23 january 2012

The New Law of the Republic of Kazakshtan "On Gas Supply and Gas"

The President of the Republic of Kazakhstan signed the Law of the Republic of Kazakhstan "On Gas Supply and Gas" (hereinafter - the "New Law", "Gas Law" or the "Law"), the main provisions of which are discussed in this article. The following describes what we believe to be the most important specialties and provisions of the Law.

Gas Law is a novelty for legislation of the Republic of Kazakhstan. Previously gas and the gas supply sphere  were partially regulated by the subsoil use legislation and a number of the Government Resolutions. The Law aims to address the relations in the  gas and gas supply sphere and as a general principle seeks to prioritise the internal market provision of commercial  (under the Law, a mixture of hydrocarbons with a predominance of methane) and liquefied petroleum gas (under the Law, a mixture of propane and butane) produced in the RK.

The Law itself introduces many innovations that are directly related to the activities of investors in the Gas and Gas Supply industry.

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In particular, the Law establishes provisions regarding the state’s pre-emptive right to purchase raw and commercial gas.

Thus, under the New Law, the state has a pre-emptive right to purchase:

• raw gas, disposed of by  subsoil users and owned by them under the Subsoil Law   or the Subsoil Use Contract  ("Contract");
• commercial gas produced by subsoil users in the processing of recovered  gas and raw gas owned by them. 

Pre-emptive right shall be exercised by National Operator (“Operator”) – the company established (defined) by the Government and operates in the gas supply sphere to meet the internal needs of the RK regarding commercial gas.

The price of the raw gas purchased by the Operator is determined by the subsoil user and should take into consideration:

• cost of recovering raw gas;
• cost of transportation to the place of sale to the Operator;
•  profitability (no more than 10%). 

Commercial gas price is also determined by the subsoil user and takes into consideration:

• cost of recovering raw gas;
• cost of producing commercial gas from raw;
• cost of transportation to the place of sale to the Operator;
• level of profitability (no more than 10%). 

In relation to this, the subsoil users planning to sell raw or commercial gas in the next year shall send to the authorized body ("AB[1]")  calculations of the gas prices (with confirming documentation) for the Operator. Upon the review (max. 30 days), AB approves the price or reply with a justified objection. Subsoil users can not exceed the approved cost in the transactions with the Operator.

After approving the price, but not later than 5 months before the scheduled period, the subsoil user sends to the Operator a commercial proposal, including:

1. the volume of disposed raw and (or)commercial gas;
2. gas prices (not exceeding the one approved by the AB);
3. the delivery point.

The Operator makes a decision within a month whether to implement the pre-emptive right or reject it. If the Operator does not answer within a month, it shall be taken as a rejection of the implement the right.

The pre-emptive right does not apply to the implementation of:

1. raw gas, recovered from the gas and (or) gas-condensate fields,  and commercial gas produced from it;
2. commercial gas produced from the raw gas recovered from the gas and (or) gas-condensate fields;
3. liquefied natural and commercial gas produced in the process of re-gasification
4. raw gas sold according to international agreements of the RK;
5. commercial gas produced outside of Kazakhstan, imported for consumption;
6. commercial gas produced outside of Kazakhstan from raw gas recovered in Kazakhstan, under international agreements of the RK;
7. commercial gas produced under a contract of public-private partnership in the gas and gas supply sphere. In this context PPP in the gas supply sphere means cooperation in the processing of associated gas owned by RK.

Regarding the priority right of the state, it should be noted that the Law introduces the concept of "United system of commercial gas supply" (hereinafter - "Gas Supply System"). This system includes all of the following that are intended for the production, transportation, storage, sale and consumption of commercial gas:

• gas link and main gas pipeline
• Storage points for commercial gas,
• gas distribution and gas consuming system
• gas station
• and other technological objects.

Together these things form the components of gas supply systems

The system does not include:

• oilfield pipelines
• gas consuming system of household and communal household consumers,
• technological objects intended for the production, re-gasification, transportation, storage, sale and consumption of liquefied petroleum gas. 

In general the Gas supply systems activities must be provided by the Operator. 

According to the Law, the state represented by the Operator, has the priority right to purchase disposed (1) components of the Gas supply systems (hereinafter - "Components") and (2) entity interests (shares) of owners of such objects (hereinafter - "Shares").

Moreover, if the disposed property is a strategic object (the list of which is approved by the Government), such transaction shall occur under the Law "On State Property" and is not regulated by the Law. 

If the disposed property is not a strategic object, the entity planning to dispose it sends a commercial offer with a price and other terms of the disposition to the Operator.

The Operator makes a decision within a month on the exercising or rejection of the priority right and shall notify the applicant of the decision. If the Operator waives the priority right of state or does not notify the Applicant that it whishes to exercise it in time (within 1 month), the Applicant has a right to dispose of the Components and / or Shares to other persons. The terms of the disposal shall be not less beneficial to the Applicant as the ones proposed to the Operator.

As provided for by the Law, the state priority right does not apply to:

1) the alienation of gas filling compressor stations and gas consuming systems of industrial consumers;

2) the alienation of shares circulating on an organized securities market;

3) the transfer of Components and Shares :

• to a subsidiary organization, where at least 99% equity interest (shares) are directly or indirectly owned by the Component;
• between entities in which at least 99% equity interests (shares) are directly or indirectly owned by the same person;

4) transfer of Shares, if the person acquires the right for less than 0.1% of the Shares.

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The Law also introduces the regulation of gas sales. In general, under the Law, the sale of commercial, liquefied petroleum and liquefied natural gas is carried out with the obligatory use of a control metering device.

Wholesale trade of commercial gas (for the purpose of selling in the internal market or abroad), according to the provisions of the Law is can be performed solely by:

1. the Operator;
2. producers of commercial gas;
3. subsoil users - owners of commercial gas produced in the processing of the raw gas recovered by them;
4. owners of the commercial gas produced outside the RK and imported for consumption;
5. owners of commercial gas produced outside the RK from the raw gas recovered in Kazakhstan under international agreements of the RK, in the case of selling of commercial gas to the Operator and (or) outside of Kazakhstan;
6. gas networking organizations in the case of selling of commercial gas to the Operator and (or) the owners of car gas filling compressor stations.
7. In this case, the Law prohibits further gross resale of commercial gas, except the resale by the gas distribution companies to the Operator or owner of gas filling compressor stations. This restriction also does not apply to the Operator.

Retail sales of commercial gas are carried out by:

1. gas distribution companies;
2. owners of the automatic gas filling compressor stations;
3. Operator;
4. producers and owners of commercial gas produced outside of Kazakhstan and imported for consumption, in retail sales to industrial customers, whose  gas consuming systems are connected directly to the main or connecting pipeline.

The Law provides that every six months the Government (as advised by the AB) approves the limit prices of commercial gas sale for each region and the cities of Astana and Almaty. Prices shall be approved not later than 15 days before the scheduled period.

The limit price mentioned above does not apply to the sale of commercial gas:

1. to the Operator under the state pre-emptive rights;
2. to the Operator by the owners of gas produced outside of of Kazakhstan from the raw gas recovered in Kazakhstan, under international agreements of the RK;
3. obtained in the process of re-gasification of liquefied natural gas. 

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With respect to the sales of liquefied petroleum gas the Law contains a similar regulation.

Thus, the Law provides that the wholesale trade of liquefied petroleum gas can be performed only:

1. by producers;
2. by the owners of the gas produced during the processing of hydrocarbons owned by them;
3. by owners of the gas produced outside of Kazakhstan and imported for consumption;
4. gas networking organizations in the sale of the liquefied petroleum gas to the owners of gas filling points and (or) automatic gas filling stations.
5. At the same time the Law prohibits further gross resale of liquefied petroleum gas, except for resale to the owners of gas filling points and (or) automatic gas filling stations by gas networking organizations. 

Retail sales of liquefied petroleum gas are carried out solely by:

1. gas-distributing organizations;
2. owners of gas filling points;
3. owners of automatic gas filling stations;
4. producers or owners of liquefied petroleum gas produced during the processing of hydrocarbon raw materials owned by them or produced outside of Kazakhstan and imported for consumption in the retail sale of liquefied petroleum gas to industrial consumers.

Limit prices of liquefied petroleum gas sales are approved on a quarterly basis by the Government for the whole territory of Kazakhstan.

It should be noted that the Law does not directly indicate whether the specified limit prices for liquefied petroleum gas and commercial gas is an upper or lower limit. At the same time, the Law requires sellers of these types of gas to not exceed specified limit prices. This provision allows us to conclude that the limit prices are the upper limit. 

Please also note that the Law assumes a monthly approval of liquefied petroleum gas deliveries plan to the internal market of Kazakhstan by the AB.

This plan should be developed on the basis of applications of gas networking organizations (accredited wholesale and retail seller of liquefied petroleum gas sales that exploits gas filling stations, group reservoir installation) and, in fact, should contain a list of suppliers, the volume of delivered gas and the list of buyers. The volume of gas supplied by each supplier is proportional to its volume of production. 

Worthy of special attention is the Introduction by the Law of the concept of the gas networking organization, which means the entity accredited and operating as a gas-filling station, group reservoir units, and selling the liquefied petroleum gas.

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As for the associated gas the New Law establishes the following shall be considered as a state property:

1. associated gas recovered by subsoil user and owned by RK under the Subsoil Law;
2. associated gas, transmitted by subsoil users to state ownership. 

According to the Law, by the decision of AB associated gas is transmitted in specified amounts to an investor's ownership under the Public Private Partnership agreement in the field of gas and gas supply.

Subsoil users that produce commercial (or) liquefied petroleum gas from associated gas owned by RK by AB decision transfer:

• commercial gas to National Operator
• commercial and (or) liquefied petroleum gas to investors attracted under PPP at a price agreed by the parties.

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Concerning gas transportation the Law also sets certain restrictions. 

In particular, under the Law, gas transporting organizations have the right to render services in transportation of commercial gas through pipelines only for:

1. Operator;
2. producers of commercial gas;
3. subsoil users - owners of commercial gas produced during processing of the raw gas recovered by them;
4. owners of commercial gas produced outside of Kazakhstan, transporting it through Kazakhstan.

At the same time the gas transportation organization must refuse to transport gas in the following cases:

1. non-compliance of gas with technical regulation requirements and state standards of RK;
2. failure to provide documentation relating to compliance with pre-emptive state rights.

Regarding the transportation of liquefied petroleum and natural gas the Law also establishes a number of limitations. 

Under the Law, transportation of liquefied petroleum and natural gas by train, motor, marine and inland water transport from Kazakhstan can be carried out by

1. producers of liquefied petroleum and natural gas;
2. owners of liquefied petroleum and (or) natural gas produced in the processing of their hydrocarbons;
3. owners of liquefied petroleum and (or) natural gas produced outside of Kazakhstan, which have the intention to export it from Kazakhstan. 

At the same time the persons providing services in transportation of liquefied petroleum and (or) natural gas from Kazakhstan, have the right to render such services only to the entities specified above. 

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The Law of the Republic of Kazakhstan "On Gas and Gas Supply" comes into force within 10 days after its official publication and applies to relations arising after its entry into force. For the contracts for sale of raw, commercial and (or) liquefied petroleum gas as well as for technical service of gas consuming systems and gas equipment household and communal household consumers, concluded before the entry of the Law into force, which are for a period of more than a year, the seller or executor should make them comply with the provisions the New Law by 12/31/2012.

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On the basis of these innovations of the Law, we can make the following conclusions:

• The New Law introduces a rather strict regulation of gas and the gas supply field in RK;
• The New Law, in our opinion, affects the investment climate in Kazakhstan, since it introduces a number of restrictions on particular types of activities (transportation, gas sales, purchase and sale of objects of gas supply system, etc.)
• It introduces significant state control over the sale of gas in Kazakhstan;
• It introduces the prerequisites for constructing a unified gas supply system in the country;
• It expands the possibilities for nationalizing the components of the gas supply system.