10 march 2010

Review of the draft law of the Republic of Kazakhstan “On Subsurface and subsurface use”

Currently, the draft law “On subsurface and subsurface use” is being considered by the Senate of the Parliament of the Republic of Kazakhstan.

The draft law (further the “Draft law”) combines the norms of the Law “On Subsoil and Subsoil use” of RK dated January 27, 1996 (further the “Law on Subsoil”) and the Law of the RK “On Oil” dated June 28, 1995 (further the “Law on Oil”), and also involves the conditions and requirements of certain governmental resolutions and other legal acts.

It is worth noting that one of the principles of the Law on Subsoil and one of the purposes of the draft law is the “creation of favourable conditions for raising investments in the subsoil use operations sector”. However, the law in fact toughens the conditions of carrying out operations on subsoil use, by introducing certain provisions which, on the contrary, worsen the investment attractiveness of the mineral resources sector of Kazakhstan and create a number of preconditions for the nationalisation of the mining industry. On the other hand, the project involves provisions that explain many matters on the application of Law in practice.

We would like to point out some specific features of the proposed Draft law.

1. Definitions and related provisions.
The Draft law gives precise definitions of two separate concepts: “concentration of the rights to carry out operations on subsoil use” and “concentration of the rights under the contract”.

• The first definition is directed towards a restriction of the concentration in the hands of one entity, group of entities from one country of shares in subsoil users or in contracts on subsoil use, if such concentration will create a threat to the economic interests of Republic Kazakhstan.
• The second definition of “concentration of the rights under the contract” relates to “joint users of the licence for subsoil use”, which are related under the Draft law to subsoil users (i.e. of several co-Contractors) working under the same contract.

The Draft law proposes the definitions of and provisions on the operating state agencies, which control the  subsoil use operations, and their functions. These agencies are the “Inter-Agency Committee on Issues of Exercising by the State of its Pre-emptive Right”,  “Central Commission on Exploration and Production  of Mineral Resources (CCP)” and  “Expert Commission on Subsoil Use Issues”. Except for the common definitions of “exploration” and “production”, it has proposed to introduce more detailed definitions of the particular stages in subsoil use operations – “appraisal works”, “exploration works”, “ test industrial production”, “test industrial development”, and ”commercial development”. Also, detailed definitions and provisions concerning the project documentation have been introduced into the Draft law: “the project of test production”, “the project of appraisal work”, “the project of researching works”, “the project of production testing”, “the project of deposit development”, and “the technological scheme of deposit development”.

2. Provisions on the pre-emptive and priority right of the state.
There is a new Article in the Draft law called “Pre-emptive and priority rights”. The Article has been expanded, in terms of names and definitions, and includes provisions of the current law on subsoil use concerning the pre-emptive and priority right of the state to:

• acquire mineral resources; and
• acquire a stake (stakes) in a legal entity possessing the subsoil use right, as well as in a legal entity that has the ability to directly and (or) indirectly determine resolutions and (or) influence the decisions taken by such subsoil user, if the main activities of the legal entity are related to subsoil use in Kazakhstan.

Lets consider these provisions of the Draft Law in more detail.

2.1. The pre-emptive right to acquire mineral resources.
Regarding realisation of the pre-emptive state right on the purchase of minerals from the subsoil user, the Draft law provides that the Republic of Kazakhstan has the pre-emptive right to purchase minerals under the prices, which do not exceed the prices applied by the subsoil user in transactions with the corresponding minerals, formed on the date of the transaction to acquire minerals by the state, excluding transport charges and expenses for realisation. Under current legislation, the Republic of Kazakhstan has the pre-emptive right to purchase the minerals under the prices, which do not exceed the world market prices. Thus, it is not clear how transport charges and expenses for realisation will be deducted.

Moreover, in the Draft law, it is established that the order of the realisation of Kazakhstan’s pre-emptive right on the acquisition of minerals is defined by the Government. Such order of regulation may complicate the realisation of the subsoil user’s rights and can provide the terms and conditions profitable to the state.

2.2. The pre-emptive right to acquire the subsoil use right and objects related to subsoil use.
We would like to note that the Draft law has undergone essential modification in the state’s pre-emptive right to acquire the subsoil use right  or participating interest (shares) in the subsoil user or the entity that influences the decision–making of the subsoil user.

Foremost, we draw your attention to the fact that such this pre-emptive right now applies to any kind of transactions! Article 71 of the current Law on subsoil use provides that the state’s pre-emptive right shall apply in case of alienation of subsoil use rights  or participating interest (shares) in a subsoil user or entity that influences its decision-making process. Under alienation, any kinds of transactions are contemplated. Meanwhile, the indication that the state shall exercise its pre-emptive right on the terms and conditions that are not worse than those offered by other buyers' means that Article 71 of the Law on subsoil is applicable only to transactions on purchase and sale. The Draft Law provides that the state’s pre-emptive right applies to cases, when the  subsoil use right or a participating interest (shares) in the subsoil user or the entity that influences the decision-making of such subsoil user are alienated on gratis and non-gratis grounds.

In addition, the bill extended the range of property subject to a priority right of the state. In accordance with the draft, this right applies to "objects associated with the right of subsoil use”. This concept includes participation interests (stakes) in the subsoil user or the entity, having the possibility to directly and (or) indirectly determine resolutions and (or) influence the decisions taken by the subsoil user if the legal entity’s main activity is related to subsoil use in Kazakhstan. These objects also include securities evidencing ownership of shares or are convertible into shares of a subsoil user or the legal entity that can directly and (or) indirectly determine resolutions and (or) influence the decisions taken by the subsoil, if the legal entity’s main activity is related to subsoil use in Kazakhstan.

(Neither the current legislation, nor the draft law, provides criteria for determining the main activity and its relation to subsoil use.)

In the Draft Law, there is a new provision on the procedure for the state exercising its pre-emptive right. According to these provisions, the pre-emptive right is applicable to the following entities:

• Entities, which alienate their  subsoil use right;
• Entities that transfer their subsoil use right, or an object associated with such right, to the charter capital of a legal entity;
• Entities that alienate objects, which are associated with the subsoil use right (see below).

The Draft Law provides the procedure for the realisation of the right. This procedure, in accordance with the draft law, forms a part of the procedure for handling applications and issuing permits for the alienation of the right of subsoil use. This procedure is described below.
 
As in the current Law, the Draft Law provides that the state exercises its pre-emptive right on the terms and conditions that are not worse than those offered by other acquirers. In the case of gratis transactions, the acquisition by the state of the subsoil use right or the associated object will be effected at a market price, defined in accordance with the laws on appraisal activities. The Law  “On Appraisal Activities” gives a definition of “market price”, stating that this is the most probable price, at which an object can be alienated in the conditions of competition, provided that the parties act without coercion and in their own
interests, and have full information on the object.  

Thus, we can draw a conclusion that when exercising the pre-emptive right on a gratis transaction, the state will make a payment to the party that alienates the object. In this case the state will exercise its right under the price, to be defined on the basis of competitive prices for the alienated object, which the other concerned parties could offer. On the other hand, it is unclear how the valuation process will be conducted, if the  subsoil use right or associated object is transferred as part of the assets under the gratis transaction. Also, it is unclear how the valuation would be made, if the gratis transaction is carried out outside of Kazakhstan, when the alienated party is a foreign subsoil user or foreign participant of a foreign subsoil user?

3. Changes in the conditions of requisition of mineral resources.
The draft law in the part of the right of the state to the requisition of mineral resources proposes some changes in the terms of requisition.  The changes have affected the payment of compensation to a subsoil user for the mineral resources that are called into requisition.

In the current Law on subsoil use, the compensation for mineral resources falls under the prices of the world market at the date of requisition.

In the Draft Law, it is stipulated that the price of compensation should not exceed the prices applied by subsoil users at transactions with corresponding minerals, settled on the date of the transaction.

In this case, from the price applied at requisition, the transport charges and expenses for realisation of minerals (for example, charges on storage, sale and other costs) are deducted (excluded).

Thus, the Draft Law provides an application of the smaller price for requisitioned minerals at payment of the indemnification, rather than that which is stipulated by the current Law on Subsoil.

4. Changes of the functions of the Expert Commission and grounds for getting authorisation from the Competent body.
The Draft Law establishes the functions of the Expert Commission on Subsoil Use Issues.

The Expert Commission as a permanent working body will give proposals to the Competent body as to an issue, or refuse to issue the relevant permit. Except for cases specified in Article 14 of the current Law, the Expert Commission now considers applications for the issue of permits in the following cases:
1) Transfer in pledge of a participating interest (blocks of shares) in a legal entity that has the relevant subsoil use right;
2) Participation in public auction on selling of:

• The subsoil use right (its part), objects related to subsoil use in cases of foreclosure, including the pledge of such subsoil use right (its part), objects related to subsoil use right;
• Bankruptcy assets, which involve the subsoil use right(its part), objects related to subsoil use right when carrying out the bankruptcy procedures;

3) Acquiring by the pledgee of the pledged subsoil use right (its part), objects related to subsoil use right in the event of an announcement of the bids as failed on selling the pledged subsoil use right (its part), objects related to subsoil use right;
4) Acquiring of the right to a shareholding of a subsoil user, as a result of an increase in the authorised capital, in the event of admitting a new participant into the legal entity;
5) Initial public offering on the organised securities market of stocks of a subsoil user and legal entities that have participating interests (blocks of shares) in legal entities – subsoil users;
6) The right to the initial public offering on the organised securities market of stocks of such legal entities issued as an additional issue of stocks;
7) amending obligations under a working program or a contract;
8) extending the duration of contracts
The question is still open as to how the legal provisions will operate with regard to the initial public offering and additionally emitted shares of foreign joint stock companies, which have a subsidiary-subsoil user in Kazakhstan?

5. Changes in the guarantees of the subsoil user’s rights.
Article on guarantees of the subsoil user’s rights also underwent considerable changes.

The Draft Law provides that the changes in the legislation shall not apply to subsoil users, if such changes “worsen the results of entrepreneurial activities of the subsoil user under contracts”.

Article 71 of the current Law on Subsoil provides guarantees in case the position of the subsoil user is worsened. The Draft Law does not contain the following norms:

• What does “the result of entrepreneurial activities” mean?
• Who will define this result – a subsoil user itself or jointly with the Competent body, by engaging some financial experts?
• How will this result be defined – under some agreement, opinion, by the decision of a certain public agency or by a court decision?
• How will the fact of any worsening be defined, by which parameters?

It is obvious that the absence of this mechanism in the legislation will complicate the application of the given provisions in practice.

6. Innovations in the governing of transfer of the subsoil use right.
The Draft Law provides for additional cases, when the permit of a Competent body is required. Besides those specified in the current Law (Article 14), the permit of the Competent body is required in the below cases:

• Foreclosure on the subsoil use right, participating interest (blocks of shares) in a subsoil user, including those pledged. I.e., for example, this norm can be applied in the event, when any third party forecloses on the subsoil use right under the court decision in order to liquidate debts and other liabilities of the subsoil user. However, to exercise such a decision of the court, the permit of a Competent body is required. The Draft Law provides for the procedure of foreclosure, described in Article 39;
• Emergence of the right to a share in a subsoil user, as a result of increase in the authorised capital in the event of admittance of a new participant into the legal entity (i.e. the given norm shall not apply to JSC and parent companies of the subsoil user);
• The initial public offering of stocks of a subsoil user on the organised securities market and legal entities that have participating interests (blocks of shares) in legal entities – subsoil users, including the initial public offering on the organised securities market of stocks of such legal entities issued as an additional issue of stocks;
• Transfer in pledge of a participating interest (blocks of shares) in a subsoil user (earlier, the authorisation was required only for the pledge of the subsoil use right);
• The transfer of the subsoil use right or of a participating interest (blocks of shares) in subsoil user as a succession in the event of the reorganisation of the subsoil user or participant (shareholder) of the subsoil user (Article 36 of the Draft Law).

The Draft Law defines more specific cases, when the permit of a Competent body is not required. Such cases involve:

• alienation of shares or securities that prove ownership of shares or are convertible into shares, traded on the organised securities market of the legal entity - a subsoil user, legal entity, which is able to directly and (or) indirectly determine resolutions and (or) influence the decisions taken by the subsoil user, if the legal entity’s main activities are related to subsoil use in the Republic of Kazakhstan;
• transfer, directly or indirectly (through third parties), less than 0.1 per cent of the participation interest (shares) in the share capital of the subsoil user, and (or) a legal entity, that has the possibility of directly and (or) indirectly determining resolutions and (or) influencing the decision taken by the subsoil user, if the legal entity’s main activities in the Republic of Kazakhstan are related to subsoil use;
• transfer of all or part of the subsoil use right, objects related to subsoil use  between legal entities at least 99% of shares, of which (shares) are owned by one entity;
• the transition of the subsoil use right (its part), as a succession right, or transition of objects related to subsoil use in cases of the transformation of the legal entity, with a right of subsoil use, in the form of changes in the legal form.

Also, the Draft Law describes the procedure for getting a permit from the Competent body. Namely, the Draft Law describes in detail the following:

• Procedure for applying to the Competent body;
• Data, to be obligatorily specified in the application;
• The term for consideration of the application and relevant materials is extended from the currently effective 45-day period to 70 business days;
• The conditions are set forth, and if they are met, the Competent body shall issue the denial of the relevant permit. Such conditions, in particular, are the incompliance of:

a) The applicant with the requirements set to subsoil users and claimants to the subsoil use right;
b) Application produced with the requirement set forth in the Draft Law.

It is clear that in case of revealing such incompliance, the Competent body has to return the application without consideration and give a chance to the applicant to amend the document as necessary and again produce the application for consideration. However, the Draft Law does not describe what the Competent body shall do in such a case – to return the application and any materials attached or to reject to issue the authorisation.

In addition to this, a permit may be denied if the transfer of subsoil use rights or a related facility would entail non-compliance with Kazakhstan legislation, including requirements to ensure national security, the concentration of rights under the contract and (or) a concentration of rights to conduct operations in the field of subsoil use, as well as international agreements concluded by the Republic of Kazakhstan. The bill provides for the rule that the refusal to grant permission for the transfer of subsoil use right, in accordance with the above grounds, is made without explanation.

The procedure of the draft law for issuing permits to dispose of the subsoil use right is as follows:

• Making an application for alienation to the competent authority.
• Sending an application and materials by the competent authority within 20 working days to the Interdepartmental commission (hereinafter the “IDC”).
• Reviewing by the IDC of applications, developing the proposals within 30 working days. Referral to the competent authority of a protocol with the proposal to deny implementation of the priority right of the State with a proposal on the use of the right.
• Directing by the competent body within 5 working days, the materials of the Expert Commission. Reviewing and developing within 10 days of proposals to issue (refuse to issue) permission for alienation.
• Making of the decision by the competent authority, within 5 working days, to issue permission to alienate the subsoil use right, or to refuse to issue such permission.

It should be noted that the described procedure also provides for a procedure on
implementation of the priority rights of the state.

The Draft Law also contains a provision on a two year moratorium for the transfer of the subsoil use right, but takes into consideration the amendments with regard to exceptional cases. Thus, the moratorium shall not apply to the following cases:

• foreclosing the subsoil use right as subject of a pledge (as it is in the current legislation.
• Reorganisation of the subsoil user. Besides reorganisation, the current legislation in effect also points out the liquidation of the subsoil user.
• Transferring of the subsoil use right by the national company and its subsidiary companies.
• transferring of the subsoil use right between legal entities at least 99% of shares of which (shares) are owned by one entity or in cases of direct or indirect transfer, of not more than 0,1% of shares (shares) in a legal entity - subsoil user or legal entity that has the opportunity to determine the decisions of a subsoil user and (or) to influence the decisions taken by the subsoil user, if the legal entity’s main activities in the Republic of Kazakhstan are related to subsoil use.

7. Termination of the  subsoil use right.
There is a new article concerning the termination of the subsoil use right . Among evident reasons for termination of the subsoil use right (termination of the contract), the liquidation of the subsoil user is also specified. When applying this article, certain risks are likely for the subsoil users in the case of reorganisation by way of affiliation, merger or division, which provide for the liquidation of one of the legal entities being reorganised.

8. Changes in the terms of conducting the bids for the subsoil use right.
The terms of conducting the bids for the right to use subsoil have also been changed.
1) The Draft Law describes in many details the procedure of contest and the content of the bids. The competitive offer instead of “size of deductions on development of social sphere” should contain the size of deductions on “social and economic development of region and development of its infrastructure”.

From the list of data which should be contained within the application, the following are removed:

• Data about the financial, technical, administrative and organisational opportunities of the applicant, including qualification of the personnel;
• The document confirming maintenance of the application.

2) The term between the date of announcement of the terms of bids and the date of beginning to summarise the results of bids, is amended from 3 months as in the current Law to 4 months. The term for summarising the results of bids reduced from 2 months as in the current Law to 15 days as in the Draft Law. Nevertheless, under the decision of the Commission, the term of summarising can be prolonged for one month.
3) The list of criteria, by which the winner has to be selected, has been reduced. Now there are only 2 criteria (instead of 9) proposed by the Draft Law:

• Amount of signature bonus, and
• Amount of expenses for social and economical development of the region and the development of its infrastructure.

4) Under the current Law, in case recognition of the bids has failed, the conducting of repeated bids is provided. The Draft Law also provides the possibility of changing the bid’s documentation and conducting repeated bids. In the case of a repeated bid being made with only one bidder, the Competent body may conclude a contract with this bidder through direct negotiations.
5) The Draft Law contains an article about the recognition of the bids as invalid. Article 45 of the current Law specifies the cases, when a contract can be recognised as invalid. We would like to note that, besides the provisions of Article 45 of the current Law on Subsoil, the Draft Law establishes the violation of the competition rules as one of the reasons for finding the competition invalid, provided under this law, which influenced the determination of the winner of the competition as well as changing the participation or shareholding structure in the legal entity, the winner of the competition, prior to the day of concluding the contract.

9. Changes in the governing of the procedure of granting the  subsoil use right through direct negotiations.
Some provisions concerning the granting of the subsoil use right through direct negotiations are now brought out into a separate chapter. We would like to note that the legislator provides in the Draft Law: the procedure for concluding a contract for production on the basis of the exclusive right of subsoil user, who made a commercial discovery.

The following provisions deserve special attention:
The Competent body and the subsurface user, not later than two months from the date of receipt of the application for concluding the subsoil use contract through direct negotiations, jointly determine the following conditions of the production contract:
1) the size of the Kazakhstan content in goods, works, services and personnel;
2) the amount of expenses on social and economic development of the region and the development of its infrastructure.
If the parties fail to agree on the above conditions within three months from the date of commencement of direct negotiations, the competent authority decides to refuse to grant the right to conduct production operations.
Upon refusal by the Competent body to grant the applicant the right of subsoil use for production, on the basis of direct negotiations, the related area (plots) of the subsoil within three months will be exposed for tender.
If the contract is not concluded within twenty four months following the execution of direct negotiations protocol, due to the applicant’s fault, the applicant loses an exclusive right to conclude the contract for production and the corresponding plot of subsoil will be exposed for tender or will be provided on the basis of direct negotiations according to the procedure provided under this Law with the condition of compensating such person for
the costs of exploration.

Thus the state, on behalf of the Competent body, can in fact dictate the terms and conditions of the contract. Moreover, the draft law does not specify how the applicant can be at fault.

In the mean time, the Draft Law provides that in cases described above of refusal by the Competent body to conclude the contract for production, the applicant will be refunded its expenses borne in connection with the contract of exploration and production of the given area and commercial discovery. Such expenses will be refunded by the new winner of the tender for the given area within 3 months from the date of conclusion of the contract for production.

10. Changes in the  subsoil use contracts.
With regard to subsoil use contracts, we would like to note the following provisions of the Draft Law:

1) It is obvious that each type of subsoil use will have its own model contract;

2) The Draft Law provides that the contract should include penalties for failure to fulfill the contractual obligations with regard to payments of a non-tax nature. Thus, for the failure to fulfill the obligations, for example on, financing the training of Kazakhstani personnel or development of social infrastructure (and other similar obligations), the subsoil user shall pay the penalty. The Code on administrative violations of RK also provides for the responsibility for failure to fulfill the contract obligations (Article 264). I.e. for violation of financial terms of the contract, the subsoil user can be brought to two kinds of responsibility – civil responsibility and administrative responsibility. The Draft Law does not take into consideration the fact that the target indications and expenses are laid as a basis of obligations in the project documents, working program, annual working program, and other documents. The market conditions change constantly with ups and downs. Many conditions and target indications planned by a subsoil user do not depend on it, but depend on the market and terms offered by suppliers of goods and services. In such a case, if at the beginning of the year some financial expenses are planned, and within the year they turn out to be less (for example, the supplier of equipment delayed the delivery and the obligations of the subsoil user are thus extended to the next year), then the subsoil user will bear risks of liability to the state. Such risk of liability involves not only penalties, but possible withdrawal of the contract as well.

3) The current Law on Subsoil provides for approval of the contract working program simultaneously with the contract analysis. The Draft Law sets forth that the contract shall be concluded on the basis of an approved working program and project documents. I.e. all project documents and programs shall be approved before preparation of the draft  of subsoil use contract.

4) The number of mandatory approvals and expertise of the contracts has reduced from the current 7 to 4. The Draft Law provides for going through three examinations (legal, economic, and ecological) and getting one approval from the body for the exploration and use of subsoil. The draft law excludes examination for health and sanitary issues, mining and tax issues (that is likely the result of cancellation of the tax stability regime). The term of conduction of expertise remain unchanged, except for the ecological expertise, and in accordance with the draft law is 3 months.

5) The draft law provides a list of all mandatory project documents on oil operations and on extraction solid mineral resources, on the basis of which the operations on subsoil use will be carried out. The Draft Law contains the description of the said documents, procedure and the term of their reviewing and approval. In particular, the Draft Law will contain provisions on the projects of researching and evaluation works, production testing, commercial production and test, and initial field development plans.

6) The terms of payment of the signature bonus are also changed. The Draft Law on subsoil contains provisions on the payment of the signature bonus by stages:

• 50% shall be paid by the winner of the tender within a month after announcement of the tender results;
• The other 50% shall be paid within a month after registration of the contract.

If the winner of the tender fails to pay the signature bonus in the requisite above order, the commission has a right to reverse the decision about recognition of the winner . The Draft Law also provides that, in the event of failure to conclude the contract within the established time limits through the tender’s winner’s fault, the signature bonus will not be refunded. Nothing is said in the Draft Law about whether the signature bonus will be refunded or not, paid by the winner of the tender, in the event that the contract is not concluded through the fault of a relevant state body (for example, when the process of getting approvals and examinations is delayed, or any delays in conducting negotiations in connection with job shuffles of public servants etc.). It is also unclear whether the paid signature bonus will be refunded (like other tax and financial payments under the contract) in the event of recognition of the contract as being invalid. Under the Civil Code of RK, in the event of recognition of the contract as being invalid, the parties shall return to the original state of matters and refund to each other, any amounts received on the transaction.

7) The Draft Law provides for particular time limits for entering into the contracts of exploration to be 18 months, and the contract of production to be 24 months from the date of the announcement of the tender bidder and the date of signing the minutes of the direct negotiations (in case of granting the  subsoil use right through direct negotiations).

8) The provisions on the terms of validity of the contracts have also been changed in the Draft Law:

• With regard to the contracts of exploration, only a six-year period is provided.  Prolongation may be possible only in the event of commercial discovery and only for the period required for its appraisal. Thus, the current right of the subsoil users provided by the current Law to prolong twice the period of exploration for two years is now excluded in the Draft Law;
• At carrying out of oil operations on the sea, the contract on exploration can be prolonged by competent body until two years;
• With regard to contracts of production, there is no fixed term set. The term of validity of the contract of production now depends on the approved project of operations on production.

9) The Draft Law is supplemented by regulations about the interaction of two or more subsoil users, operating within the limits of one contract territory. Between such subsoil users, the agreement which defines the order of conducting works should be reached. If subsoil users, carrying out subsoil use operations within the limits of one contract territory, but under different contracts, cannot come to an agreement on the order of conducting works, then the subsoil user posses a right to an establishment of the order of conducting works in the contract territory, carrying out operations on the exploration or extraction of minerals under the contract concluded with Competent body.

10) The Draft Law now contains the changed grounds for termination of the subsoil use contracts. Under the Draft Law, the following grounds exist for early termination of the contract. It is necessary to have the following grounds:

• a failure to rectify by the subsoil user, as is specified in the notification of the Competent body time period, more than two violations of the obligations established by the contract for subsoil use, or project documents;
• if the subsoil user fails to comply with provisions of the draft law in relation to the priority right of the state to acquire the subsoil use right.

Failure to develop it, as the Bill's provisions deal with the priority right of the state to purchase the right of subsoil use.

In addition to that, in the draft law there are terms taken from the current law in relation to disagreement by the subsoil user to make changes to the contract:
If a subsoil user:

• does not confirm in writing his consent to negotiate or refuses to negotiate within two months from the date of receipt of notification from the Competent body about the changes or additions to the condition of the contract;
• if the parties will not come to an agreement within four months from the date of receipt of the subsoil user’s consent to negotiate;
• if the parties do not sign the changes and additions to the contract from the date of coming to an agreement.  

In case of the early termination by the Competent body of the contract, the National company takes the contract territory into beneficial ownership. The property, facilities and equipment present on the subsoil user’s territory are transferred by the subsoil user to the national company for temporary possession and use. In the absence of the former subsoil user or its deviation from the transfer of assets to the national company, the competent authority acts as its agent in respect of such property.
We would like to note that the Draft Law excludes the material violation of contract or a working program from the grounds for termination.  Also, the current Law on Subsoil does not specify the number of violations and what violation can be deemed material. Thus, compared to the current Law, the Draft Law softened the subsoil user’s position, because the list of grounds for termination of the contract is reduced. At the same time, the current Subsoil Law provides such a ground for termination of the contract as a failure to rectify the violations of the contract. In contrast, the draft law requires the failure to rectify more than two violations of the contract as a ground for termination.

The Draft Law also provides the subsoil user’s right to:

• Terminate the contract before time in accordance with the judicial procedure; or
• Refuse to fulfill the contract unilaterally.

A subsoil user can exercise such rights, if there are the grounds set out in the contract. It is obvious that such grounds will be specified in a Model contract, or should be specified by parties in the contract itself. If such grounds are not provided in the contract, this means that the subsoil user will not be capable of exercising such rights. On the other hand, the question is still open as to whether a subsoil user will be capable of using grounds provided for in the Civil Code of the RK for termination of the contract before time or not? The contract and Draft law on subsoil does not contain (or cannot contain in accordance with the Draft Law):

• References to the grounds, provided not only by the contract, but Civil Code as well; and
• The Draft Law itself does not specify any obligations of the Competent body or other public agencies that relate to fulfillment of the contract. Accordingly, once there are no obligations, this means that there will be no violations of such obligations by the other party to the contract.

It is also unclear in the Draft Law whether the breach of a balance of the economic interests of the party to the contract can be considered as a ground for the subsoil user to terminate it unilaterally or not? The key question is whether the subsoil user is entitled, when terminating the contract of its own initiative, to claim damages or loss of profit from the Competent body?

Thus, the Draft Law limits the possibilities for a subsoil user to terminate the contract unilaterally or to refuse to fulfil it, as well as limits the exercise of the subsoil user’s rights in practice.

11) The Draft Law provides the right of the Competent body to renew the validity of the terminated contract. The grounds for renewal of the contract can be:

- Invalidation of data, on the basis of which the Competent body took a decision to terminate the contract (including the absence of documents, certifying the fulfilment of contractual obligations on reasonable grounds)

- Ascertaining and confirmation of reasons not depending on the will of the subsoil user, as a result of which the subsoil user failed to fulfil or fulfilled improperly the contractual obligations.
The Draft Law establishes the procedure and time limits for the Competent Body exercising the right to renew the terminated contract.

11. Added obligations of the subsoil users
The Draft Law amended the rights and obligations of the subsoil user with an obligation to develop and use high technologies, processing enterprises, and pipelines, and to build and use infrastructure facilities. Such obligations have to be fulfilled by the subsoil user in accordance with provisions of the subsoil use contract. Accordingly, if there are no such provisions in the contract (the contracts concluded in the nineties), then there are no relevant
obligations of the subsoil user.

The Draft Law has an article, describing the obligation of a subsoil user to provide a temporary conservation of the field in case of the suspension of the subsoil use operations.

12. Disposal of trunk pipeline.
There is a new article in the Draft Law that regulates questions of possession, use and disposal of a trunk pipeline. The Draft Law refers the pipeline and the rights associated with it to the strategic facilities, namely:

• Trunk pipeline;
• Participating interests (blocks of shares) of the entities/persons, which can directly or indirectly define or influence the decisions of legal entities, which are the owners of trunk pipelines.

Such strategic facilities are of social and economic importance for the state, and transactions with them can affect the condition of national security.

13. Issues of liquidation of fields.
The Draft Law contains an article, which describes in detail the provisions on the liquidation and conservation of the fields.

The Draft Law provides the mandatory development of the field liquidation or conservation project by the project organisation having the relevant licence. The liquidation project shall be:

• Approved by 5 state agencies (supervising the environment protection, study and use of subsoil, industrial safety, regulating the land resources, sanitary & epidemiological protection)
• Approved by the subsoil user.

Some provisions on the liquidation fund existing in current legislation are also included in the Draft Law, namely:

• Using a banking deposit account for the purpose of creating the liquidation fund; and
• Using the means of the fund under permission of the Competent body and approval of the state body on the survey and use of subsoil.

Thus, the Draft Law on subsoil contains a number of modifications and changes. However, some questions as to the future application of the new Draft Law and other legal acts are still open. It is obvious that a lot of issues and problems will appear in practice, related to the further performance of the existing licences and subsoil use contracts, issued and concluded
in the nineties.

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We hope that this information is interesting and will be useful to you. In case you have any questions or you require additional information, we will be happy to help.

Best Regards,

Natural Resources Department

Tel.: +7 (727) 2 445-777
Fax: +7 (727) 2 445-776
natural_resources@gratanet.com