Pursuant to the Kazakhstan Constitution, the subsoil belongs to the Kazakhstan people. On behalf of the Kazakhstan people, the right to property is exercised 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 subsoil use legislation, the provisions on the right to property will apply to an SUR insofar as they do not contravene the nature of the right in rem.
The lion’s share of SURs in Kazakhstan are held by private entities. Some SURs are granted to a national company (either KazMunayGas for oil and gas fields or, starting from December 2021, QazaqGas for gas and gas condensate fields), which is entitled to obtain SURs both through online auctions on general grounds and through direct negotiations. Representing the state’s interests, KazMunayGas is also a participant in a number of consortiums, including the largest three oil and gas fields.
See also questions 1.5 and 2.3.
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 sealed 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 in the Subsoil Code in more detail.
General statutes regulate:
- the behaviour of Kazakhstan nature users, land users and taxpayers (the Environmental, Land and Tax Codes, respectively);
- the order of construction; and
- the procedures for obtaining licences, work permits and customs clearance of imported goods.
Some of these also dedicate separate chapters to oil and gas subsoil users.
On top of this, 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.
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;
- the Kyoto Protocol; and
- the Paris Climate Change Agreement.
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 investors; and
- the procedure for investment protection.
However, they all acknowledge investors’ right to resort to international investment arbitration to safeguard their rights and investment.
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:
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- raw gas flaring;
- the creation and deployment of offshore facilities used for exploration; and
- the production of hydrocarbons in seas and inland waters; and
- co-approves the national plan of preparedness and response for the remediation of oil spills:
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- in seas and inland waters; and
- in the preservation zone of Kazakhstan.
The activities of subsoil users may also be inspected by regional directorates of the Geology Committee under the Ministry of Industry and Construction.
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.
- A change in the direct or indirect control of an SUR generally requires the prior approval of the MoE (unless an exception applies). If an SUR is linked to a strategic subsoil plot (ie, either which is 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 over any persons and organizations, including persons and organizations that have preferential rights based on Kazakhstan laws or an agreement, in case of any change of direct or indirect control over such SUR.
- Any exploration, pilot operation or production works must be based on relevant project documents to be agreed with the authorities.
- Subsoil users must provide security for decommissioning works.
- Goods, works and services must be procured under the procurement rules approved by the MoE, mostly through online procurement platform tenders. Subsoil users that have SUCs on complex projects may procure under their own procurement procedures, which must meet certain criteria as set out in the Subsoil Code.
- Subsoil users must honour a minimum quota of local content (in-country value) in relation to staff and the procurement of works and services. (This local content requirement does not apply to SUCs for complex projects in the Caspian and Aral Seas.)
- The state monitors compliance with the obligations set out in the work programme (during exploration) and project documentation (during production) based on periodic 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.
Kazakhstan has a highly centralised system of governance. The MoE plays a leading role in regulating the oil and gas industry (see questions 1.5 and 1.6).
Kazakhstan has been an oil producer since 1911. In 1991, Kazakhstan gained independence and 26.6 million tons of oil were produced that year. Production has since been ramped up, increasing by a factor of 3.3 (see question 2.2).
The Kazakh hydrocarbons sector has become a magnet for foreign direct investment (FDI), attracting about 60% of all FDI into Kazakhstan. Today, it accounts for approximately 53% of national export revenues.
Kazakhstan now ranks among the world’s top 15 oil producers. Around 80% of oil produced – including gas condensate – is exported. This indicator has also increased eightfold, from 8.58 million tons (MT) (out of 22.96 MT produced) in 1996 to 64.3 MT (out of 84.2 MT produced) in 2022.
Kazakhstan has been a member of 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.
To enhance transparency in the industry, the state plans to complete the implementation of the state information system for the accounting of crude oil and gas condensate by 2025. Almost all companies which are engaged in the production, preparation, transportation, processing and export of crude oil and gas condensate must connect to this system.
Due to the participation of major petroleum companies in the development of oilfields, Kazakhstan is well aware of international industry standards. As subsoil users are obliged to finance the training of Kazakhstan personnel and to develop local content in staff, Kazakhstan also has relevant qualified personnel.
In 2022, Kazakhstan produced 84.2 MT of oil and condensate.
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 53.3 billion cubic metres (bcm) in 2022. In total, 27.8 bcm of commercial gas and 2.8 MT of liquefied gas were produced.
Kazakhstan Petrochemical Industries Inc LLP completed its integrated gas-to-chemicals complex in Atyrau in November 2022. This facility promises to 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 is set to produce 500,000 tpy of polypropylene for supply to domestic and export markets.
Two additional petrochemical complexes are under development in the Kashagan (North Caspian Operating Company NV (NCOC)) and Karachaganak (Karachaganak Petroleum Operating BV (KPO)) fields, which will each produce 4 bcm per year.
The key players in the oil and gas industry can be divided into two groups. The first group comprises three megaprojects related to oil and gas production in Kazakhstan, which operate under stabilised subsoil use contracts (production sharing agreements). These are:
- Tengizchevroil LLP (TCO) (Chevron (50%), ExxonMobil (25%), KazMunayGas (20%) and Lukarco (5%));
- North Caspian Operating Company NV (NCOC) (KazMunayGas (16.88%), 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%), ENI (29.25%), Chevron (18%), Lukoil (13.5%) and KazMunayGas (10%)).
In 2022, TCO dominated Kazakhstan’s oil and condensate production, with a 34.7% share; while the production shares of NCOC and KPO were 15% and 13.3%, respectively.
The second group of key players are represented by the Ministry of Energy and quasi-state companies such as:
- KazMunayGas, which acts as a national company representing the interests of the state in the oil and gas industry;
- National Company QazaqGas JSC, acting as a national company in the gas industry (exploration and production of gas resources in gas and gas condensate fields), as well as the national operator in the field of gas and gas supply;
- PSA LLP, appointed by the government as the authorised body in production sharing agreements relating to NCOC, KPO and the Dunga field;
- 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.
According to the Fuel and Energy Balance of Kazakhstan (2022), the total primary energy consumption in 2022 amounted to 69.9 million tons of oil equivalent (Mtoe). Coal accounts for the largest share at 48.2%, followed by natural gas at 26.4%; oil and oil products account for the remaining 23.5%.
Final energy consumption amounted to 43.4 Mtoe in 2022, broken down as follows:
- Oil and oil products: 31.6%
- Coal: 22.1%
- Electricity: 16.5%
- Natural gas: 15.7%
- Thermal energy: 14.1%
Out of 84.2 MT of oil and condensate produced in Kazakhstan in 2022, 64.3 MT (76%) were exported, primarily through the Caspian Pipeline Consortium (CPC) (80%). Due to the geopolitical situation and multiple export suspensions imposed on the CPC infrastructure after the commencement of the Russia-Ukraine war, Kazakhstan is seeking other export routes.
Out of 53.2 bcm of gas produced in Kazakhstan in 2022, 4.6 bcm (8.6%) were exported.
Production of commercial gas in 2022 amounted to 27.8 bcm, of which 4.6 bcm was exported.
The production volume of liquefied petroleum gas (LPG) for the domestic market fell from 3.1 MT in 2021 to 2.8 million tons in 2022 (-10%). Meanwhile, internal consumption of LPG that same year rose by 29% to 1.8 million tons (including 65% for vehicles and 25% to industrial enterprises). In total, 1.12 million tons of LPG were exported.
To conduct exploration or production activities, an entity must obtain a subsoil use right (SUR), formalised by the execution of a subsoil use contract (SUC).
SUCs can be for:
- the exploration and production of hydrocarbons; and
- the production of hydrocarbons.
In January 2023, numerous changes related to so-called ‘complex projects’ came into force, entitling the Ministry of Energy (MoE) to grant SURs for the exploration and production or the production of hydrocarbons through complex projects. (As of August 2023, three SUCs for complex projects had been signed.)
Such projects fall within one of the following categories:
- offshore projects for the exploration and/or production of hydrocarbons within the Kazakhstani sector of the Caspian Sea or the Aral Sea;
- onshore projects for the exploration and production of hydrocarbons that meet any of the following criteria:
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- it involves unconventional hydrocarbons reserves (ie, shale oil, shale gas, natural bitumen, coalbed methane or gas extracted from gas hydrates);
- the depth of the highest point of the reservoir (deposit) discovered is at least 4,500 metres;
- the volume of hydrogen sulphide in the reservoir fluid is at least 3.5%;
- there is abnormally high reservoir pressure, with the coefficient being at least 1.5;
- the reservoir (deposit) discovered has salt sediments which are at least 100 metres thick;
- the reservoir discovered is classified as a non-structural trap; or
- onshore gas projects for the exploration and/or production of hydrocarbons at a subsoil plot where oil comprises up to 25% of the total hydrocarbons volume.
SUCs for complex projects grant more favourable conditions to subsoil users, including from a tax perspective.
A contract for exploration and/or production through a complex project may also be concluded for an onshore subsoil plot for which there is no geological information. In such case, the subsoil user must confirm the status of the complex project during the exploration period through a relevant report on the calculation of geological reserves which confirms the deposit’s compliance with any of the above criteria (including for onshore gas projects). No further confirmation is required. Failure to confirm the project as such will cause the subsoil user to transition to the conditions of a standard production contract for the production stage.
Furthermore, if even one of discovered deposits meets any of the above criteria (including for onshore gas projects) and its reserves exceed 50% of the initial recoverable hydrocarbon reserves of all discovered deposits, the Subsoil Code conditions for complex projects will apply.
Under the Subsoil Code, only a national company may obtain exploration or production rights through direct negotiations (either KazMunayGas for oil and gas fields or QazaqGas for gas and gas condensate fields). All other interested parties may obtain such rights only by winning an online auction conducted through www.gosreestr.kz – that is, by offering the highest 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-2023 referred to 56 subsoil plots available for auction and 35 subsoil plots for a national company.
At present, an entity that is 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 did not register 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 was acknowledged as the winner of another 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 four times per year.
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 Sea or the Aral Sea (whether its own experience or that of a direct shareholder holding at least 25% of the shares).
An SUR for the exploration or production of hydrocarbons in the Caspian Sea or the Aral Sea may be granted only if KazMunayGas will be granted at least a 50% share in the relevant SUC. If an operator is formed between joint holders of such SUC, participation share of KazMunayGas shall initially be at least 50%. Subsequently, the size of the share in the SUC and charter capital of the operator may be reduced, provided that KazMunayGas retains its control over the decision-making by subsoil users under the SUC. The above restriction regarding the charter capital of the operator does not apply to holders of SUCs for complex projects.
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, after a party is acknowledged as the winner of an auction, it takes about two months to obtain such rights.
The results of the auction(s) are determined automatically on the auction date and 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 typical 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.
If the auction winner failed to provide evidence of the payment or a signed contract, the right to conclude the contract is proposed to the participant which offered the second-highest signature bonus. If that participant also fails to pay the bonus and sign a contract, the related subsoil plot is put up for auction again.
Any domestic or foreign individual, entity or group of persons (consortium) may obtain exploration and production rights (further, a ‘subsoil user’ may be either a single entity or a consortium). Specific restrictions are imposed on the exploration or production of hydrocarbons in the Caspian Sea or the Aral Sea – KazMunayGas must be granted at least a 50% share in the relevant SUC.
A subsoil user may establish or designate another legal entity as an operator under an SUC or a deposit. (A single subsoil user may not be designated as an operator.) Relations between the operator and the subsoil user will be regulated by an agreement. The subsoil user must notify the MoE of the designation of the operator or the cessation of the latter’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 its 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 peoples, in Kazakhstan.
All participants in auctions must pay a participation fee (approximately $770) and a security deposit, securing the winner’s obligation to pay the signature bonus. The amount of this deposit is calculated depending on certain criteria and starts from approximately $23,000.
The auction winner must also pay a signature bonus.
The duration of exploration and production rights depends on whether the SUC relates to a complex project.
Where a contract for the exploration and production of hydrocarbons through a complex project is concluded, the exploration period is 18 years, including:
- nine years for the initial exploration stage;
- six years for the appraisal stage; and
- three years for pilot operation stage.
Transition to each next stage requires the submission of an application by the subsoil user, together with certain documents specified by the Subsoil Code, before the expiry of the current stage. (Otherwise, the exploration term is limited to the duration of the current stage.) The MoE will consider the application within 20 business days. If there are no grounds for rejection (eg, late submission of the application or failure to submit all required documents), the MoE will sign the relevant amendment to the SUC on its extension for the duration of the subsequent stage within 10 business days.
The maximum duration of the exploration stage under a standard SUC is six years. If a reservoir is discovered, the SUC may be extended for appraisal works for up to three years. The exploration period may be extended by a further period of up to three years to conduct pilot operations on the reservoir (ie, the maximum exploration term is thus 12 years). The extension procedure is generally the same as that outlined above.
If, during the exploration, compliance with one of the criteria for complex projects is confirmed, the subsoil user may transition to the conditions for complex projects, including the right to extended terms of exploration (minus the factual term of exploration). The relevant application will be considered by the MoE within 20 business days.
Before the expiry of the exploration period under a standard SUC, the subsoil user must submit the relevant application and have either a production period or a preparation period fixed by relevant amendment; otherwise, the SUC becomes ineffective.
During the preparation period, which cannot exceed three years, the subsoil user may:
- prepare and obtain approval for the 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.
If a complex project SUC holder fails to file an application before the expiry of the exploration period to transfer to the production stage executed, this will result in the premature termination of the SUC.
The maximum duration of the production period is:
- 45 years for huge fields (ie, where geological reserves of oil or gas exceed 100 million tons or 50 billion cubic metres, respectively); and
- 25 years for other fields.
An SUC for a huge field must contain one of five obligations set out in Article 119.7 of the Subsoil Code (eg, modernisation or reconstruction of existing extraction or processing facilities; implementation of another investment project). This obligation becomes effective for a complex project SUC holder only after 20 years from the date of on which hydrocarbon exports commence.
A complex project SUC may be converted into a standard production contract if exploration does not result in confirmation of compliance with any of the criteria for complex projects. Conversely, a standard SUC may be converted into a complex project SUC if the results of the exploration confirm such compliance.
See question 3.4.
The requirements for the relinquishment of parts of the initial area specified under an SUC are set out in Article 110 of the Subsoil Code.
The extension of the exploration period to assess the discovered reservoirs applies only to the assessment area; the remaining territory must be returned to the state.
The extension of the exploration period for pilot operations implies such an extension only for the pilot operation area; the remaining territory must be returned to the state.
Transitioning to production and establishing the production period are possible only for the specific production area (which is determined by the contours of the discovered deposit).
As a general rule, any change of direct or indirect control over 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; and
- a transfer through a transaction involving National Welfare Fund Samruk-Kazyna JSC, KazMunayGas or QazaqGas.
The MoE will issue its consent (rejections are very rare):
- within one month; or
- within three months if the transaction relates to:
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- a strategic field (ie, with geological reserves of at least 50 million tonnes of oil or 15 billion cubic metres of natural gas); or
- a huge field (ie, with geological reserves exceeding 100 million tons of oil or 50 billion cubic metres of natural gas).
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 are 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. Depending on the tax status of the buyer, the capital gain is subject to:
- CIT at a rate of 20%; or
- withholding tax at a rate of 15% or 20%.
Yes, exploration and production rights may be pledged in favour of third parties, subject to:
- the prior consent of the MoE; and
- registration of the pledge agreement with the MoE.
A loan backed by the pledge of an SUR may be used only for subsoil use purposes or for further reprocessing in Kazakhstan by the subsoil user itself or its wholly owned subsidiary.
Foreclosure on the pledged SUR requires a public auction. Starting from 28 February 2024 the consent of the MoE for acquisition of the SUR shall be obtained not before, but after a relevant public auction (unless a statutory exemption applies). If the auction is found invalid, the pledge holder may re-register the security in its own name or require conducting a new auction.
The subsoil user bears the obligation of remediating the consequences of subsoil use operations, irrespective of whether:
- the SUC:
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- 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 the subsoil plot has been returned to the state.
The only exceptions are cases in which the MoE notifies the subsoil user that:
- the related subsoil plot must be transferred for trust management to a national company; or
- the subsoil user must conduct conservation works for the 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.
Execution of the obligation to remediate the consequences of subsoil use operations must be secured by pledge of a bank deposit for the amount estimated in the relevant project document (an exploration project or a field development project). For the exploration stage, any further correction of the remediation costs may also be secured by a guarantee (subject to special requirements) or insurance.
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.
Surface rights (known in Kazakhstan as ‘land use rights’) are separate from exploration or production rights and are procured through processes set out in 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).
As per the Subsoil Code, the execution of a production contract (or transitioning to the production stage under an exploration and production contract) provides the basis for local regional bodies (Akimats) to grant the relevant land use right in accordance with the Land Code.
Should the land plots on which production operations will be conducted constitute state property, the relevant regional Akimat will provide a temporary land use right for the duration of production. This right is confirmed by resolution of the Akimat, based on which the relevant land plot lease agreement is signed.
If the land plots are owned or leased by third parties, the subsoil user must conclude an agreement with these owners/leaseholders. Generally, the subsoil user must compensate the landowners/leaseholders for losses associated with agricultural activity (stemming from the withdrawal of land plots used for agricultural activities). In certain circumstances, the subsoil user must conclude servitude contracts.
If the subsoil user does not reach an agreement with an owner/leaseholder regarding the amount of compensation, the dispute will be subject to court resolution. Earlier court practice in this regard was uncertain due to a collision between provisions of Article 84 of the Land Code:
- Clause 2.3 provided that the expropriation of a land plot for state needs is possible if a deposit has been discovered; and
- Clause 5 stipulated that expropriation may not pursue commercial purposes or aim to satisfy non-state interests.
However, recent practice confirms that the courts will tend to satisfy relevant claims for expropriation if there is no agreement between subsoil users and owners/leaseholders.
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 plot (in most cases), may inspect land users’ compliance with the land legislation.
To obtain a land use right, a subsoil user must obtain a temporary land use right through either:
- public or private servitude (for exploration); or
- a lease (for production).
Public or private servitude: Public servitude is established via a resolution of the Akimat made upon the subsoil user’s application. Private servitude is established by an agreement with the landowner.
The owners or users of a land plot burdened by a public servitude are entitled to request a proportionate fee if the establishment of the servitude leads to significant difficulties in using the land plot. The fee is paid by the respective subsoil user.
The procedure for the subsoil user’s interaction with third parties is described in question 4.1.
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 transitioning to the production period or a preparation period).
The Akimat will consider the application and issue its resolution within two months. This term does not include the time required to:
- prepare a land use design project;
- mark the boundaries of the land plot; and
- acquire the approvals required under Article 44.7 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 following the execution and state registration of the lease agreement.
There is no concept similar to ‘native title’ in Kazakhstan.
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 creation 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 50 to 99 metres for V-class objects to 1,000 or more metres for I-class objects).
The processing and refining of oil and gas are licensed 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 the raw gas produced, with the exception of gas used for own needs, by pumping it 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 (QazaqGas 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.
In January 2023, a new incentive formula was introduced for:
- the purchase of gas from new fields; and
- the purchase of additional volumes of gas from existing fields if production exceeds the annual average for the previous five years.
According to this formula:
- 70% of the purchase price is based on the export price of commercial gas on the border with China; and
- 30% of the purchase price is based on the wholesale price on the domestic market.
According to a May 2023 report by the MoE vice minister, while the average purchase price for gas in Kazakhstan was about $40-$50 per 1,000 cubic metres, the new formula allows companies to sell gas for $110-$120 per 1,000 cubic metres.
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 decides not to realise the state’s pre-emption right, the subsoil user is entitled to sell the gas to third parties.
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, minus transportation costs and expenses for the sale of hydrocarbons. The maximum volume of such hydrocarbons is specified in the relevant SUC.
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.
Subsoil users that wish to export oil must file applications with the MoE by:
- 30 November of the year preceding the reporting year (for an annual schedule of oil supply); and
- the fifth 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 by 15 December. 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.
The above restrictions do not apply during the production period of contracts on complex projects pertaining to offshore fields and onshore gas deposits.
In recent years, from time to time the government has banned the export of liquified petroleum gas and 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 volume of exported crude oil sold 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.
See question 6.2.
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 advantageous than those offered to the government.
Numerous licences and approvals are mandatory 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 and gas and oil products, situated at a depth more than five metres from the surface, a licence for subsoil space utilisation must be procured from the Geology Committee.
Devices that measure operations on the 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 via trunk pipelines, and the storage and transportation of commercial gas (save for the transit or export of oil, oil products or commercial gas) are natural monopolies 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 400 tank farms and wholesale realisation is conducted through approximately 3,200 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.
Please see question 5.2 for constraints relating to cross-border transportation.
Commercial oil production exceeding 500 tons per day and natural gas production exceeding 500,000 cubic metres per day are subject to an environmental impact assessment (EIA).
The exploration and production of hydrocarbons that do not reach these thresholds are subject to mandatory screening. This procedure is conducted to determine whether an activity requires an EIA. If the authorised body (the Ecology Ministry) decides, based on the results of screening, that an EIA is needed, it must be conducted accordingly.
Operations on the exploration and production of hydrocarbons involve the construction and operation of facilities that have a significant negative impact on the environment (Category I facility). The design documentation for the construction and/or operation of Category I facilities is subject to mandatory state environmental review.
Furthermore, the exploration and production of hydrocarbons also require an environmental permit. The new Environmental Code, dated 2 January 2021, introduced two types of environmental permits:
- an integrated environmental permit; and
- an environmental impact permit.
Currently, oil and gas companies must possess either:
- environmental emissions permits issued under the previous Environmental Code, dated 9 January 2007, which was in effect until 1 July 2021; or
- environmental impact permits issued under the Environmental Code of 2021.
Starting from 1 January 2025, all oil and gas companies – with some limited exceptions – will be obliged to have integrated environmental permits.
As outlined in question 3.4, references to an ‘operator’ conducting oil and gas activities have the same meaning as references to ‘subsoil users.’ Operators must comply with:
- the Environmental Code, dated 2 January 2021;
- the Subsoil Code;
- the Land Code, dated 20 June 2003;
- the Water Code, dated 9 July 2003;
- the Forest Code, dated 8 July 2003;
- the Law on the Protection, Reproduction and Use of Fauna, dated 9 July 2004;
- the Law on Specially Protected Natural Territories, dated 7 July 2006; and
- their subordinate regulations.
The obligation to comply with environmental legislation is typically included in subsoil use contracts.
The decommissioning of technological facilities, including wells, and the remediation of the consequences of subsoil use during hydrocarbon exploration and production are carried out in accordance with:
- the Subsoil Code; and
- the Rules for Conservation and Liquidation during Exploration and Production of Hydrocarbons, approved by Order 200 of the Minister of Energy, dated 22 May 2018.
While the subsoil use right (SUR) is valid, the operator must decommission wells that:
- are subject to decommissioning due to technical or geological reasons; and
- cannot be used for other purposes.
The operator must remediate the consequences of subsoil use during hydrocarbons exploration and production in the event of:
- the termination of its SUR; or
- the transfer of part of the contractual territory back to the state.
Technological facilities are decommissioned under a project for decommissioning of technological facilities, for which a positive conclusion of the state environmental expertise has been duly issued. There are some exceptions related to certain categories of wells (oil, gas and injection wells of various purposes), the decommissioning of which is carried out under a decommissioning plan.
Before commencing production of hydrocarbons, the operator must deposit in its bank account an amount that is equal to the projected cost of the decommissioning works. The operator must transfer this bank deposit to the state as collateral. If the operator fails to perform the decommissioning works as required, the state may claim the deposit in full or in relevant part.
Before commencing hydrocarbons exploration, the operator must provide security for remediation of the consequences of the subsoil use operations, in the form of either a bank deposit or a guarantee. The guarantee must meet certain criteria set out by the Subsoil Code. Holders of SUCs for complex projects may provide a guarantee for elimination of consequences of subsoil use operations issued not only by banks, but also by legal entities not being banks (subject to meeting certain requirements).
Failure to fulfil obligations relating to the remediation of the consequences of subsoil use within the timeframes set out by the Subsoil Code will result in the imposition of an administrative fine equal to approximately $1,160. Directors, managers and employees of the operator will not be fined for non-compliance.
However, directors, managers and employees of the operator may face criminal liability if the failure or improper fulfilment of obligations regarding the remediation of the consequences of subsoil use led to or could have led to:
- a serious ecological threat (ie, with a cost of more than $7,700); or
- a threat to human health.
The harshest punishment for this crime is imprisonment for up to three years.
The harshest punishment is imprisonment for between three and seven years where the crime results in:
- an especially serious ecological threat (ie, with a cost of more than $155,000);
- the death of a person; or
- mass disease.
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 Ministry of Energy.
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.
Kazakh law classifies facilities of the oil and gas industry as hazardous industrial facilities and requires their owners to comply with various requirements in the field of health and safety, such as:
- labour protection;
- industrial and fire safety; and
- sanitary and epidemiological safety.
These requirements are aimed at ensuring a safe work and production process that eliminates any harm to the health and lives of employees during their work activities at hazardous industrial facilities.
Requirements for:
- safety and labour protection are set out in the Labour Code;
- ensuring industrial and fire safety are set out in the Law on Civil Protection, dated 11 April 2014; and
- ensuring sanitary and epidemiological safety are set out in the Code on the Health of the People and the Healthcare System, dated 7 July 2020.
There are also numerous technical regulations, rules, instructions and other legal instruments on matters such as:
- safety and labour protection;
- industrial and fire safety;
- sanitation;
- hygiene; and
- standardisation of documents.
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 Committee of Labour and Social Protection of the Ministry of Labour and Social Protection of the Population; and
- the Akimats’ departments of labour inspection (‘local labour inspectorates’).
According to the Labour Code, in 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.
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 $1,160. In case of concealment of an accident or an incident at a hazardous industrial facility, the operator may be fined a maximum amount of $3,100.
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 will 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;
- the death of a human or other severe consequences, the maximum term of imprisonment is six years; and
- the death of several persons, the term of imprisonment will range from three to eight years.
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.
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.
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;
- value added tax 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 42% (of 0% to 14% for offshore complex projects) 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).
Oil and gas operators implementing complex oil and gas projects are entitled to apply exemptions from corporate income tax and property tax.
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.
Among the most significant changes to the tax legislation over the last three years were changes to taxation of complex oil and gas projects, effective from January 2023. In particular, these included:
- the introduction of the corporate income tax and property tax exemptions;
- changes to the rates of the alternative subsoil use tax; and
- the introduction of separate depreciation rates.
As from 1 July 2021, when the new Administrative Procedure Code (APC) came into force, the forum for resolution of disputes between petroleum companies and state authorities is determined under either the Civil Procedure Code (CPC) or the APC.
The CPC regulates disputes relating to:
- civil, labour, business, land and other claims; and
- so-called ‘investment disputes’ (with the exception of disputes resolved under the APC), including claims of state authorities against investors associated with investment activities which involve:
-
- a foreign entity (or its branch) that carries out entrepreneurial activity in Kazakhstan;
- an entity in which 50% or more of the voting shares belong 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 are heard by the Astana Specialised Inter-district Economic Court (Astana SIEC).
The APC 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, the claims of investors are considered by the Astana Specialised Inter-district Administrative Court (Astana 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.
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, while the courts resolving disputes under the CPC often support the position of state authorities, courts considering cases under the APC rule in favour of business entities in more than half of all cases.
According to statistics from the Kazakhstan Supreme Court, during the first year of the APC’s effectiveness, the courts considered 148 investment disputes, including 90 disputes based on investors’ claims. Out of 148 claims, 70 were considered under the APC and 78 under the CPC.
The courts issued resolutions on 84 claims, ruling in favour of investors in 46 of those claims (55%). The remaining claims were dismissed.
The appellate court (ie, the Astana City Court) considered 48 cases, ruling in favour of investors in 10 cases. At the cassation level, the Supreme Court considered five cases and ruled in favour of investors in two cases.
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.
The Kazakhstan Supreme Court database (http://sud.gov.kz) contains details of most court cases. Some recent cases of note are described below.
Subsoil User 1 v MoE (April-June 2023)
A company filed suit with the Astana SIEC challenging:
- the MoE’s refusal to extend the validity period of the production contract, which was valid until June 2022; and
- the MoE’s notification of termination of the contract.
In April 2023, the court rejected the claim and ruled in favour of the MoE (as upheld by the appellate court in June 2023), stating as follows:
- The company had filed an application for the extension beyond the established timeframe for its submission (it should have been filed earlier than six months before the expiration of the contract).
- The company’s argument that the initial application had been submitted six months before the expiration of the contract could not be accepted because the application did not comply with the legislative requirements (there was no field development project as stipulated by Article 120.4.23 of the Subsoil Code).
- The Central Commission on Exploration and Development of Hydrocarbon Deposits is entitled to conduct state review of project documents only and the final decision on the extension of a production contract is vested in the MoE. The court thus considered that the claimant’s reference to the commission’s positive resolution on the extension of the contract until December 2033 was irrelevant, because it was merely advisory.
- Under Article 120.7 of the Subsoil Code, the MoE may reject a request for the extension of the production period in case of:
-
- ongoing failure to rectify breaches of contractual obligations (these had been rectified only in February 2022); and/or
- failure to reach agreement with the relevant subsoil user regarding certain investment obligations.
- Finally, after four years of rehabilitation, the claimant had been declared bankrupt by decision of the regional court dated October 2021, which became effective in January 2022. According to the contract, the MoE had the right to terminate if:
-
- the claimant was declared bankrupt by a court; and
- none of its shareholders were willing to assume its obligations under the contract within 60 days of such declaration.
The decision was upheld by the appellate court in June 2023.
Subsoil User 2 v MoE (October 2022-January 2023)
A company filed suit with the Astana SIAC against the Central Commission on Exploration and Development of Hydrocarbon Deposits and the MoE, challenging a decision of the Central Commission to limit the duration of the trial operation period until 15 July 2022. (Previously, in September 2020, the exploration period under the contract had been extended for 10 months until 31 October 2023 due to force majeure).
At the first-instance hearing in October 2022, the SIAC ruled in favour of Subsoil User 2, obliging the commission and the MoE to adopt a favourable administrative act (ie, a positive resolution of state review for the extension of the trial operation project) that would extend the term for the trial operations by an additional 10 months after the issuance of the administrative act. (It is prohibited to perform subsoil use operations without a duly approved/modified project document.)
However, the MoE filed an appellate complaint and the Astana City Court overturned the first-instance decision and refused to consider the case. It determined that:
- the contractual relationships between the parties fell under contractual law rather than public law;
- the company’s claims pertained to an investment dispute, which should be addressed by the Astana SIEC; and
- the commission is neither a legal entity nor an administrative body entitled to adopt an administrative act, and thus could not act as a defendant.
Subsoil User 3 v MoE (January-May 2023)
A company filed suit 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 to invalidate the auction.
In January 2023, the Astana SIAC ruled in favour of the MoE, stating that it had the authority to reject the application because the company had failed to provide evidence of sufficient funds to meet the minimum work programme on the subsoil plot.
The lender’s bank accounts had a substantially lower amount than was prescribed in the loan agreement signed between the lender and the company (non-compliance with Article 93.2.2 of the Subsoil Code). Moreover, the company had previously been declared the winner of an auction for another deposit but had failed to make the corresponding payment, which also confirmed its lack of financial resources.
The Astana City Court upheld this decision on appeal in May 2023.
The adoption of the Subsoil Code has improved the attractiveness of Kazakhstan’s upstream oil and gas sector for investors. Notable among the recent legislative changes is a substantial block of amendments to the Subsoil and Tax Codes which make a typical contract for complex projects a more attractive instrument than a standard contract. It is expected that most new subsoil use contracts (SUCs) for exploration will be concluded in the form of an SUC for complex projects.
As of 1 August 2023, 292 SUCs had been concluded, including:
- nine production sharing agreements;
- 26 exploration contracts;
- 147 contracts for combined exploration and production; and
- 110 production contracts.
In the first half of 2023, investment in Kazakhstan's hydrocarbons sector reached an estimated $8.9 billion, marking a 10% increase compared to the same period in 2022. The costs of exploration in the same period totalled $416 million (compared to approximately $295 million for the whole of 2022).
The procedure for online auctions for the grant of subsoil use rights has been improved and the number of investors interested in acquiring such rights continues to increase.
On 28 December 2023, a new package of amendments to the Subsoil Code was signed, which come into force on 28 February 2024. The amendments included, inter alia, the following:
- With a single exception, all further amendments to the Subsoil Code will be made under a separate law which will not provide for the introduction of amendments to other legislative acts (similar to how the Tax Code is amended). This provision will be implemented from 1 July 2024.
- Participants in auctions will be obliged to disclose the details of controlling and non-controlling:
-
- persons;
- states; and
- international organisations.
- If the MoE identifies any instances of non-compliance, participants will be given time to amend their applications.
- Where an SUR for a huge field (ie, where geological reserves of oil or gas exceed 100 million tons or 50 billion cubic metres respectively) is granted, KazMunayGas will have a 50% mandatory share in the relevant SUC.
- The procedure for foreclosure on an SUR or on objects linked to an SUR (ie, shares in a subsoil user or its controlling companies) will be modified. The consent of the MoE for acquisition of the SUR or the objects linked to the SUR shall be obtained not before, but after a relevant public auction (unless a statutory exemption applies). If the auction is found invalid, the pledge holder does not need a separate consent but may re-register the security in its own name or require conducting a new auction.
- The maximum term for exploration on subsoil plots which are not related to complex projects may be extended once for no more than three years subject to certain criteria, including the subsoil user’s obligation to have at least 750,000 monthly calculating indexes (approx. $6.1 million) in its bank accounts in Kazakhstan. These funds must be spent exclusively on exploration or, in the event of failure, must be transferred to the state budget.
- Under the Subsoil Code, an application for the extension of the production period must currently be submitted at least six months (or 24 months for huge deposits) before the expiry of the relevant contract. These terms will be reduced to one and six months, respectively.
- The procedure for the approval of a pledge of SURs or ‘objects linked to SURs’ in entities that directly or indirectly control the subsoil user will be simplified.
- A subsoil user that owns an SUC which is not related to a complex project will be entitled to refuse to drill a well as stipulated by the work programme and return the entire contract area, subject to the completion of seismic works and the filing of an application, within three years of the date of the SUC.
- New provisions relating to the production of hydrocarbons from ‘depleting deposits’ will be introduced. To be such a ‘depleting deposit’, at least one of the following indicators should be met:
-
- the current oil recovery factor should be 0.4 or more; or
- (for huge hydrocarbon fields only) the depletion of reserves should be 70% or more of the approved recoverable reserves and the water cut of the field should be 85% or more.
- An investment obligation will be included in the contract in an amount equal to the multiplication of an investment coefficient (on a sliding scale ranging from 1%, if up to 250,000 tons of oil are produced per year to 8.5% if more than 10 million tons are produced per year) by the total annual income from such a deposit in the previous year.
- Provisions relating to contracts for complex projects will not apply to contracts for huge fields if production operations in those fields had commenced as of 1 January 2023.
Given that the main legal risk for petroleum companies is the potential 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 Subsoil Law (applicable to subsoil use contracts (SUCs) concluded before 29 June 2018); and
- Article 106 of the Subsoil Code.
They include the following:
- failure to rectify more than two violations of the subsoil user’s contractual obligations within the timeframe set out in a notification issued by the MoE;
- 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 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 security under the established schedule or in violation of the schedule;
- performance of operations without the appropriate project documents for which positive conclusions have been obtained from relevant authorities; and
- other grounds set out in the SUC.
In practice, most cases in which SURs have been unilaterally terminated involved the subsoil user’s substantial underperformance of its financial obligations.
There are three potential ways to resolve the risk of termination of the SUC in this case:
- proving force majeure 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.
It is also crucial to fulfil specific obligations that, if violated, may lead to substantial penalties as outlined by the respective SUC or the Code on Administrative Offences.
In some cases, there may be ambiguity in the interpretation of legislative regulations. In these instances, a request for official clarification should be filed with the respective authority. Under the law, if a business entity acts in accordance with a clarification issued by the authorised state body (even if such clarification is subsequently revoked or acknowledged as erroneous, or if a further clarification with a different meaning is 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-Authored by Lyazzat Zhilkibagarova.