and (or) restricts monopolistic activity, anticompetitive actions of State authorities and unfair competition. Among others, the following monopolistic activities are prohibited:

  1. anti-competitive agreements among market entities (e.g.: agreements establishing coordinated prices or other conditions for purchasing or selling goods; agreements on raising, decreasing or maintaining prices at auctions; agreements on dividing commodity markets on a territorial basis, by assortment of goods, by cluster(s) of sellers or buyers, or by other parameters; and agreements on refusal to conclude contracts with specific sellers of buyers);
  2. anti-competitive actions of market entities (e.g., unreasonably restricting the manufacture or sales of goods, including establishing quotas or unreasonably refusing to contract with certain sellers or buyers, application of discriminating conditions to equivalent contracts with other subjects); and
  3. abuse of a predominant or monopoly position in the market (e.g., establishing or sustaining monopolistically high (low) prices, or applying different prices or conditions similar to agreements with entities without reasonable justification, setting restrictions on resale of commodities under territorial basis, quantity and price of the goods, circle of consumers).

The Competition Law has extraterritorial effect and applies to actions of entities performed outside Kazakhstan, if as a result of such actions either competition in Kazakhstan is restricted or assets, shares of the market entities on the Kazakhstan territory or rights of Kazakh legal entities are directly or indirectly affected.

The Antimonopoly Agency is authorised to conduct investigations and charge fines to those entities which violate the Competition Law.

11.3 What power or authority does the regulator have to preclude or take action in relation to anti-competitive practices?

Under the Competition Law, the Antimonopoly Agency is authorised to introduce mandatory prescripts on the restraint or elimination of violations, demand termination of contracts being not in compliance with competition legislation, review cases of administrative violations of competition legislation, charge fines to those entities which violate the Competition Law and, in case of dispute, bring court actions against violators of competition legislation.

11.4 Does the regulator (or any other Government authority) have the power to approve/disapprove mergers or other changes in control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets? If so, what criteria and procedures are applied? How long does it typically take to obtain a decision approving or disapproving the transaction?

Depending on the type of mergers or other control over businesses in the oil and natural gas sector, or proposed acquisitions of development assets, transportation or associated infrastructure or distribution assets, the following consents or notifications may be required:

  1. For transactions (alienation, encumbrances) with subsoil use rights, shares in subsoil users or entities which can directly or indirectly influence decisions adopted by a subsoil user, if the principal place of business of such entity is connected to subsoil use in Kazakhstan, an owner of the subsoil use rights of above shares shall preliminarily obtain waiver of the State's priority right and consent of the Competent Authority. Both the waiver and consent are obtained within the framework of a single procedure, taking according to the Subsoil Law, 70 business days. However, in practice it can take 4-6 or more months, as the authorities are entitled to request additional information from the applicant. There are some limited exceptions discussed in question 3.8 above.
  2. According to the Competition Law, preliminary consent of the Antimonopoly Agency shall be obtained for any transaction resulting in so-called "economic concentration", i.e.:

    1. the reorganisation of a market entity by merger or acquisition;
    2. acquisition of 25 per cent or more of the shares in a market entity; and
    3. acquisition of the main production assets/intangible assets of a market entity where the balance sheet value of the assets exceeds 10 per cent of the balance sheet value of the main production assets and intangible assets of another market entity that is selling/transferring the assets.
    Furthermore, the Antimonopoly Agency shall be notified within 45 calendar days from the date of execution of the following transactions:

    1. participation of the same individuals in the executive bodies of two or more market entities; and
    2. obtaining the right to issues mandatory orders for a entity on the basis of a consortium, agency or trust management agreements.
    The above (i)-(v) cases are applicable if the balance amount of assets of the purchaser and the target company for the last financial year exceeds approximately 10 million monthly calculation indexes (approximately USD 111 million). The procedure for obtaining the Antimonopoly Agency's consent is set out by the Competition Law and usually takes several months to obtain.
  3. According to the Natural Monopolies Law, transfer of more than 10 per cent of the shares in entities that are classified as natural monopolies require the prior notification of the NMA.
  4. The Kazakhstan Law on State Property dated 1 March 2011 (the "State Property Law") sets out that for alienation or encumbrance of strategic assets, such as trunk oil and gas pipelines or shares in owners of strategic objects, or entities which can directly or indirectly influence decisions adopted by the owner, the owner shall preliminarily obtain the Government's consent and the State's waiver of its pre-emptive right. For these purposes, the owner of the strategic object must apply to the Ministry of Economic Development and Trade, which by law, shall considered the application within sixty working days. In practice, however, it usually lasts longer. If the Government decided to realise its priority right, the transactions shall be completed within two years. The owner of strategic objects is entitled to revoke from the transaction any time and the State's priority right is automatically terminated.
  5. According to the State Property Law, the State has not only the priority right with regard to transactions with strategic objects, but also the right to unilaterally block such transaction, e.g. if it may create a threat to the national interests of Kazakhstan. A special commission on strategic objects issues its recommendation on either granting a consent or denying the transaction.
  6. Transfer of any UCGSS facilities or any shares in owners of UCGSS facilities is subject to a priority right of KazTransGas, the national operator of UCGSS (see question 6.1).

12 FOREIGN INVESTMENT AND INTERNATIONAL OBLIGATIONS

12.1 Are there any special requirements or limitations on acquisitions of interests in the natural gas sector (whether development, transportation or associated infrastructure, distribution or other) by foreign companies?

The acquisition of interests gas (gas condensate) subsoil users, as well as in companies which possess a significant percentage of direct or indirect shares in such subsoil users, is allowed only with prior consent of the Competent Authority and waiver of the State's pre-emptive right. The exception is given for shares circulated on stock exchanges for which a prior consent of the Competent Authority was obtained.

According to the Pipelines Law, trunk pipelines cannot be owned by foreign entities.

Also, according to the State Property Law, foreign individuals, entities and Kazakhstan entities with foreign participation are not allowed in public auctions for sale of strategic objects (e.g., trunk oil and gas pipelines).

12.2 To what extent is regulatory policy in respect of the oil and natural gas sector influenced or affected by international treaties or other multinational arrangements?

The Constitution and all of Kazakshtan laws specifically prescribe that international agreements have priority over Kazakhstan laws.

Kazakhstan has ratified around 50 Bilateral Investment Treaties (BITs), which generally create more favorable rights for investors than those provided by Kazakshtan law.

Kazakhstan also observes its commitments undertaken under international agreements with countries of Customs Union, CIS counties, China, counties of the Energy Charter Treaty, and the Kyoto Protocol.

With regard to activities related to the Caspian Sea, Kazakhstan acts along the agreements signed during the Soviet Union, one signed between Russia and Persia in 1921 and another between the USSR and Persia in 1940.

All five littoral states to the Caspian Sea have signed the Framework Convention for the Protection of the Marine Environment of the Caspian Sea in 2003 (Tehran), aimed to protect the Caspian environment from all sources of pollution including the protection, preservation, restoration and sustainable and rational use of the biological resources of the Caspian Sea.

Kazakhstan has also signed agreements on delineation of the bottom of the relevant areas of the Caspian Sea with Russia and Azerbaijan.

13 DISPUTE RESOLUTION

13.1 Provide a brief overview of compulsory dispute resolution procedures (statutory or otherwise) applying to the oil and natural gas sector (if any), including procedures applying in the context of disputes between the applicable Government authority/regulator and: participants in relation to oil and natural gas development; transportation pipeline and associated infrastructure owners or users in relation to the transportation, processing or storage of natural gas; downstream oil infrastructure owners or users; and distribution network owners or users in relation to the distribution/transmission of natural gas.

Generally, parties to a dispute are entitled to choose State courts or arbitration for resolution of their disputes. The State normally insists on the choice of local court, however, if a counteragent is a foreign entity, a choice of international arbitration can also agreed upon (except for issues on land plots in Kazakhstan and forming a Kazakh legal entity, which are subject to Kazakh courts only). Foreign arbitration decisions, but not local arbitration decisions, are considered final and binding.

13.2 Is Kazakhstan a signatory to, and has it duly ratified into domestic legislation: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; and/or the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID")?

Kazakhstan is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and to the ICSID. The Kazakhstan Parliament ratified the ICSID on 9 July 2004 with the entry into force from 6 December 2001. Though the New York Convention has been approved by the Presidential Decree dated 4 October 1995, but has not been ratified, it is common understanding in Kazakhstan that it is valid.

13.3 Is there any special difficulty (whether as a matter of law or practice) in litigating, or seeking to enforce judgments or awards, against Government authorities or State organs (including any immunity)?

Courts in Kazakhstan cannot be considered as fully independent. Judges generally take the position of the State authorities, unless a claimant has strong legal grounds for its claim. Court judgments, once issued, are enforceable.

Awards by local arbitration courts against State authorities on the dispute between subsoil users and the State authorities are practically not met. Though such awards are enforceable, however, they are not considered final and may be appealed to the local courts.

Kazakhstan is a party to two multilateral treaties for the mutual enforcement of court judgments within the CIS and seven bilateral treaties with China, India, the UAE, North Korea, Turkey, Mongolia and Pakistan. Judgments by foreign state courts of other countries will not be recognised by Kazakhstan courts. As Kazakhstan is a signatory to the NY Convention, the European Convention on International Commercial Arbitration (1961) and the ICSID, international arbitration awards are enforceable.

13.4 Have there been instances in the oil and natural gas sector when foreign corporations have successfully obtained judgments or awards against Government authorities or State organs pursuant to litigation before domestic courts?

Yes, there have been cases when foreign companies involved in the oil and gas industry successfully obtained judgments against State authorities before domestic courts. Such cases comprise disputes involving taxes and other obligatory payments, claims against imposed fines and other claims concerning implementation of subsoil use contracts, including acknowledgment of decisions of the Competent Authority on unilateral termination of a relevant subsoil use contract as invalid.

14 UPDATES

14.1 Please provide, in no more than 300 words, a summary of any new cases, trends and developments in Oil and Gas Regulation Law in Kazakhstan.

The MOG is currently preparing amendments to the Subsoil Law to be adopted supposedly by mid-2014. The main amendments which might be adopted are:

  1. The necessity to obtain the waiver of the State's priority right will cover only transactions with fields of strategic interest. It will allow for other subsoil users to shorten the procedure of obtaining the permission to transactions for 50 business days (only 20 business days for obtaining MOG consent will be left).
  2. In addition to the tender on granting subsoil use rights, a new notion of auction, where participants raise amounts of signature bonus will be added.
  3. For contracts concluded after 1 January 2004, it will be allowed to separate subsoil use rights and contract territories, to conclude new contracts.
  4. Acquisition of shares in subsoil users (their parent companies) operating large and unique fields by foreign companies will result in the obligation to participate in the State programme of industrial innovation development, to be commenced within a five-year period.
  5. VAT on the exploration stage will be abolished.
  6. Model contract on exploration, production, E&P will become a must, not as a recommendation form.
  7. Onshore subsoil users will be granted with rights to prolong their contracts.

The State also is considering elaboration of a Mining Code to replace the Subsoil Law.

Originally published by International Comparative Legal Guides.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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