With the view to carryout planned workload of the state transportation systems and to stabilize the domestic oil market the state establishes oil export quotas.

According to clause 1 of Article 35 of the Decree «About Oil» (right of the Republic of Kazakhstan for Oil acquisition) «The Republic of Kazakhstan has the top priority for Oil acquisition from the share of the subsoil user or non-governmental subsoil user at the prices of the world market. The maximum volume of the acquired Oil, order of prices determination and type of payment are stipulated in the Contract». Thus, we would like to attract your attention to the fact that the Contract for subsoil use (Oil Contract) should establish:

1. The volume of the oil, which the Government has the right to demand from the subsoil user in accordance with its right for priority acquisition.
2. Order of determination of world market price, at which the Government will acquire the oil from the subsoil user in a priority way.
3. Type of payment for oil acquired.

We would like to underline that the procedure of realization of the right by the government on priority acquisition of oil is deemed to be no less important matter, which should be a subject during negotiations between the State and the subsoil user during signing of the Oil Contract. However, Oil contracts do not always regulate this procedure, and as a result, there is a practice of unilateral regulation by the competent state authority — the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan — of oil supplies to the home market and for export by confirmation of the schedules for supplies of this kind.

At present, the situation with determination of the quota on oil supplies and export to the Kazakhstan oil processing plants (OPP) is as follows:

In August 2000, Decree # 1172 of the Government of Kazakhstan Republic as of 02.08.00 «About some questions of stabilization of the oil products home market» (hereinafter «Decree») was adopted. The Decree provides for carrying out the following measures by state bodies:

1. Within a month the Republican state enterprise «Kazakhstan temir zholy» together with the Ministry of Transport and Communications of the Republic of Kazakhstan shall provide for undertaking necessary measures to regulate export transportation of crude oil by railway and pipelines according to schedules that are approved by the Ministry of Energy, Industry and Trade every month;
2. Within a week to approve schedule of workload of the domestic OPP till the end of the year and provide for its strict execution.

Basing on aforementioned Decree Orders are made. According to the Orders the Ministry of Transport and Communications develops monthly plans basing on the monthly schedules of oil dispatch for export, which are approved by the Ministry of Energy and Mineral Resources. Basing on the monthly plans «Kazakhstan temir zholy» carries out export dispatch of oil by railway transport.

It seems that the Decree was adopted for one term use. In this regard there are many questions:

1. Clause 1 of the Decree states that «To agree with proposals of companies on guarantied oil dispatch to domestic oil processing plants according to the annex».

The aforementioned annex was the first and the single one. Within 4 years (from 2001 till 2004) the Government has not been approving any schedules of oil dispatch by companies to OPP of Kazakhstan.

2. «Within a week to approve schedule of workload of the domestic OPP till the end o the year and provide for its strict execution».

Why were there no amendments/changes to the Decree during these years' Why did the Government not determine another procedure of approval of oil dispatch to the domestic OPP? To be objective the Decree is not enough to determine the authority of the Ministry of Energy and Mineral Resources. Furthermore, the authoritative body is now called the Ministry of Energy and Mineral Resources, instead of the Ministry of Energy, Industry and Trade. There were no amendments concerning this matter.

Beginning from July 1, 2003 the Law of the Republic of Kazakhstan «About Changes in statutory acts of the Republic of Kazakhstan, concerning the issues of state regulation of production and turnover of separate kinds of oil products» (hereinafter «The Law») has become effective and made the following amendments in the Decree «About Oil»:

I) The competency The Government of the Republic of Kazakhstan was amended with the following authorities:

3) Regulates the oil export, including by the way of approval (changing) of excise-duty rates, customs, protective, anti-dumping and compensatory duties, as well as quotas on oil export.

4) Establishes the quantitative restrictions (quotas) for oil transportation by various kinds of vehicle.

5) Determines the order of oil production and turnover unified database maintenance.

6) Organizes the system of control over the observance of safety requirements in the technological process of oil production, storage and turnover.

II) The functions of the competent authority have been enlarged:

1) The competent authority accomplishes state regulation of oil production in accordance with the project for field development, as well as for its turnover.

However, there were no amendments/changes to the Decree and quotas are still approved by the Ministry of Energy and Mineral resources in the form of letters of the Ministry to companies.

The second complicated issue is that the Ministry of Energy and Mineral resources approving monthly quotas of oil dispatch violates concluded Oil Contracts. For instance, X Company concluded an Oil Contract with the Government in 1995. Under the Contract the Company has a right to export all hydrocarbons extracted on the Contractual territory. Despite this provision the Ministry of Energy and Mineral resources imperatively states that 30% of annual oil production shall be sold at the domestic market of the Republic, and other 70% for export. In this connection the Company suffers certain losses that are not reimbursed by the Government of the Republic.

Under the special circumstances the State has the right for oil requisition:

1. In accordance with Article 36 of the Decree «About Oil» (Requisition and compensation of the Oil) in cases of war, natural disasters or other cases, provided by the legislation on emergency situations, the Government of the Republic of Kazakhstan possesses the right to requisite the part or the whole amount of the oil, belonging to a subsoil user on the basis of proprietary right or right for economic management. The requisition is realized within the volumes, necessary for provision of needs of the Republic of Kazakhstan during the whole period of emergency situations.
2. According to the Law of Kazakhstan Republic as of 05.07.96 «About emergency situations of natural and man-caused origin», an emergency situation is considered to be situation on a definite territory, that has arisen in the result of accident, disaster or catastrophe, which has entailed or can entail the deaths of people, damage to their health, damage to environment and the objects of economic activity, significant material losses and breach of the public living conditions.
3. According to clause 1 of Article 35 of the Decree «About Oil» (right of the Republic of Kazakhstan for Oil acquisition) «The Republic of Kazakhstan has the top priority for Oil acquisition from the share of the subsoil user or non-governmental subsoil user at the prices of the world market.

Thus, the current legislation that regulates issues of oil export quotas is discrepant and is not elaborated enough. Furthermore, decisions of the Ministry of Energy and Mineral Resources do not always comply with the Oil Contracts. This arouses investors' discontent, which might negatively reflect on attractiveness of the investment market of the Republic for both the investors that already work in the Republic and the potential ones. The willingness of the Government to regulate the export of domestic oil is understandable, however, there are certain rules stipulated in the legislation.