The changes in the investment climate due to the adoption of the new law on subsoil and subsoil use

The changes in the investment climate due to the adoption of the new law on subsoil and subsoil use

On 24 June 2010, the President of the Republic of Kazakhstan signed a new Law ‘On Subsoil and Subsoil Use’ No. 291-IV (hereinafter – the ‘New Subsoil Law’). The New Subsoil Law amends[1] the Law of the Republic of Kazakhstan ‘On Subsoil and Subsoil Use’ No. 2828, dated 27 January 1996 (hereinafter – the ‘Subsoil Law’) and the Law of the Republic of Kazakhstan ‘On Oil’ No. 2350, dated 28 June 1995 (hereinafter – the ‘Oil Law’).

In this regard, a number of concepts of the Oil Law were extended to the whole subsoil use area. In accordance with the New Subsoil Law, the concept of ‘operator’ and ‘strategic partner’ therefore applies not only to the contracts for oil operations, but also to all other types of subsoil use contracts. Accordingly, we can say that the New Subsoil Law is aimed at harmonising the legislation.

We assume that the combination of the Oil Law and Subsoil Law itself will not cause any sufficient deterioration of subsoil users’ position.

Besides the codification of these laws, the New Subsoil Law also provides for a wide range of innovations to the legal regulation of subsoil use in Kazakhstan.

Firstly, we would like to note that the New Subsoil Law significantly alters the powers of the state authorities in the area of subsoil use. In particular, many of the powers to approve any by-laws were transferred to the competence of the Government. This is due to the recent amendments to the Law ‘On Private Entrepreneurship’, according to which the state control over the subjects of private enterprise can only be performed to ensure compliance with laws and Governmental Resolutions.

Moreover, the New Subsoil Law enshrines many of the existing powers of the state authorities.

It should also be noted that the New Subsoil Law considers the changes in the system of state authorities that emerged as a result of the Decree of the President of the Republic of Kazakhstan ‘On Further Improvement of the State Management System of the Republic of Kazakhstan’, dated 12 March 2010, according to which such Ministries as the Ministry of Industry and New Technologies and the Ministry of Oil and Gas of the Republic of Kazakhstan emerged.

In terms of the individual innovations provided for by the New Subsoil Law, we may note the following in particular:

1.   The Procedure for Entering into a Contract

The procedure for signing a subsoil use contract has been detailed. The said procedure is represented in the New Subsoil Law as follows:

1.   Announcement of the competition results or signing the minutes of direct negotiations.

2.   Development and approval of project documents (within 6 months for a project of prospecting operations when entering into a contract for exploration, combining exploration and production, and within 18 months for project documents on production when signing the contract for production. These terms are calculated from the day of signing the minutes of direct negotiations or the announcement of the competition results);

3.   Development and approval of the working program based on the project documents. The working program is agreed within a month after the receipt of the program by an authorised agency for subsoil study and use. The agreement is performed simultaneously with examining the draft contract;

4.   Development and approval of the draft subsoil use contract. The draft is developed on the basis of a standard contract, the minutes of the direct negotiation or the winner’s bid, and the approved working program, which has been developed under the developed and properly approved project documents. The draft contract has to undergo three examinations (before it was 7 examinations) and 1 agreement with an authorised agency for subsoil study and use;

5.   Signing and registration of the subsoil use contract.

Please note that the New Subsoil Law provides for a certain procedure for the development of documents. In the meantime, there is one contradiction: the draft contract, inter alia, should be developed under the approved working program, while the said working program is approved simultaneously with examining the draft contract.

In any event, please note the issues regarding the contracts for combining the exploration and production of minerals.

The New Subsoil Law allows for the signing of contracts for combining exploration and production only under the Resolution of the Government of the Republic of Kazakhstan, and only in respect of subsoil plots and fields of strategic importance and (or) with a complex geological structure.

Pursuant to the New Subsoil Law, at the stage of exploration the discussed type of contracts are subject to the provisions of the laws on exploration contracts. After the discovery and evaluation of a field and proper approval of the relevant project documents under the exclusive right to production due to commercial discovery, the contract is amended in view of the production stage, whereupon such a contract is subject to the legislation on contracts for production, unless otherwise specified by the laws.

At the same time, a number of issues remain unclear. In particular, the wording of the definition of subsoil plots (fields) with a complex geological structure is rather uncertain.

The interesting fact is that until the last moment, the contract for combining exploration and production was not included into the draft of the New Subsoil Law.

The decision to include such type of contract into the Draft law was made by the Government of the Republic of Kazakhstan shortly before the adoption of the Draft law by the Majilis by sending the opinion on the amendments to the deputies, who suggested leaving this type of contract in the Draft law.

2.   Assignment of Subsoil Use Rights

A number of other innovations specified by the New Subsoil Law have affected the assignment of the rights to subsoil use.

The first issue, which should be noted, is the expansion of the list of assets, the transfer (free or compensable) of which requires the permit of a competent authority. In addition to the subsoil use right, a permit is therefore required for the transfer of so-called objects related to a subsoil use right. According to the New Subsoil Law, this concept includes the following:

• · participatory interest (stock) in a subsoil user;
• · participatory interest (stock) in an entity that may directly and (or) indirectly define and (or) influence the decisions of a subsoil user, if the main activity of this legal entity is connected with subsoil use in the Republic of Kazakhstan.
• · securities that confirm the ownership to the shares or that are convertible into shares of a subsoil user;
• · securities that confirm the ownership to the shares or that are convertible into shares of a legal entity, which may directly and (or) indirectly define and (or) influence the decisions of the subsoil user, if the main activity of this legal entity is connected with subsoil use in the Republic of Kazakhstan.

In addition to the ways of the assignment of subsoil use rights specified by the Subsoil Law, the New Subsoil Law introduces 2 new ways of assigning subsoil use rights:

• · execution on the subsoil use right and the objects related to the subsoil use right, including the pledge;
• · emergence of the right to a participatory interest in a subsoil user or legal entity that may directly and (or) indirectly define and (or) influence the decisions of a subsoil user, if the main activity of this legal entity is connected with subsoil use in the Republic of Kazakhstan, as a result of (i) an increase in the charter capital by additional contributions from one or more parties, as well as by (ii) the acceptance of a new participant into the list of participants in the legal entity.

The most important innovation of the New Subsoil Law is the regulation of permits for the assignment of  a subsoil use right or an object related to the subsoil use right, as well as the decision for exercising the state priority right.

You may recall that the Subsoil Law did not provide for key points such as a specific list of filed documents, the stages of the application, etc.

In particular, a person intending to dispose of ownership to a subsoil use right (or a part thereof), and (or) objects related to the subsoil use right, shall file an application to the competent authority for a permit to transfer the subsoil use rights and (or) objects related to the right of subsoil use. The New Subsoil Law contains requirements as to the form and content of such an application with an attachment of properly certified documents confirming the information specified in the statement. The requirements to the registration of such documents are also contained in the New Subsoil Law.

In addition, the New Subsoil Law provides for the procedure for exercising the state priority rights, which also includes filing an application for disposal to a competent authority in the manner provided for applying for a permit to transfer the subsoil user rights and (or) object related to the right of subsoil use.

In general, the procedure for obtaining the permit to assign the subsoil use rights and (or) object related to the subsoil use rights and procedure for exercising the priority rights by the State in accordance with the New Subsoil Law are as follows:

• · Filing an application for disposal to the competent authority;
• · The transfer of the application and accompanying materials within 20 business days for consideration by the Interdepartmental Committee on the Issues of Exercising the State Priority Rights (hereinafter – the ‘IDC’) to develop the proposal on acquisition (refusal to acquire) of the disposed subsoil use right (or a part thereof) and (or) objects related to the right of subsoil use;
• · The development of IDC’s proposal within 30 business days. Sending the protocol with the proposal on the refusal to exercise the priority right or proposal to exercise such a right to the competent authority. If the IDC has developed the proposal to exercise the priority right, the IDC recommends that the competent authority appoint a national managing holding/national company or a state agency authorised to acquire;
• · Sending the materials to the competent authority within 5 working days after the receipt of the IDC protocol for consideration on the subsoil use issue by the expert commission (hereinafter – the ‘EC’). The development by the EC’s proposals for the issue (refusal to issue) the permit is made within 10 business days and finalised in the report, which is sent to the competent authority[2];
• · Making the decision to issue the permit or to deny the issue of the permit to transfer the subsoil user rights and (or) object related to the right of subsoil use within 5 business days;[3]
• · After obtaining the decision of the competent authority on the acquisition of the disposed subsoil use right (or a part thereof) and (or) objects related to the right of subsoil use, a national managing holding, national company or authorised state agency initiates the negotiations with a subsoil user or an entity holding the object related to the subsoil use right.

The entire procedure for consideration of the application should therefore take no more than 70 business days (before a 45-day period was provided for obtaining the permit to transfer the subsoil use rights. To exercise the state priority right, no specific period was provided for but according to practice, it could take several months). It is however necessary to take into account the fact that the New Subsoil Law provides for the right of the IDC and EC to request and receive additional materials required to develop recommendations and proposals, which in practice may increase the regulated period for consideration.

Speaking about the priority right of the State, please note the following very important point: under the New Subsoil Law, this right also applies to the donation of subsoil use rights or related objects. In the case of the disposal of subsoil use rights (or a part thereof) and (or) related object on a free basis, as well as in the case of the transfer of subsoil use rights (part) and (or) related object to the charter capital of a legal entity, such objects are acquired at the market value, as determined in accordance with the laws of the Republic of Kazakhstan on the assessment activities.

We would also like to note that the timing of the acquisition of the subsoil use rights (part) (or a part thereof) and (or) related object should not exceed six months from the date of the decision to acquire the subsoil use rights (part) (or a part thereof) and (or) related object.

The New Subsoil Law also provides for a range of exceptions, which are very important for subsoil users, that are not subject to the requirements to obtain a permit from the competent authority, as well as the priority right of the State. These exceptions are as follows:

1) transactions on the disposal of shares or other securities, confirming the ownership of shares or securities convertible into shares, traded on an organised securities market of a subsoil user or legal entity that may directly and (or) indirectly make decisions and (or) influence the decisions taken by such subsoil user, if the legal entity’s main activities are connected with the subsoil use in the Republic of Kazakhstan[4];

2) transfer of all or a part of the subsoil use rights, related objects:

• · in favour of a subsidiary, where at least 99% of the participatory interest (stock) is directly or indirectly owned by the subsoil user, provided that such subsidiary is not registered in a state with preferential taxation;
• · between legal entities, where in each at least 99% of the participatory interest (stock) is directly or indirectly owned by the same person, provided that the acquirer of all or a part of the subsoil use rights and related objects are not registered in a state with preferential taxation;

3) transfer of shares (participatory interest) in a subsoil user, if as a result of such a transfer, an entity acquires the right to directly or indirectly dispose of less than 0.1 per cent of interest (stock) in the charter capital of the subsoil user, and (or) a legal entity that may directly and (or) indirectly make decisions and (or) influence the decisions taken by such subsoil user, if the legal entity’s main activities are connected with subsoil use in the Republic of Kazakhstan.

The New Subsoil Law also regulates the procedure for termination of subsoil use rights by enforcement in cases of the execution of the right of subsoil use (or a part thereof) and (or) related objects, including the pledge and the case of the sale of bankruptcy assets when performing the bankruptcy procedure.

The corresponding realisation (sale) of the subsoil use rights (or a part thereof) and (or) related objects is performed by public auction, unless otherwise stipulated by law.

Moreover, it provides the procedure for obtaining a permit to participate in a public auction. Such a permit allows an entity, which enters into a disposal transaction, according to the auction results, not to obtain an additional permit to dispose of the subsoil use right and (or) related objects.

In addition, the New Subsoil Law enshrines the actions of a pledge holder that has an intention to acquire the pledged subsoil use right (or a part thereof) and (or) related objects, in case of declaring a public auction process void, which includes obtaining a permit to acquire the pledged subsoil use right (or a part thereof) and (or) related objects.

3.   Associated Gas

Touching upon the issues of the State’s rights, please note the issues related to associated gas.

In our view, the most important point is that pursuant to the New Subsoil Law, associated gas owned by the State, unless otherwise specified by the subsoil use contract. Moreover, the New Subsoil Law expands the list of reasons, for which associated gas is permitted to be flared. As a new ground, the New Subsoil Law provides for the technologically inevitable gas flaring in the case of the:

• · commissioning of technical equipment;
• · operation of technical equipment;
• · maintenance and repair of technical equipment.

The issues of associated gas utilisation should be noted separately. Like the Oil Law, the New Subsoil Law prohibits the commercial development of oil and gas fields without processing and (or) utilisation of the natural and (or) associated gas.

Under the New Subsoil Law, a subsoil user that performs the production of hydrocarbons has to hold activities aimed at the minimisation of environmental damage, the minimisation of the volume of hydrocarbon gas flaring, and the rational and multiple use of associated gas, including processing thereof.

We believe the most important point is that the obligation to process associated gas under the contracts signed prior to the introduction of the New Subsoil Law is finalised in the agreement between the subsoil user and the competent authority and has to be an annex to the contract for production, combined exploration and production of hydrocarbons.

The New Subsoil Law contains a provision that the Prohibition on flaring associated and (or) natural gas and the prohibition on the commercial development of oil and gas fields without processing and (or) flaring associated and (or) natural gas does not apply to subsoil users performing oil operations under subsoil use contracts entered into prior to 1 December 2004, until the end of the programs for flaring associated and (or) natural gas, if they were approved (agreed) with a government body before 1 December 2004 or agreed upon by the competent authority and the authorised body for environmental protection prior to 1 July 2006.

4.   Kazakh Content

Special attention should also be paid to the local content issues raised in the New Subsoil Law.

In order to monitor the compliance with the terms and conditions of contracts in respect of local content, the New Subsoil Law, in addition to a provision that a subsoil user should submit an annual program of purchasing goods, works and services for the coming year, includes provisions that a subsoil user should submit a (1) medium-term (up to 3 years), and (2) long-term program (up to 10 years or until the end of the contract) on the procurement of goods, works and services.

Please note that the New Subsoil Law introduced the concept of a ‘register of goods and services used in subsoil operations, and producers thereof’. Under the New Subsoil Law, this concept refers to a ‘public information system designed to control and monitor the procurement of goods and services used in subsoil operations, and producers thereof, as well as an e-procurement and the formation of the list of goods, works and services used in subsoil operations’.

It should also be noted that the New Subsoil Law provides for the obligatory use by a subsoil user of the register of goods and services used in subsoil operations for the procurement of goods, works and services. The procedure for the formation and maintenance of the register, as well as the procedure for the use thereof when subsoil users procure goods, works and services, is specified by the Government of the Republic of Kazakhstan.

Moreover, according to the New Subsoil Law, the issues of Kazakh content relating to the transition stage from the exploration to the production due to commercial discovery are very important. By the way, the procedure for this transition is regulated by the New Subsoil Law in much more detail than in the Subsoil Law. Among other things, the New Subsoil Law provides for the conditions to be agreed by the competent authority and a subsoil user in the course of such transition. Some of these conditions include the local content issue.

Under the New Subsoil Law however, if in the course of direct negotiations on a contract for production on the basis of the exclusive rights of a subsoil user in connection with a commercial discovery, the parties fail to agree on the local content issues, within 3 months after the commencement of direct negotiations the competent authority decides not to grant the right to production. After making such a decision, the subsoil plot is put up for a render within 3 months.

The transitional provisions enshrined in the New Subsoil Law do not clearly answer the question as to whether these provisions apply to previously signed contracts for exploration or not. As the New Subsoil Law contains regulations regarding the application of its provisions to the relations arising after this act comes into effect, we believe that the said provisions will be applied to previously signed contracts for exploration.

5.   Performance of Obligations

Another important innovation of the New Subsoil Law is the significant changes in regulating the procedure for the direct performance of subsoil users.

In particular, the New Subsoil Law removes the concept of an annual work program. At the same time, the definition of a work program has also changed and is as follows: ‘a document compiled on the basis of parameters laid down in project documents, defining the set of plans of a subsoil user for the duration of the contract with generalised indices of volume and cost by years’. A subsoil user will therefore have to provide for all of its actions and costs in each year before signing the contract, which is extremely difficult in practice.

The New Subsoil Law does not consider the fact that the work program includes the planned parameters and costs. Market conditions change constantly, both upwards and downwards. Moreover, many conditions and parameters planned by a subsoil user do not depend on this, but on the market conditions of suppliers of goods and services. In this case, if at the beginning of a year some financial costs were planned, and within a year they are lower (for example, an equipment supplier delayed deliveries and the obligations of the subsoil user were moved to the following year), that subsoil user is under a risk of liability to the state. At the same time, such risk of liability may cause the subsoil user to incur not only fines, but also the termination of the contract.

In the meantime, under the New Subsoil Law, if the actual costs of a subsoil user appear lower than those provided in the annual working program due to the circumstance beyond its will, but the actual volume of the obligations of the subsoil user specified by the working program has been performed in full, a decrease of the actual costs is not considered as a violation of the contract.

According to practice, the liability of a subsoil user will be defined by whether it is able to prove that:

• · its physical obligations have been performed in full;
• · the failure to perform the obligation has occurred through no fault of the subsoil user.

In addition to the further obligations of subsoil users introduced by the New Subsoil Law regarding the submission of medium-term and long-term programs for the procurement of goods, works and services, we would like to draw your attention to the following obligations of a subsoil user: (i) submission of obligation performance reports in terms of expenditure allocated to training of Kazakhstani personnel; (ii) submission of obligation performance reports in terms of local content of the staff; (iii) notification of the competent authority of performed transactions on the disposal of subsoil use rights by affiliates, as well as a participatory interest in the charter capital of the subsoil user or stock; (iv) record keeping, including internal documentation, and the performance of transactions in the Kazakh and Russian languages attaching a translation into other languages where necessary.

6.   Termination of the Subsoil Use Rights

Speaking about the termination of the subsoil use rights, the innovations related to this issue and contained in the New Subsoil Law should be noted.

The New Subsoil Law provides a list of grounds for termination of the subsoil use rights. Besides the obvious reasons, such as termination of a contract or a permit to conduct operations on the construction and (or) operation of underground facilities specified by the New Subsoil Law, as grounds for termination of the subsoil use right, the New Subsoil Law provides for the prohibition by the Government to use a subsoil plot.

We note that the Subsoil Law stipulates the right of the Government to prohibit using the subsoil, but this prohibition was not explicitly listed as a ground for the termination of a subsoil use rights or the termination of a contract.

Liquidation of a legal entity is also enshrined by the New Subsoil Law as a basis for termination of the subsoil use rights. In view of this circumstance, the possibility to transfer subsoil use rights to the founders/participants of a subsoil user is precluded. It should be noted that there is an opinion on the contradiction of this provision to the provisions of civil law on universal succession.

At the same time, the New Subsoil Law expressly provides for the possibility of transferring the subsoil use rights in the case of reorganisation of a legal entity through universal succession. Due to the fact that in practice, during the reorganisation of a legal entity, its actual liquidation occurs after the transfer of all rights and obligations of assignees, the above rule on the termination of subsoil use rights in the liquidation of a legal entity does not affect the transfer of subsoil use rights in succession.

Due to this condition, we believe that the above rule is not contrary to the norms of civil law on universal succession.

It should also be noted that the New Subsoil Law reduced and changed the list of grounds for termination of the subsoil use contract. Among other things, the New Subsoil Law provides for the following reasons:

• · the failure of a subsoil user to eliminate more than 2 violations of obligations under the subsoil use contract or project documents, which are mentioned in the notice from the competent authority;
• · the violation of the requirements of the New Subsoil Law in terms of a permit to transfer the subsoil use rights and (or) related objects.

In this case, the New Subsoil Law (as well as the previous law) provides the possibility for the competent authority to amend the contract due to the fact that the actions of a subsoil user in respect of subsoil plots and fields of strategic importance lead to a change in the economic interests of Kazakhstan, which is a threat to national security. At the same time, if

• · within two months after the receipt of notification on amending the contract. a subsoil user does not confirm in writing its consent to negotiate or it refusal thereto; or
• · within four months after the receipt of the consent of the subsoil user, the parties fail to agree amendments to the conditions of the contract; or
• · within six months after achieving an agreed decision, the parties fail to sign the amendments to the terms of the contract

the competent authority may terminate the said subsoil use contract.

In addition, the New Subsoil Law provides for the right of the competent authority upon the decision of the Government of the Republic of Kazakhstan to unilaterally terminate the contract, including previously signed contracts, if the actions of a subsoil user when performing subsoil operations in respect of subsoil plots and fields of strategic value lead to a change in the economic interests of Kazakhstan, which is a threat to national security.

In terms of the number of grounds for termination of the contract on the basis of the foregoing, it can be said that the New Subsoil Law mitigates the position of a subsoil user in this regard.

Please note that, besides from the grounds for termination of the contract, the New Subsoil Law provides grounds for the renewal of terminated contracts, which is another innovation. These grounds are however provided only for the renewal of subsoil use contracts terminated at the initiative of the competent authority. These reasons are:

• the establishment of the fact of the decision to terminate the contract on the basis of incorrect data significantly affected the adoption of this decision, including if on the date this decision was adopted, the subsoil user for valid reasons had no documents confirming the performance of contractual obligations;
• the establishment and confirmation of reasons beyond the control of a subsoil user that have caused the failure or improper performance of obligations under the contract, including force majeure circumstances directly affecting the failure or improper performance of the obligations.

The ground for consideration of the renewal is an application of an entity, whose contract was terminated, or an independent establishment by the competent authority of the grounds for renewal within 6 months after the decision to terminate the contract.

In deciding to renew the contract the competent authority and the subsoil user within 3 months negotiate and conclude an additional agreement to the contract, which should address the renewal of the contract, including issues related to the interruption under the contract and liability issues. The above 3-month period may be extended.

7.   National Companies

It should be separately noted that the New Subsoil Law provides for a separate article on the functions of national companies.

These functions have been transferred from the Oil Law almost in full. In the meantime, the New Subsoil Law clearly establishes the function of national companies to conduct negotiations on the transfer of subsoil use rights under exercising the priority right of the State.

Moreover, the New Subsoil Law reserves the rules on granting the subsoil use rights to national companies through direct negotiations for the operations on exploration and (or) production.

By the way, please note that the extent of the concept of ‘strategic partner’ to the exploration and production of solid minerals has been expanded. Consequently, the implementation of developed schemes of cooperation between national companies and investors, in our opinion, has become somewhat easier. In this case, the specific scheme for cooperative activities with these companies (in particular, NMC Tau-Ken Samruk JSC) currently remains unclear.

8.   Settlement of Disputes under Contract

A pressing issue today is still the possibility of settling disputes between the State and subsoil users.

The New Subsoil Law does not provide direct provisions on the right of a subsoil user to appeal to arbitration. In this aspect, the New Subsoil Law includes the following wording for the rules regarding the procedure for settling disputes between subsoil users and the competent authority: ‘If the disputes arising from the execution, modification or termination of the contract cannot be resolved by negotiations, the parties may settle disputes in accordance with laws of the Republic of Kazakhstan and international treaties ratified by the Republic of Kazakhstan’.

By virtue of the aforementioned circumstance, we assume that the developed draft contracts will most likely not provide for an arbitration clause.

At the same time, in accordance with the Law ‘On Investments’, in the case of a failure to settle investment disputes by negotiation, the disputes shall be settled in accordance with international treaties and legislative acts in the courts, as well as in international arbitrations, specified by the parties in an agreement (Article 9 of the Law of the Republic of Kazakhstan ‘On Investments’).

The right to appeal to arbitration is thus reserved by a subsoil user, based on the Investment Law and international treaties, as well as on agreements between the countries.

At the same time, the above wording of the article will allow the competent authority to take a tougher position on the rejection of the arbitration clause in the newly negotiated contracts with investors.

Speaking of the disputes between the State and a subsoil user, please note the guarantees of subsoil users against changing the law.

As with the previous Subsoil Law, the New Subsoil Law provides for certain guarantees of protection of subsoil users against changes in legislation.

In the meantime, the New Subsoil Law includes a number of innovations on this aspect of legal regulation of subsoil use. In accordance with this act, the above guarantee is therefore as follows: Amendments to the legislation, which adversely affect the business results of a subsoil user under the contract, shall not apply to contracts entered into before the introduction of such amendments.

Consequently, the abovementioned guarantees apply only to changes in legislation, which impair the results of the business activities of subsoil users under the contracts, whereas in accordance with the Subsoil Law, the contracts entered into prior to the introduction of amendments to the legislation were not subject to provisions worsening the position of a subsoil user.

As we are aware, the Subsoil Law provided a number of exceptions to the stated guarantees for the rights of subsoil users against changes in law. In accordance with this Law, the said guarantees do not therefore cover changes in the legislation of the Republic of Kazakhstan in the areas of:

• · ensurance of defensive ability,
• · national security,
• · environmental safety,
• · health care.

The New Subsoil Law extends this list slightly and provides that these guarantees do not apply to changes in the legislation of the Republic of Kazakhstan in the areas of taxation and customs regulation.

We assume that these changes are tightening the legal regulation of subsoil users’ activity.

A crucial issue is also the possibility of applying the rules of the New Subsoil Law to existing contracts for subsoil use.

The New Subsoil Law will apply to relations arising after the introduction of the law. At the same time, in respect to the previously concluded contracts on subsoil use with the state authorities of the Republic of Kazakhstan, the parties are obliged to follow the requirements established by the New Subsoil Law in terms of:

• · terminology unification,
• · provision of information (i) on Kazakh content in the staff, (ii) on Kazakh content in the goods, works and services, calculated according to the unified method of calculation by companies of Kazakh content when procuring goods, works and services, (iii) on planned and actual procurements of goods, works and services in the procedure and form to be approved by the competent authority.

In addition, the New Subsoil Law provides that subsoil users that have signed contracts for subsoil use with the competent authority in the absence of project documents, are obliged to ensure the development and approval thereof within twelve months after the introduction of the New Subsoil Law. Moreover, subsoil users are required to submit project documents within eighteen months after the introduction of the New Subsoil Law for approval to the authorised agency for the study and use of subsoil working programs to contracts for exploration and production on the basis of project documents.

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Summarising all of the above, we believe it is possible to say that in general, the New Subsoil Law systematises and tightens the conditions for contracting and exercising subsoil use rights in Kazakhstan.

In particular, we note the following points:

• The list of actions in respect of the subsoil use rights that require a permit from the competent authority has been expanded.
• The range of transactions covered by the priority right of the State has been significantly expanded. Under the New Subsoil Law, this right applies to free transactions.
• The question regarding the possibility of exercising the priority rights of the State during the transfer of the subsoil use rights and related objects in the reorganisation of a legal entity remains unclear.
• The conditions on local content in operations on subsoil use have been tightened:

o   the volume of documents required to be submitted by a subsoil user in respect of local content has been significantly increased;

o   state control over the performance of obligations by subsoil users when procuring Kazakh goods, works and services has been tightened,

o   the obligatory use of the register of goods, works and services used in subsoil operations, and their producers has been provided.

Despite the fact that one of the objectives of the New Subsoil Law is the establishment of a favourable environment for investments in subsoil use operations, we are of the opinion that the New Subsoil Law, in general, strengthens the investment climate in the country and creates a number of opportunities for the nationalisation of the mining industry.

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We hope this information is useful to you. If you have any questions or require  further information, please contact us.