Dear Sirs,
“GRATA” Law Firm has the honor to bring to your attention the following information, which we hope will be useful for the activities of your Company.
In September 2007 the draft of the Law “On Making Amendments and Supplements in the Law “On Subsoil and Subsoil Use” (hereinafter referred to as the “Draft Law”) has been developed. This Law amends and supplements the Law of RK “On Subsoil and Subsoil Use” as of 27.01.1996 as follows:
1) In the cases provided for by the Draft Law the Government of RK is allotted with the right to demand making amendments and/or supplements in contract terms and conditions;
2) If subsoil user refuses to make the corresponding amendments and/or supplements the Competent Body shall be entitled to refuse unilaterally from fulfillment of the Contract;
3) The Law Draft gives the retroactive force to the previously concluded contracts for production or combined exploration and production in relation to the subsoil areas (deposits) having strategic importance.
On September 26 and September 27, 2007 the upper and the lower chambers of the Parliament of RK approved the Law Draft mentioned above. Currently the Law Draft is submitted for signing to the President of the Republic of Kazakhstan – N.A. Nazarbayev. Consequently the amendments and supplements provided for in the Law Draft have not yet come into legal force.
Generally according to the Explanatory Note from the Deputies of Mazhilis of the Parliament of the Republic of Kazakhstan this Law Draft has been developed for protection of the national interests of the Republic of Kazakhstan in the field of subsoil use. As some representatives of the state authorities mention the “state does not pursue the aim to nationalize and expropriate everything. The aim of the state is in the due fulfillment of the law and the contracts. At the end of 90ths the state did not make any amendments and did not check the contracts in order to maintain the investment attractiveness of the Republic of Kazakhstan. The new Law Draft protects the Republic of Kazakhstan against the cases of violation of the contracts by subsoil users, thus it allows amending of the contract or withdrawal thereof”. In this respect the representatives of the Parliament suppose that even in case of adoption of this Law Draft Kazakhstan will remain attractive for the investors: if some investors leave, the other, who will agree with the legislation conditions and offered changes in the contracts, will come.
See below the offered wording of such amendments and supplements to the Law of the Republic of Kazakhstan “On Subsoil and Subsoil Use” as of 27.01.1998.
1. The amendments and supplements made, relate to the subsoil (deposit) areas having strategic importance. The list of such areas of subsoil (deposits) according to the Law Draft will be approved by the Government of RK.
The Law “On Subsoil and Subsoil Use” and the new Law Draft do not provide the definition of the term “subsoil (deposit) areas”. In this connection it is necessary to follow the other regulatory legal acts relevant to the definition of the strategic objects and strategic branches of economy.
So, on 16.08.2007 the Law of RK “On Making Amendments and Supplements in some Legislative Acts of the Republic of Kazakhstan on the Issues of the State Interests Provision in the Sphere of Economy” was put into force as of 07.08.2007 №321-III. According to this Law for the first time there were made the amendments in the Civil Code of the Republic of Kazakhstan (hereinafter referred to as the “CC RK”) defining the concept of “strategic objects”. According to Article 193-1 of CC RK the strategic object is the property having social and economic importance for stable development of the Kazakhstani society, ownership and (or) use and (or) disposing of which may impact the state of the national security of the Republic of Kazakhstan.
According to CC RK the following objects may be attributed to the strategic objects:
• Trunk railway networks;
• Trunk oil pipelines and gas pipelines;
• National electrical network;
• Trunk communication lines;
• National mail network;
• International airports;
• Sea ports with the status of international importance;
• Air navigation devices of the air traffic control system;
• Devices and navigation marks regulating and providing safety of navigation;
• Objects of atomic energy use;
• Objects of cosmic branch;
• Water facilities;
• Motor roads of public use; as well as
• Share holdings (interests, participation shares) in the legal entities owning the strategic objects;
• Share holdings (interests, participation shares) of physical persons and legal entities, having possibility directly or indirectly determine or influence the decisions of the legal entities owning strategic objects.
Thus in the Civil Code of the Republic of Kazakhstan the deposits or subsoil areas are not directly specified among the strategic objects. But the definition of the strategic object, provided in CC RK, allows to attribute any field to the strategic object, if such field has social and economic importance for stable development of Kazakhstani society, ownership and (or) use and (or) disposing of which may influence the state of national security of the Republic of Kazakhstan.
In addition to the definition of “strategic objects” the legislation of RK (Law of RK “On State Monitoring of Ownership in the Spheres of Economy Having Strategic Importance” as of 04.11.2003 № 490-II) provides the definition of “strategic branches of economy”. So, according to sub-clause 3 Article 1 of the mentioned Law the branches of economy having strategic importance, include:
• Production and processing of fuel and energy mineral resources (coal, oil, gas, uranium and metallic ores);
• Machine-building;
• Chemical industry;
• Transport and communications;
• Electric power production and distribution;
• As well as branches manufacturing the items of military-industrial purpose.
As it can be seen the subsoil use operations with respect to coal, oil, gas, uranium and metallic ores are attributed by the legislation to the branches of economy having strategic importance.
Thus no clear and unambiguous definition of the term “strategic importance” applied to the deposits and subsoil areas is provided by any regulatory legal act. Consequently, according to the current legislation of RK and the Law Draft the subsoil (deposit) areas having strategic importance will be determined and approved by the Government of RK only at its absolute discretion. Taking into account that the list of subsoil (deposit) areas having strategic importance is subject to approval of the Government of RK, which may change this list from time to time, any subsoil user is under the risk of application of the Law Draft provisions, especially because this Law Draft will have the retroactive force with respect to the previously concluded contracts (see below).
Also we would like to mention that on 21.08.2007 the Resolution of the Government of RK “On Creation of the Interdepartmental Commission for Development of Oil, Gas and Energy Branches” was passed. Under this Resolution the Government of RK approved the composition of the Interdepartmental Commission for Development of Oil, Gas and Energy Branches, which must draw-up the proposals for development of oil, gas and energy branches in the Republic of Kazakhstan. Probably this Commission will make proposals for attribution of some deposits to the number of strategically important.
2. Possibility of Unilateral Refusal of the Competent Authority from Fulfillment of the Contract.
According to the Law Draft “if the subsoil user’s actions while subsoil use operations performance with respect to subsoil (deposit) areas having strategic importance result in significant change of the economic interests of the Republic of Kazakhstan, which create the threat to the national security, the Government of the Republic of Kazakhstan shall be entitled to initiate amendment and/or supplement of the contract conditions with the purpose of restoration of the economic interests of the Republic of Kazakhstan”.
The competent authority shall be entitled unilaterally terminate the contract if subsoil user does not support the initiative of the Competent Authority to amend and/or supplement the contract conditions. In particular, the contract may be terminated in any of the following cases:
1) If within 2 months after the date of receipt of notice from the Competent Authority the subsoil user does not submit its written consent for negotiations with respect to amendment and/or supplement of the contract conditions, or refuses from negotiations;
2) If within 4 months after the date of receipt of the subsoil user’s consent for negotiations, the parties fail to come to the agreement on amendment and/or supplement of the contract conditions;
3) Within 6 months after the date of coming to an agreement for restoration of the economic interests of the Republic of Kazakhstan the amendment and/or supplement of the contract conditions have not been signed.
Providing that the supplements made in Article 45-3 of the Law RK “On Subsoil and Subsoil Use” allow to the Competent Authority not to follow the standard judicial procedure of the contract termination as specified in CC RK. This means that the decision of the competent authority is enough for unilateral termination of the contract.
Thus, the Law Draft provides for enlargement of the list of the bases for termination of the contracts for subsoil use. But nevertheless the main criterion for unilateral refusal from fulfillment of the contract for subsoil use is significant change of the economic interests of the state. But for today no clear and unambiguous definition of such concepts as “significant change” and “economic interests” exist either in the Law “On Subsoil and Subsoil Use” or in the new Law Draft. In this connection probably it is necessary to follow the regulatory legal acts relevant to the term “economic interests”.
The only definition legally adopted is that of the term “economic security”, provided in Article 1 of the Law RK “On National Security of the Republic of Kazakhstan” as of 26.06.1998. Economic security is the state of protection of the national economy of the Republic of Kazakhstan against external and internal conditions, processes and factors threatening to the stable development and economic independence. But this definition of economic security is also not clear and ambiguous, which will give to the state authorities the possibility to use this definition as it will be convenient for the state.
In connection with the above it is possible to make conclusion that the above mentioned terms: “significant change” and “economic interests” will also be defined according to the discretion of the state authorities individually for each particular case.
3. Retroactive Force of the New Provisions
Amendments and supplements provided for in the new Law Draft will cover all previously concluded contracts for production or combined exploration and production. This supplement on the retroactive force of the law is not contradictory to the current legislation of the Republic of Kazakhstan. In particular, according to Clause 2 Article 383 CC RK if after conclusion of the contract the legislation determines any other rules compulsory for the parties and different from those applied upon conclusion of the contract, the terms and conditions of the concluded contracts remain in force except for the cases when the legislation determines that it shall also apply to the relations resulting from the previously concluded contracts.
We would like to draw your attention to the fact that the amendments and supplements provided for in the new Law Draft cover the previously concluded contracts, in particular:
1. contracts for production; or
2. combined exploration and production.
In this respect we would like to mention that this list is exhaustive. Consequently, the amendments and supplements provided for in the new Law Draft shall not be applied to the contract for exploration, which is one of the types of the contracts for subsoil use operations performance.
In relation to the contracts, which may be impacted by the new Law Draft, we would like to draw your attention to the Decree of the Prime Minister of RK as of 23.08.2007 “On Creation of the Work Team for Development of Proposals in relation to Revision of the Contracts for Subsoil Use”. The mentioned Decree of the Prime-Minister of RK provides for creation of the work team, which must have done the following:
1. analysis of all contracts for subsoil use;
2. within the term till October 1, 2007 develop and submit to the Government of RK the proposals for making amendments and supplements to the contracts for subsoil use for restoration of the original economic interests of the parties.
Generally it is possible to say that the amendments and supplements offered by the new Law Draft have been really developed for protection of the national interests of the Republic of Kazakhstan. But the new amendments and supplements require the detailed analysis of the legal consequences and legal regulation for example with respect to definition of the most important terms used in this Law Draft, such as “significant change of the economic interests of the Republic of Kazakhstan”, “subsoil (deposit) areas having strategic importance”. It is necessary to take into consideration that the norms of the new Law Draft may be applied to any current subsoil user despite the size of deposit, reserves, age of the contract, economic situation and interests of the parties as of the date of the contract conclusion. Also, if the state terminates the contract unilaterally the new Law Draft does not provide for any compensation to subsoil user of the costs incurred for the performed subsoil use operations.
As regards to the above-mentioned procedure of the contract termination, we would like to say that in case of adoption of even this Law Draft we would recommend to the subsoil users in order to protect their rights and interests not to ignore the proposals of the Competent Authority to make amendments and/or supplements in the contract conditions. We think that it is better for the subsoil users to participate actively in negotiations and to involve legal, financial and other advisers (specialists) to find the mutually profitable and acceptable conditions for further performance of subsoil use operations.
If you have any questions or if you need any additional information on this subject, please, do not hesitate to contact us. We will be glad to offer you our assistance and help in obtaining of the required information.
Sincerely,
Saule Akhmetova, Partner
GRATA Law firm
Samat Daumov, Lawyer
GRATA Law firm
