1 Legal and regulatory framework
1.1 What role does the national state play in the oil and gas industry in your jurisdiction? Are oil and gas rights owned by the state or is private ownership allowed?
Pursuant to the Kazakhstan Constitution, subsoil is owned by the state. The state grants rights to use the subsoil to individuals, entities and consortiums in accordance with the subsoil use legislation. This right of use is called a ‘subsoil use right' (SUR) and grants the opportunity to use, for a fee, the subsoil within the boundaries of an allocated plot for business purposes for a specific period. An SUR is a proprietary, indivisible right. Subject to the provisions of subsoil use legislation, provisions on the right to property will apply to the SUR insofar as these do not contravene the nature of the right in rem.
The absolute majority of SURs in Kazakhstan are held by private entities. Some SURs are granted to the national oil company, KazMunayGas JSC, which is entitled to obtain SURs both through online auctions on general grounds and through direct negotiations. KazMunayGas, as the state's representative, also participates in a number of consortiums, including the biggest three oil and gas fields.
See also questions 1.5 and 2.3.
1.2 Which national legislative and regulatory provisions govern the oil and gas industry in your jurisdiction?
The principal statute governing the oil and gas industry in Kazakhstan is the Code on Subsoil and Subsoil Use of 27 December 2017 (‘Subsoil Code'), which came into force on 29 June 2018.
It replaced the similarly named Law of 24 June 2010 (‘2010 Subsoil Law'), save for certain provisions that remain effective for entities whose subsoil use contracts (SUCs) were concluded before 29 June 2018.
There are also numerous decrees of the Kazakhstan government and orders of the head of the competent authority for hydrocarbons (currently the Ministry of Energy (MoE)), which regulate the oil and gas issues set out by the Subsoil Code in more detail.
1.3 What other national legislative and regulatory provisions have relevance for oil and gas activities in your jurisdiction?
General statutes regulate:
- the behaviour of Kazakhstan nature users, land users and taxpayers;
- the order of construction; and
- the procedure for obtaining licences, work permits and customs clearance of imported goods.
Some of them also have separate chapters for oil and gas subsoil users.
In addition, certain aspects of oil and gas activities are regulated by the following laws:
- the Law on Gas and Gas Supply dated 9 January 2012;
- the Law on Trunk Pipelines dated 22 July 2012;
- the Law on State Regulation of Manufacturing and Turnover of Specific Types of Oil Products dated 20 July 2011; and
- the Law on Natural Monopolies dated 27 December 2018.
1.4 Are there any regional treaties or laws that need to be taken into account?
Under the Kazakhstan Constitution, international agreements ratified by Kazakhstan prevail over Kazakh law.
Besides being a member of the World Trade Organization, Kazakhstan has entered into several international treaties which have an impact on the oil and gas sector, such as:
- the Energy Charter Treaty;
- the Partnership and Cooperation Agreement with the European Communities and their Member States, dated 23 January 1995;
- the Agreement on Cooperation in Study, Exploration and Use of Mineral Resources with the Commonwealth of Independent States Countries dated 27 March 1997;
- the Eurasian Customs Union (Russia, Kazakhstan, Belarus, Kyrgyzstan and Armenia);
- the Convention on the Legal Status of the Caspian Sea dated 12 August 2018; and
- the Kyoto Protocol.
Kazakhstan is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
Finally, Kazakhstan has concluded bilateral investment treaties with approximately 50 countries establishing guarantees for the protection of investment activities. The texts of these treaties may differ in terms of:
- their definitions of an ‘investor' and an ‘object of investment';
- the protected rights of an investor; and
- the procedure for investment protection.
However, they all recognise the investor's right to apply for international investment arbitration to protect their rights and investment.
1.5 Which national regulatory bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?
The MoE is the competent authority which represents the interests of Kazakhstan and implements state policy in the sphere of subsoil use for hydrocarbons. Among other things, it:
- drafts and approves legislative acts in the oil and gas sphere;
- grants and terminates SURs for hydrocarbons;
- monitors subsoil users' performance of their obligations;
- imposes penalties on subsoil users for breach of their obligations;
- establishes schedules of raw oil and gas condensate supplies to domestic and foreign refineries;
- issues permits for;
- raw gas flaring;
- the creation and deployment of offshore facilities used for exploration; and
- the production of hydrocarbons at sea and inland waters; and
- co-approves the national plan of preparedness and response for remediation of oil spills on the seas and inland waters and in the preservation zone of Kazakhstan.
The activities of subsoil users may also be inspected by a regional directorate of the Geology Committee under the Ministry of Ecology, Geology and Mineral Resources.
1.6 What is the national regulators' general approach in regulating the oil and gas industry?
The regulator's general approach is as follows:
- For most prospective areas, rights for the exploration and production or the production of hydrocarbons are granted on an auction basis.
- As a rule, a change in the direct or indirect control of an SUR is subject to the prior consent of the MoE (unless an exception applies). If an SUR is linked to a strategic subsoil plot (either located in the Caspian Sea or whose geological reserves of oil or gas exceed 50 million tons or 15 billion cubic metres, respectively), the state has a pre-emption right in case of alienation of such SUR or issuance of relevant so-called ‘objects linked to SUR' (ie, shares in the subsoil user or its direct or indirect shareholders).
- Any work programme must be based on project documents for subsoil use operations to be agreed with the authorities.
- Subsoil users must provide security for abandonment works.
- Goods, works and services must be procured under the procurement rules, mostly through tenders conducted on the online procurement platform.
- Subsoil users must comply with a minimum percentage of local content in relation to staff and the procurement of works and services.
- The state will continually monitor compliance with the work programme obligations based on periodical reports submitted by the subsoil user. In case of a subsoil user's substantial non-compliance with its financial obligations, the MoE may unilaterally terminate the relevant SUR.
See also question 1.5.
1.7 What role do provincial, state and/or other local government regulatory bodies play in the regulation of the oil and gas industry?
Kazakhstan has a highly centralised system of governance. The MoE plays the major role in regulating the oil and gas industry (see questions 1.5 and 1.6).
2 Oil and gas industry
2.1 How mature is the oil and gas industry in your jurisdiction?
Kazakhstan has been an oil producer since 1911. In 1991, Kazakhstan gained independence and 26.6 million barrels of oil were produced. Since then, production has increased by 3.3 (see question 2.2).
Since 1991, the hydrocarbons sector has generated about 60% of direct foreign investment and it now accounts for approximately 53% of the state's export revenues.
Today, Kazakhstan ranks among the top 15 oil producing countries of the world. Around 80% of oil – including gas condensate – is exported. This indicator also has increased eightfold, from 8.58 million tons (MT) in 1996 to 68.6 MT in 2020.
Kazakhstan has been a member of the OPEC+ since 2016.
Kazakhstan completed the modernisation of its three major refineries in 2018. As a result, the quality of gasoline and diesel fuel has been improved to K4 and K5 emission classes (analogues of Euro-4 and Euro-5), and processing volume has increased from 12.5 to 17.5 MT, enabling the refineries to cover all needs of the domestic market.
In the coming year, companies which represent more than 60% of general production and processing of crude oil and gas condensate will be connected to the state information system for accounting of crude oil and gas condensate, which will increase the transparency of the industry. Three refineries, 16 mini-refineries, four oil transportation organisations and around 100 subsoil users will be connected to the system.
Due to the participation of major petroleum companies in the development of oil fields, Kazakhstan is well aware of international industry standards. As subsoil users are obliged to finance the training of Kazakhstan personnel and develop local content in staff, Kazakhstan also has relevant qualified personnel.
2.2 What are the key oil and gas products which are produced in your jurisdiction and where are activities typically based?
In 2020, Kazakhstan produced 85.7 million tons (MT) of oil and condensate. Some 15.8 MT of oil were processed and oil product production reached 11.5 MT, including 4.5 MT of gasoline, 4.55 MT of diesel and 2.1 MT of fuel oil.
Oil products are mostly processed at Kazakhstan's three major refineries – the Atyrau, Pavlodar and Shymkent plants – which account for more than 90% of refining (apart from JSC Condensate JSC, Joint Venture Caspi Bitum LLP and approximately 30 mini-refineries).
Kazakhstan's natural gas output amounted to 55.1 billion cubic metres (bcm) in 2020. In total, 30.5 bcm of commercial gas and 3.2 MT of liquefied gas were produced.
As of mid-2021, Kazakhstan Petrochemical Industries Inc LLP had completed nearly 90% of its integrated gas-to-chemicals complex in Atyrau. Completion of the complex is planned in 2022. It will convert 629,000 tons per year (tpy) of propane from the Tengiz oil field into propylene feedstock for the complex's associated polypropylene plant, which will produce 500,000 tpy of polypropylene for supply to domestic and export markets.
There are also plans to construct three more petrochemical complexes in the Atyrau, Aktobe and Mangystau regions.
2.3 Who are the key players in the oil and gas industry in your jurisdiction?
The key players in the oil and gas industry can be divided into two groups. The first group of key players are the so-called ‘three whales' – the major oil and gas producers in Kazakhstan, operating under stabilised subsoil use contracts (production sharing agreements):
- Tengizchevroil LLP (TCO) (Chevron (50% of participation interest), ExxonMobil (25%), KazMunayGas (25%) and Lukarco (5%));
- North Caspian Operating Company NV (NCOC) (KazMunayGas (16.88% of shares), Eni (16.81%), Shell (16.81%), ExxonMobil (16.81%), Total (16.81%), CNPC (8.33%) and Inpex (7.56%)); and
- Karachaganak Petroleum Operating BV (KPO) (Royal Dutch Shell (29.25% of shares), ENI (29.25%), Chevron (18%), Lukoil (13.5%) and KazMunayGas (10%)).
TCO produced 31% of oil and condensate production in Kazakhstan for 2020; while NCOC and KPO's production shares were 18% and 14%, respectively (jointly – 62.4%).
The second group of key players are represented by the Ministry of Energy and quasi-state companies such as:
- KazMunayGas, acting as a national company representing the interests of the state in the oil and gas industry;
- PSA LLP, appointed by the government as the authorised body in production sharing agreements relating to NCOC, KPO and the Dunga field;
- KazTransGas JSC, as the national operator in the field of gas and gas supply;
- KazTransOil JSC, as the national operator for trunk oil pipelines;
- Intergas Central Asia JSC, as the national operator for trunk gas pipelines; and
- National Maritime Shipping Company Kazmortransflot LLP, as the national sea carrier.
2.4 How are the following reflected in the domestic energy mix?
(a) Oil and gas
(b) Imports and exports?
In 2018, the Kazakhstan energy mix was as follows:
- coal – 37,516 kilotonnes of oil equivalent (ktoe) (39.4%);
- oil – 18,880 ktoe (24.8%);
- natural gas – 18,619 ktoe (24.5%);
- hydro – 894 ktoe (1.2%); and
- wind, solar etc – 73 ktoe (0.1%).
Out of 85.7 MT of oil and condensate produced in Kazakhstan in 2020, 68.6 MT were exported.
According to reports, in 2020:
- 19.8 billion cubic metres (bcm) of natural gas were exported (to Russia – 8 bcm; China – 7.3 bcm; Switzerland – 3.2 bcm; Ukraine – 0.6 bcm; Kyrgyzstan – 0.28 bcm; and Germany – 0.26 bcm); and
- 9.6 bcm were imported (from Russia – 8.2 bcm, Uzbekistan – 0.79 bcm; and Turkmenistan – 0.1 bcm).
3 Exploration and production
3.1 What rights are required to undertake exploration and production in your jurisdiction? Do these vary depending on the type or location of the activity?
To conduct exploration or production activities, an entity must obtain a subsoil use right (SUR), formalised by execution of a subsoil use contract (SUC). Before 29 June 2018, under the 2010 Subsoil Law, the state granted separate SURs for either:
- exploration (with the right to obtain an SUR for production subject to certain requirements); or
- production of hydrocarbons.
SURs for combined exploration and production could be granted only by government resolution.
Since 29 June 2018, the state grants SURs either for:
- exploration and production; or
- production of hydrocarbons.
Subject to the requirements of the Subsoil Code, before transitioning to the production stage, the SUC may secure a preparation period for up to three years. During this period, the subsoil user may:
- prepare and obtain approvals for a field development project;
- develop the field infrastructure; and
- produce hydrocarbons in a volume that does not exceed the volume of production during the test operations of the field.
3.2 What regulatory or contractual requirements must be satisfied to obtain exploration and production rights?
Under the Subsoil Code, only KazMunayGas, as a national company, may obtain exploration or production rights through direct negotiations. All other interested parties may obtain such rights only by winning an online auction – that is, offering the highest proposed signature bonus.
An auction may be conducted only for subsoil plots for hydrocarbons included in Annex 3 to the State Subsoil Fund Management Programme, which as of mid-2021 referred to 73 subsoil plots available for auctions and 11 subsoil plots for KazMunayGas. All these territories may be viewed on an e-map at http://gis.geology.gov.kz/geo.
If a certain territory of interest is not included in the programme, any entity may file a request with the Ministry of Energy (MoE) to include such a territory in the programme. However, the process of consideration is rather lengthy and may take many months; it involves not only the MoE, but also the Geology Committee under the Ecology Ministry and the Ministry of Investment and Infrastructural Development, with the latter issuing an order on the introduction of amendments to the programme.
The government intends to approve a decree specifying a procedure for the consideration of relevant applications for amending the programme during each calendar quarter and authorising the Geology Committee to approve such amendments.
At present, an entity interested in obtaining an SUR must file an application with the MoE to hold an auction. The MoE may reject the application if, among other things:
- the prospective territory is not included in the programme;
- in the previous three years, the applicant filed another application to hold an auction but was not registered as a participant in that auction;
- in the previous three years, the MoE terminated an SUC to which the applicant or its affiliate was a party;
- the applicant is a subsoil user under another SUC and there are non-rectified breaches of contractual obligations indicated by the MoE; or
- the applicant won an auction, but failed to pay the signature bonus.
If the application is accepted, the applicant will be allowed to participate in an action.
Under the Subsoil Code, the MoE may publish an announcement to hold an auction no more than twice a year (it has been announced that this limitation may be removed).
The requirements for participation in an auction and for winners of SURs are prescribed in Articles 93 to 97 of the Subsoil Code, including the need to provide evidence of:
- funds sufficient to comply with the minimum requirements for works during the exploration period; or
- positive experience in the performance of offshore works if an SUR is granted for a subsoil plot in the Caspian or Aral Sea (whether its own experience or that of a direct shareholder holding at least 25% of the shares (participation interest)).
An SUR for exploration or production of hydrocarbons in the Caspian or Aral Sea may be granted only if KazMunayGas will be granted at least a 50% share in the relevant SUC.
3.3 If there is state ownership of oil and gas rights in your jurisdiction, what is the procedure for obtaining exploration and production rights? How long does this typically take?
See questions 1.1 and 3.2 for details on how the state grants exploration and production rights through auctions.
Under the Subsoil Code, and in practice, it takes about two months to obtain such rights.
The results of auctions are published within three business days of the auction. Within the following 20 business days, the auction winner must:
- pay its signature bonus; and
- provide the MoE with evidence of the payment and a signed model contract for exploration and production or for the production of hydrocarbons.
Within the following 20 business days, the MoE will execute the contract and forward it to the winner.
3.4 Who can own exploration and production rights in your jurisdiction? Do specific requirements or restrictions apply to foreign operators? Do any indigenous ownership requirements apply?
Any domestic or foreign individual, entity or group of persons (consortium) may obtain exploration and production rights. Specific restrictions are imposed for the exploration or production of hydrocarbons in the Caspian or Aral Sea – KazMunayGas must be granted at least a 50% share in the relevant SUC.
A subsoil user may create or designate another legal entity as an operator under an SUC. Relations between the operator and the subsoil user will be regulated by contract. The subsoil user must notify the MoE of the designation of the operator or the termination of the operator's powers. The subsoil user is liable for breach of the SUC due to the operator's actions.
The subsoil user is jointly and severally liable for the operator's obligations arising in connection with the representation of the subsoil user's interests. If the operator causes harm to third parties as a result of subsoil use operations, the subsoil user may not assert that the operator was acting in excess of its powers.
There are no specially protected communities, such as aboriginal or indigenous people, in Kazakhstan.
3.5 If there is state ownership of oil and gas rights in your jurisdiction, what fees and other charges are incurred in obtaining exploration and production rights?
All participants in auctions must pay a participation fee. The MoE plans to increase this fee from 100 monthly calculation indexes (approximately $700) to the starting amount for a signature bonus for the relevant subsoil plot.
The auction winner must also pay its signature bonus.
3.6 What is the duration of exploration and production rights? What is the process for renewal?
When an SUC is concluded, the maximum duration of the exploration period for offshore plots and complex exploration projects is nine years (jointly referred to as ‘special projects'), or six years for other plots. ‘Complex exploration projects' are projects which require the drilling of wells more than 5 kilometres deep, where hydrogen sulphide content in the reservoir multiphase is 3.5% or more or with abnormally high reservoir pressure (ie, the abnormality rate is 1.5 or more).
If a hydrocarbon reservoir is discovered, the exploration period may be extended for its evaluation (including test operations) for a period of up to three years, or up to six years for special projects.
For the performance of test operations, the exploration period may be additionally extended for up to three years.
In total, the maximum exploration period may not exceed 12 years, or 18 years for special projects.
The period of hydrocarbon production cannot exceed 25 years, or 45 years for huge (ie, where geological reserves of oil or gas exceed 100 million tons or 50 billion cubic metres, respectively) or unique fields. Holders of SUCs for huge fields must undertake additional obligations (eg, the establishment of processing facilities; the modernisation or reconstruction of available production or processing facilities). Upon a subsoil user's application, the MoE may extend the production period for up to 25 years (except for SURs relating to Tengizchevroil, North Caspian Operating Company, Karachaganak Petroleum Operating and Dunga PSA, where extension is possible upon agreement of the parties).
To extend the exploration or production period, the subsoil user must:
- file a relevant application during the respective exploration or production period; and
- comply with certain requirements (including the existence of grounds for extension and the absence of non-rectified breaches of contractual obligations specified in the MoE's notification(s)).
3.7 What are the operator's rights and obligations under exploration and production rights?
See question 3.4.
3.8 Are there any requirements re relinquishment of exploration and production rights or part of the area covered by such rights?
The provisions on exploration contracts concluded before the Subsoil Code entered into force required subsoil users to relinquish certain percentages of the contract territory by the end of the second and further years of exploration, formalised by the reissue of the relevant geological allotment. In practice, these provisions appeared to be of a declaratory nature.
The Subsoil Code does not include such obligations for either exploration or production contracts.
3.9 Can exploration and production rights be transferred or assigned? If so, how and subject to what government consents? Do any fees, taxes or other charges apply to direct or indirect transfers?
As mentioned in question 1.6, the transfer of an SUR is subject to the MoE's prior consent. In certain cases, it may also be subject to a waiver of the state's pre-emption right. There are some exceptions, such as:
- a transfer between affiliated entities belonging to a beneficiary holding at least 99% direct or indirect control, unless the acquirer is registered in a tax haven country; and
- a transfer through a transaction involving the Kazakhstan government, a state body, the national managing holding or KazMunayGas.
The MoE will issue its consent (rejections are very rare) within one month, or three months if the transaction relates to huge or strategic fields. In practice, it may take longer if the MoE requests additional documents or information.
The direct transfer of an exploration right gives rise to corporate income tax (CIT) at a rate of 20%, which is imposed on the positive difference (if any) between:
- the sales price charged for the exploration right; and
- the costs of the geological survey and the exploration and preparatory works, as well as other deductible expenses.
Moreover, the gross amount of proceeds from the sale is subject to value added tax (VAT) at a rate of 12%.
The direct transfer of a production right gives rise to CIT at a rate of 20% if the sale price of the production right exceeds its book (balance) value. The sale is also subject to VAT at a rate of 12%.
The indirect transfer of an exploration or production right – that is, the sale of a participatory interest or share in the Kazakh company that holds the exploration or production right – triggers tax obligations only in the event of a capital gain. The capital gain is subject to CIT at a rate of 20% or withholding tax at a rate of 15% or 20%, depending on the tax status of the buyer.
3.10 Can security be taken over exploration and production rights?
Yes, exploration and productions rights may be pledged in favour of third parties, subject to the prior consent of the MoE and further registration of the pledge agreement with the MoE. A loan backed by the pledge of an SUR may only be used for subsoil use purposes or for the organisation of further reprocessing in Kazakhstan by the subsoil user itself or a wholly owned subsidiary.
Enforcement of the pledged SUR requires a public auction in which only entities that have obtained a separate consent may participate. If the auction is found invalid, the pledge holder may apply for consent and re-register the security in its own name.
3.11 What contractual or regulatory provisions apply with regard to cessation of exploration and production or abandonment of exploration and production rights?
The subsoil user bears the obligation of remediating the consequences of subsoil use operations, irrespective of whether the SUC:
- has expired;
- has been acknowledged as invalid; or
- has been terminated either by the MoE or jointly by the parties to the SUC (or a certain part of subsoil plot has been returned to the state).
The only exceptions are cases when the MoE notifies the subsoil user that:
- the related subsoil plot must be transferred for trust management to KazMunayGas; or
- it must conduct conservation works for further provision of the plot to another person.
Before commencement of the relevant works, a project document (a project for remediation of the consequences of the subsoil use operations or a project on subsoil plot conservation) must be prepared and approved.
The performance of remediation (abandonment) works is secured by the pledge of a bank deposit, except for subsoil users conducting offshore exploration.
Before commencement of the exploration or production operations, the subsoil user must transfer the amounts estimated in the relevant project document (an exploration project or a field development project) for this deposit.
The assignment of an SUR is the unconditional basis for the transfer of rights on the relevant pledged bank deposit.
Subsoil users conducting offshore operations are fully liable for any damage caused by oil spills and must either:
- ensure the availability of certain resources to remediate oil spills in the sea; or
- conclude contracts with organisations that specialise in the remediation of oil spills in the sea.
4 Surface rights
4.1 Does the law of your jurisdiction distinguish between exploration and production rights and surface rights? If so, how does an owner of exploration and production rights acquire surface rights?
Surface rights (known in Kazakhstan as ‘land use rights') are separate from exploration or production rights and are obtained through procedures set out by the Land Code.
The holders of exploration rights may conduct operations based on public or private servitude (easement). In the latter case, unless otherwise set out by an agreement on the establishment of private servitude, subsoil users may not commence exploration operations unless they have:
- paid a servitude fee; and
- reimbursed losses under the agreement on private servitude or a court decision (in case of a dispute with landowners or land users).
Under the Subsoil Code, the execution of a production contract (or transition to the production stage under an exploration and production contract) constitutes grounds for the grant of a relevant land use right by local regional bodies (Akimats) under the Land Code.
If the land plots on which the production operations will be performed constitute state property, the relevant regional Akimat will provide a temporary land use right for the production period. This right is confirmed by resolution of the Akimat, on which basis the relevant land plot lease agreement is concluded.
If the land plots are owned or leased by third parties, the subsoil user must conclude an agreement with those owners/leaseholders. Normally, the subsoil user must reimburse the landowners/leaseholders for losses of agricultural activity (due to the withdrawal of land plots used for agricultural activities). In certain cases, the subsoil user must conclude servitude contracts.
4.2 Where surface rights are acquired, what are the operator's rights and obligations as regards the landowner? And what are the landowner's rights and obligations as regards the operator?
See questions 3.4 (regarding the operator's status) and 4.1. In addition, subsoil users must remediate the consequences of exploration or production operations; and the state, as the owner of the land plots (in most cases), may inspect land users' compliance with the land legislation.
4.3 Is there a process for the mandatory acquisition of surface rights? If so, what does this involve?
To acquire a land use right, a subsoil user must obtain a temporary land use right. This can be obtained either through public or private servitude (for exploration) or through a lease (for production).
Public or private servitude: Public servitude is established by resolution of the Akimat. Private servitude is established by an agreement with the landowner.
Public servitude is established only for state-owned land plots. The Akimat must make the land plot available for the subsoil user for the duration of its exploration right.
The procedure for the subsoil user's interaction with third parties is described in question 4.1.
Servitude lasting more than one year is subject to mandatory state registration. State registration will take place 20 business days after the submission of all necessary documents (eg, a servitude agreement; a document certifying payment of the registration fee).
Lease: A lease is granted by resolution of the Akimat. To obtain land use rights, a subsoil user must file an application with the Akimat. The application must contain the following information:
- the purpose of use of the land plot;
- the estimated size of the land plot;
- the location of the land plot; and
- copies of the relevant production contract (or an addendum to an exploration and production contract on assignment of a production plot and production period or a preparation period).
The Akimat will take up to two months to consider the application and issue its resolution. This term does not include the time required to:
- prepare a land use design project (in practice, this takes between one and three months);
- define the boundaries of the land plot; and
- obtain approvals required under Article 44.6 of the Land Code (if certain facilities or ecological areas are to be demolished or transferred, agreements for compensation of losses concluded with owners must be provided).
A subsoil user will obtain a temporary land use right after execution and state registration of the lease agreement.
4.4 Are any native title issues applicable?
There is no concept similar to ‘native title' in Kazakhstan.
4.5 Are any other rights needed to use the land (eg, zoning permissions or planning requirements)?
The grant of land use rights to subsoil users by the authorities means that the relevant zoning requirements set out in the Land Code have been taken into account.
Under Kazakh law, all industrial, municipal and warehouse facilities, as well as special purpose zones (eg, landfill sites, sewage treatment facilities) which might threaten the population or environment, are subject to the imposition of a so-called ‘sanitary protection zone' (SPZ), in which most types of activities are prohibited. The territory of each SPZ depends on the class of danger (from 0 to 99 metres for V-class objects to 1,000 or more metres for I-class objects).
5 Processing, refining and export
5.1 What requirements and restrictions apply with regard to the processing and refining of oil and gas?
The processing and refining of oil and gas are licenced activities.
See question 2.2 (regarding refineries) and 5.2 (regarding subsoil users' obligation to supply oil to local refineries).
According to the Subsoil Code, subsoil users must not extract hydrocarbons without processing the entire volume of produced raw gas, save for limited exceptions. They must implement a programme for the development of raw gas processing, which must be approved by the Ministry of Energy (MoE) and updated every three years. Each field development project must have a section on raw gas processing (utilisation). Subsoil users must minimise the volume of raw gas flaring.
Where gas processing is economically unjustified, a field development project and the raw gas processing development programme may envisage the utilisation of raw gas produced, with the exception of gas used for own needs, by pumping into the reservoir for storage and/or maintaining reservoir pressure.
The Gas Law sets out the state's pre-emption right to purchase raw and commercial gas from producers, save for certain exceptions (eg, raw or commercial gas produced from gas and condensate fields; gas realised under an international agreement concluded by Kazakhstan). This right is exercised through the national operator (KazTransGas JSC). The price is determined in accordance with certain rules approved by the MoE, based on the subsoil user's expenses incurred in the production of raw or commercial gas and transportation to the operator, plus a 10% margin. The price for a planned year may not exceed 10% of the price of gas acquired by the national operator in the previous year. Accordingly, the actual price of gas in most cases is demotivating for producers.
Subsoil users that wish to alienate raw and/or commercial gas must submit a commercial proposal regarding the volume, price and place of supply to the national operator five months before the planned period. The operator will consider the proposal within one month. If it does not decide to realise the state's pre-emption right, the subsoil user is entitled to sell gas to third parties.
5.2 What requirements and restrictions apply to the export of oil and gas?
Both direct and indirect restrictions apply.
Almost all subsoil users (except for Tengizchevroil, Karachaganak Petroleum Operating and North Caspian Operating Company) must sell oil produced during the exploration stage and certain percentages of oil produced during the production stage to domestic refineries.
Pursuant to the Subsoil Code, the state has a pre-emption right to acquire hydrocarbons at prices which do not exceed those applied by the subsoil user in previous transactions, less transportation costs and expenses for the sale of hydrocarbons. The maximum volume of such hydrocarbons is specified in the relevant subsoil use contract.
As noted in question 5.1, pursuant to the Gas Law, the state also has a pre-emption right to acquire raw gas and commercial gas from producers. Those companies which are exempt from this pre-emption right in practice may face obstacles when seeking to export their commercial gas, as although the national operator has a statutory right to transport commercial gas abroad through trunk gas pipelines, it often does not exercise this right for various reasons.
Subsoil users that wish to export oil must file applications with the MoE by 31 October of the year preceding the reporting year (for an annual schedule of oil supply) and by the 10th of the month preceding the reporting month (for a monthly extract from the schedule). Given these requirements and the needs of local refineries, and subject to the operator's confirmation regarding the technical capacity to export oil, the MoE will approve the annual schedule of oil supply through trunk pipelines, railroad and sea transport no later than 15 days prior to the reporting year. The schedule may be amended periodically. Monthly extracts from the schedule will be sent to the applicants, the related operators and the State Revenues Committee under the Ministry of Finance.
From time to time, the government bans the export of certain oil products to prevent shortages of such products on the domestic market.
The export of crude oil from Kazakhstan is subject to rent tax (with certain exceptions) and export customs duties. The rent tax on export is levied on the sold volume of exported crude oil at rates of 0% to 32%; while export customs duties are charged at rates varying from $0 to $236 per metric ton of exported crude oil.
6 Transport and storage
6.1 What requirements and restrictions apply with regard to the transport and storage of oil and gas? Do these vary in the case of cross-border transportation?
See question 6.2.
6.2 What requirements and restrictions apply to the construction and operation of transport and storage infrastructure?
According to the Pipelines Law, the state has a pre-emption right to participate with a percentage of up to 51% in projects for the construction of a new trunk pipeline (but not projects for the enhancement of an existing trunk pipeline). Anyone that intends to conduct such activities must submit a commercial proposal for the state's participation in the project to the Ministry of Energy (MoE). Within the next 45 business days, the government will consider the proposal and the MoE will notify the party as to whether the state will exercise or waive its pre-emption right. In case of waiver, the party may either construct the pipeline by itself or propose the project to another party. However, the conditions for the participation of other parties may not be more beneficial than those offered to the government.
A number of licences and approvals are required for the design, construction and operation of transport and storage infrastructure.
For the placement and operation of underground facilities for the storage of oil, gas, gas and oil products, located at a depth below five metres from the earth's surface, a licence for subsoil space use must be obtained from the Geology Committee.
Devices that measure operations on turnover of crude oil and gas condensate must be installed at transport and storage infrastructure (see also question 2.1).
The transportation of oil or oil products through trunk pipelines, and the storage and transportation of commercial gas (save for the transit or export of oil, oil products or commercial gas) is a natural monopoly, and all related tariffs must be approved by the Committee on the Regulation of Natural Monopolies under the Ministry of National Economy.
Oil products are stored at about 360 tank farms and wholesale realisation is made through approximately 3,000 petrol stations. To store oil products, a notification on the commencement and termination of activities linked to wholesale supplies of oil products must be filed with the MoE.
See also question 5.2 regarding restrictions relating to cross-border transportation.
7 Environmental issues
7.1 What environmental authorisations are required to undertake oil and gas activities in your jurisdiction? Do these vary depending on the type or location of the activity?
Commercial oil production exceeding 500 tons per day and commercial gas production exceeding 500,000 cubic metres per day are subject to an environmental impact assessment (EIA).
Exploration and production of hydrocarbons which do not reach the above-mentioned volumes are subject to screening. This is a procedure conducted to determine whether an activity is subject to an EIA. If the authorised body (the Ecology Ministry) decides, based on the results of screening, that an EIA is needed, an EIA must be conducted.
In addition, in conducting oil and gas activities, companies will develop different technical projects, such as well drilling projects and surface facilities construction projects. Technical projects are subject to the state's environmental examination.
The exploration and production of hydrocarbons also require an environmental permit. The new Environmental Code of 2 January 2021 provides for two types of environmental permits: an integrated environmental permit and an environmental impact permit.
At present, oil and gas companies must have environmental emissions permits issued under the previous Environmental Code of 9 January 2007, which was in force until 1 July 2021, or environmental impact permits.
Since 1 January 2025, all oil and gas companies, with some limited exceptions, will be obliged to have integrated environmental permits.
7.2 What environmental regulations or contractual obligations must the operator observe while oil and gas facilities are operational?
As outlined in question 3.4, references to an ‘operator' carrying out oil and gas activities have the same meaning as references to ‘subsoil users'. Operators must comply with:
- the Environmental Code of 2 January 2021;
- the Subsoil Code;
- the Water Code of 9 July 2003;
- the Forest Code of 8 July 2003;
- the Law on the Protection, Reproduction and Use of Fauna of 9 July 2003;
- the Law on Specially Protected Natural Territories of 7 July 2006; and
- their subordinate regulations.
The duty to comply with environmental laws is usually included in subsoil use contracts.
7.3 What environmental regulations or contractual obligations must the operator observe in relation to decommissioning?
For the decommissioning of technological facilities, including wells, and remediation of the consequences of oil and gas activities, the operator must comply with the Subsoil Code and the Rules for Conservation and Liquidation during Hydrocarbon Exploration and Production and Uranium Production approved by Order 200 of the Minister of Energy of 22 May 2018.
While the subsoil use right (SUR) is valid, the operator must decommission wells that are subject to decommissioning for technical or geological reasons and cannot be used for other purposes.
The operator must remediate the consequences of the subsoil use in case of termination of its SUR or the transfer of part of the contractual territory back to the state.
Technological facilities are decommissioned under a decommissioning project which has successfully passed the state's environmental examination. Some types of wells are decommissioned under decommissioning plans.
Before commencement of the exploration or production of hydrocarbons, the operator must deposit in its bank account an amount that is equal to the projected cost of the abandonment works. The operator must transfer this bank deposit to the state as collateral. If the operator fails to perform the abandonment works as required, the state may claim the deposit in full or in relevant part.
7.4 What are the potential consequences of breach of these requirements – both for the operator itself and for directors, managers and employees?
In case of non-compliance with the obligations on remediation of the consequences of the subsoil use within the terms specified in the Subsoil Code, the operator may be fined approximately $1,050. Directors, managers and employees of the operator will not be fined for non-compliance.
However, directors, managers and employees of the operator may be held criminally liable if a failure to properly perform the abandonment works or to decommission technological facilities results in a serious ecological threat (ie, with a cost of more than $7,000) or a threat to human health. The harshest punishment for this crime is imprisonment for up to three years. If the crime results in an especially serious ecological threat (ie, with a cost of more than $140,000), the death of a person or mass disease, the harshest punishment is imprisonment for between three and seven years.
7.5 Which national, provincial/state and/or local government regulatory bodies are responsible for enforcement of environmental obligations?
The state authority which is responsible for the enforcement of environmental obligations is the Ecology Ministry and its regional departments. Administrative fines for failure to remediate the consequences of subsoil use are imposed on operators by the MoE.
7.6 What is the regulators' general approach in regulating the oil and gas sector from an environmental perspective?
The general approach of the state authorities is to exercise strict control over oil and gas activities and take all possible measures to ensure that operators properly fulfil their environmental obligations.
8 Health and safety
8.1 What key health and safety requirements apply to oil and gas operators in your jurisdiction?
According to the Law on Civil Protection dated 11 April 2014, facilities used for the exploration or production of hydrocarbons are considered hazardous industrial facilities. The operators of such facilities must fulfil certain requirements to protect staff and the general population from the hazardous impacts of their facilities, including in case of emergencies or failure of or damage to technical devices.
The law and supplementary regulations also include requirements for fire safety.
The Labour Code dated 23 November 2015 sets out requirements for occupational safety. The operator, as an employer, must maintain conditions to ensure the safety of its employees in the workplace.
The Code on People's Health and the Health Care System dated 7 July 2020 and certain sanitary regulations set out sanitary requirements applicable to industrial facilities.
8.2 Which national, provincial/state and/or local regulatory bodies are responsible for enforcement of health and safety regulations or obligations? What reporting requirements apply with regard to oil and gas accidents in your jurisdiction?
The state authorities that are responsible for the enforcement of health and safety regulations are:
- the Committee of Industrial Safety of the Ministry on Emergency Situations;
- the Committee of Sanitary and Epidemiological Control of the Ministry of Health;
- the Ministry of Labour and Social Protection of the Population; and
- the Akimats' departments of labour inspections (‘local labour inspectorates').
According to the Labour Code, in the case of an accident involving an employee, the employer must report the accident to:
- the local labour inspectorate;
- the regional department of the Committee on Industrial Safety, if the accident has occurred at a hazardous industrial facility;
- the local department of the Committee of Sanitary and Epidemiological Control;
- the police; and
- the employee representatives.
Every accident is subject to investigation by a temporary commission established by:
- the employer; or
- state bodies (eg, the local labour inspectorate, the Ministry of Labour and Social Protection of the Population or the Kazakhstan government), in cases with severe consequences (eg, the death of an employee; an accident involving several employees).
Any emergency or failure of or damage to technical devices at a hazardous industrial facility will be subject to investigation, even if it does not result in an accident involving employees.
8.3 What are the potential consequences of breach of these requirements – both for the operator itself and for directors, managers and employees?
In case of occupational safety violations, a fine of up to $840 may be imposed on the employer. The maximum fine that may be imposed on an employer for failure to organise an accident investigation is $1,960. The same maximum fine applies in case of failure to report an accident to the relevant state authorities.
For violation of industrial safety requirements, the maximum fine that may be imposed on the operator is $1,050. In case of concealment of an accident or an incident at a hazardous industrial facility, the operator may be fined a maximum amount of $2,800.
Directors, managers and employees may be criminally liable for the violation of occupational safety requirements through negligence which results in moderate or severe damage to human health or the death of one or more individuals. The harshest punishment (in case of the deaths of several people) is imprisonment for seven years.
In case of a breach of safety requirements during production or construction works, harsher punishments apply. If such a breach by negligence results in a moderate or severe threat to human health, the harshest punishment is imprisonment for up to two years. If such a breach by negligence results in the death of a human or other severe consequences, the maximum term of imprisonment is six years. If such a breach by negligence results in the death of several persons, the term of imprisonment will range from three to eight years.
8.4 What best practices in relation to health and safety should operators consider adopting in your jurisdiction?
According to Kazakh law, oil and gas companies must:
- train employees and ensure that they fulfil all legal requirements and internal regulations for the safe conduct of work;
- plan and take measures to prevent emergencies and mitigate their consequences;
- based on best practices, develop and take measures to improve production technology and the use of collective and individual protective equipment aimed at preventing occupational diseases and industrial injuries; and
- fulfil all other obligations envisaged by the legislation.
8.5 What is the regulators' general approach in regulating the oil and gas sector from a health and safety perspective?
The general approach of the state authorities is to exercise strict control over oil and gas activities and take all possible measures to ensure that operators properly fulfil their occupational health and safety obligations.
9 Taxes and royalties
9.1 What national, provincial/state and/or local taxes, royalties and similar charges are levied on oil and gas operators in your jurisdiction? How are these calculated?
Kazakh oil and gas operators may be subject to the following taxes and obligatory payments to the budget:
- corporate income tax at a rate of 20% on aggregate annual income, calculated as the difference between taxable income and deductible expenses;
- withholding tax at a rate of 5% to 20% on income paid to non-residents;
- VAT at a rate of 12% on sales of goods, works and services, as well as imports of goods, with certain exceptions;
- a signature bonus, in the form of a variable lump sum payable upon acquisition of a subsoil use right or expansion of the subsoil use territory;
- payment of historical costs compensation in the form of a fixed payment which is determined by the respective state authorities (some Kazakh oil and gas operators may opt for an alternative subsoil use tax instead, which is payable at a rate of 0% to 30% on the difference between taxable income and deductible expenses);
- mineral extraction tax, which is payable on the physical volume of extracted hydrocarbons at rates that vary from 5% to 18%, with certain exceptions (some Kazakh oil and gas operators may opt for an alternative subsoil use tax instead, as above);
- excess profit tax, which is payable at a rate of 10% to 60% on that part of net income which exceeds 25% of deductible expenses (some Kazakh oil and gas operators may opt for an alternative subsoil use tax instead, as above); and
- other taxes and obligatory payments (eg, fee for land plot use; environmental fees).
9.2 Are any tax incentives available for oil and gas operators?
There are no specific tax incentives for oil and gas operators in Kazakhstan.
9.3 What other strategies might oil and gas operators consider to mitigate their tax liabilities?
It is not recommended to own shares in Kazakh oil and gas operators through a resident of a tax haven or any other entity registered in a tax haven, as this might result in taxation at increased rates, as well as additional controls by the authorities.
As an alternative, we would recommend owning shares in Kazakh oil and gas operators through a company registered in the Astana International Financial Centre, as this affords exemptions from withholding tax on capital gains and dividends.
9.4 Have there been any significant changes to the taxation rates applicable to oil and gas operators in the last three years?
One of the most significant changes in the tax legislation over the last three years was the adoption of a new Tax Code. The abolishment of the commercial discovery bonus and the introduction of the alternative subsoil use tax were among the major changes to the tax regime applicable to oil and gas operators.
10.1 In which forums are oil and gas disputes typically heard in your jurisdiction?
Question 10 focuses on disputes between petroleum companies and state authorities, which until 1 July 2021 were resolved in the state courts under the Civil Procedure Code (CPD) only.
As from 1 July 2021, when the new Administrative Procedure Code (APD) came into force, the forum for dispute resolution will be determined under either the CPD or the APD.
The CPD regulates disputes relating to:
- civil, labour, business, land and other claims; and
- the claims of state authorities against investors associated with investment activities involving:
- a foreign entity (or its branch) that carries out entrepreneurial activity in Kazakhstan;
- an entity in which 50 or more % of the participatory interest (ie, voting shares) belongs to a foreign investor; or
- investors that have concluded contracts with the state for investments (including subsoil use contracts (SUCs) for oil and gas).
Such investment disputes will be heard by the Nur-Sultan City Specialised Inter-district Economic Court (Nur-Sultan SIEC).
The APD regulates disputes between a company and a state authority relating to:
- administrative acts (ie, written decisions of the state authority issued within the scope of its competence regarding the rights or duties of companies); or
- the actions (or lack of action) of the state authority.
If such disputes constitute investment disputes, as outlined above, they will be subject to resolution by the Nur-Sultan City Specialised Inter-district Administrative Court (Nur-Sultan SIAC).
There are some exceptions – for example:
- if a company is undergoing a rehabilitation procedure, any related disputes will be subject to the jurisdiction of the court which adopted the decision to implement the rehabilitation procedure; and
- disputes relating to immovable property are subject to resolution by courts of the region in which the property is located.
10.2 What issues do such disputes typically involve? How are they typically resolved?
Subsoil users normally appeal notifications, prescriptions and other similar documents issued by the Ministry of Energy (MoE) or the tax, environmental and labour state bodies. In practice, the courts tend to support the position of state authorities. Nonetheless, if a subsoil user has strong legal arguments (including where it has previously obtained relevant clarification from the authorised state body on how to interpret the law in a specific situation), there is a good chance that the subsoil user's claim will be upheld.
Kazakhstan has also signed about 50 bilateral investment treaties, which as a rule contain a dispute resolution clause that allows affected parties to file an investment treaty claim against the host state for the actions of its authorities with respect to the affected party's investment.
Some investors choose international arbitration as a way to resolve their disputes where they feel that the interference of the state is so serious that it puts their investment into question.
10.3 Have there been any recent cases of note?
The Kazakhstan Supreme Court database (http://sud.gov.kz/) contains details of most court cases. Some recent cases of note are described below.
MoE v Subsoil User 1 (March 2021): The MoE filed suit with the Supreme Court in a bid to oblige the subsoil user to comply with its obligations for 2017 to finance research and development (R&D) works in the amount of 1% of its aggregate annual income from contractual activities based on the results of the preceding year.
The subsoil user objected, pointing out that from 2013 to 2017 it had financed R&D works for a larger amount (five times more than the claimed amount). According to Article 76.1.12-1 of the 2010 Subsoil Law, in case of over-performance of this obligation on the results of the current year, the amount of such over-performance may be transferred to subsequent reporting periods.
The court ruled in favour of the MoE, stating as follows:
- While the amendments to Article 76.1.12-1 regarding the possibility to transfer the amount of over-performance became effective on 1 June 2015, the subsoil user's over-performance occurred in 2014 (99%) and 2016 (1%).
- Article 383 of the Kazakh Civil Code provides that if, after the conclusion of a contract, the law introduces new provisions which differ from those that were effective when the contract was concluded, the terms of the contract will remain valid, except where the law specifically provides that it applies to relations arising from contracts concluded earlier.
- The subsoil user overlooked the fact that, according to the SUC, it had undertaken to finance R&D works with a determined minimum threshold value, which did not prevent it from making payments in an amount exceeding 1%.
Subsoil User 2 v MoE (June 2021)
A company filed suit with the Nur-Sultan SIEC challenging the MoE's rejection of its application to participate in an auction for the grant of a subsoil use right for a certain subsoil plot, and requesting it to order the MoE to register the application.
The court ruled in favour of the MoE, stating that it had the authority to reject the application because the subsoil user had failed to provide duly certified documents regarding its legal entities and the individuals that indirectly controlled them, and a guarantee letter relating to its undertakings in Kazakh and confirming that it had no unrectified violations under its SUC.
Subsoil User 3 v MoE (July 2021)
A company filed suit with the Nur-Sultan SIAC challenging the MoE's failure to extend the exploration period and requesting it to order the MoE to sign an addendum to the SUC on the extension of the exploration period.
The court stated that investors' claims seeking to challenge administrative acts and actions (or lack of action) of administrative bodies and officials are considered under the APD. Meanwhile, civil cases relating to investment disputes are considered by the Nur-Sultan SIEC under the CPD.
The court ruled that although the first claim challenging the MoE's failure to extend the exploration period was formally of a public law nature, de facto it was covered by the SUC's terms, as the claimant's ultimate goal was to extend the exploration period through execution of the addendum.
Accordingly, the claim was dismissed and it was clarified that the claimant could file suit with the Nur-Sultan SIEC.
11 Trends and predictions
11.1 How would you describe the current oil and gas landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
By adopting the Subsoil Code and the new Tax Code, Kazakhstan has improved the attractiveness of the upstream oil and gas sector to investors. Examples of beneficial changes include the following:
- Under the 2010 Subsoil Law, investors could initially obtain exploration contracts only and had to meet certain criteria in order to obtain a production right; and contracts for combined exploration and production could be concluded only by government resolution with regard to certain areas or fields. Now, the winners of auctions automatically conclude exploration and production contracts.
- Previously, the winners of a tender had to prepare and obtain approvals for project documents, which took between 18 and 24 months, in order to conclude contracts for exploration or production. Now, subsoil use contracts are executed within about two months.
- All auctions are now conducted through the online platform www.gosreestr.kz.
- Certain tax preferences have been introduced.
We do not anticipate any substantial developments to the subsoil use legislation in the near future.
The Ministry of Energy (MoE) announced in August 2021 that it plans to amend the Subsoil Code in order to:
- increase the auction participation fee to the starting amount of a signature bonus for a relevant subsoil plot;
- provide for the second-placed participant in an action to be recognised as the auction winner if the winner fails to pay its signature bonus; and
- abolish the limitation that auctions be held not more than twice per year.
The Parliament is also considering draft amendments under which subsoil users will be proposed to conclude trilateral agreements with the MoE and the National Chamber of Entrepreneurs on a voluntary basis, with the aim of stimulating entrepreneurship and supporting local suppliers.
The prime minister also announced plans to release those subsoil users which have contracted territory for more than 50% of the Kazakhstani sector of the Caspian and Aral Sea from the customary obligation to supply oil to the domestic market. This amendment aims to attract investors to capital-intensive offshore projects and maintain a balance between the state interest in oil supplies to the domestic market and the interests of investors in achieving the requisite payout level.
The prime minister also announced plans to release those subsoil users which have contracted territory for more than 50% of the Kazakhstani sector of the Caspian and Aral Sea from the customary obligation to supply oil to the domestic market. This amendment aims to attract investors to capital-intensive offshore projects and maintain a balance between the state interest in oil supplies to the domestic market and the interests of investors in achieving the requisite payout level.
In general, according to the MoE's strategic plan for 2020–2024, state policy in the oil and gas sphere will focus on preserving the long-term export potential of the sector. The 2024 indicators for production are 100.8 million tons of oil and 62 billion cubic metres of gas.
12 Tips and traps
12.1 What are your top tips for oil and gas operators in your jurisdiction and what potential sticking points would you highlight?
Given that the main legal risk for petroleum companies is the loss of their subsoil use rights (SURs), special care should be taken to avoid the occurrence of grounds based on which the Ministry of Energy (MoE) might be able to terminate the SUR.
These grounds are listed in Article 72.3 of the 2010 Subsoil Law (applicable to subsoil use contracts (SUCs) concluded before 29 June 2018) and Article 106 of the Subsoil Code, and include the following:
- failure to rectify more than two violations of the subsoil user's contractual obligations within the timeframe set out in the MoE's notification:
- failure to obtain consent in case of a change in direct or indirect control of an SUR, unless a statutory exception applies;
- performance of less than 30% of the financial obligations set out in the SUC for two consecutive years (the above three grounds are listed in Article 72.3 of the 2010 Subsoil Law);
- performance of less than 30% of the financial obligations set out in the SUC for the reporting year;
- performance of operations without providing a security under the established schedule or in violation of the schedule for determining the amount of security; and
- other cases as set out by the SUC.
In practice, most cases in which SURs have been unilaterally terminated involved the subsoil users' substantial underperformance of their financial obligations. There are three potential ways to resolve the risk of termination of the SUC in this case:
- proving force majeure circumstances which prevented the subsoil user from due compliance with its contractual obligations;
- performing all physical obligations under the work programme and project document for the reporting period; or
- agreeing with the MoE to defer work programme obligations to future periods through the execution of an addendum to the SUC.
The Subsoil Code provides that the period for rectification of breaches of physical obligations must not exceed:
- six months, for financial obligations; and
- either three months or one month for other obligations.
In some cases, there may be ambiguity in the interpretation of legislative regulations. In such cases, it is recommended to file a request for official clarification with the MoE (or another authority). Under the law, if a business entity acts in accordance with clarification issued by the authorised state body (even if such clarification is subsequently revoked or acknowledged as erroneous, or if further clarification with a different meaning has been issued on the same regulatory act), that entity will be considered to be acting in good faith, which may serve as a strong legal argument in the event of a dispute.
Co-Author: Almat Daumov
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.