Kazakhstan: Legislation And Regulation Of Kazakhstan's Energy And Subsoil Sector

Introduction

Fuel and energy complex is one of the major sectors within the Kazakh economy. The country ranks sixth in the world for natural resources, and 70 out of the 110 elements in the periodic table have been explored and extracted in Kazakhstan. According to calculations of explored depths, fuel and energy complex is estimated to be worth approximately US$10 trillion. It is therefore very important for Kazakhstan to explore its energy resources in order to ensure the greatest economic benefit for the country.

Current energy mix

Kazakhstan is a major producer of oil, gas and coal, as well as being the largest producer and exporter of uranium in the world. The total amount of extractive reserves of fuel resources in Kazakhstan is approximately 34.9 billion tonnes of oil equivalent (TOE). In the structure of the country's extractive natural energy resources the main share is coal and uranium reserves (46% and 30% respectively), while carbon represents 25% of total reserves.

Recent changes in energy policy

Energy is considered the most important industry in Kazakhstan and significantly contributes to the economic growth of the country. However, in order for development and efficiency to continue at a high rate, there is a need for reform, as well as for the elimination of some deficiencies. Over the past few years a lot has been done to modernise this sector, with even greater transformation expected in the future. For instance, a number of changes and amendments have been made to the legislation, foreign investment regime, and anti-corruption regulations.

The president of the Republic of Kazakhstan has repeatedly made policy statements regarding changes in the industry, pointing out that: "Kazakhstan is moving towards a new state policy in the subsoil sector, where the priority must be the exchange of the latest technology." Thus, there has been an increase in funding for geological exploration work and the construction of a centre for geological work, and procedures for granting exploration rights have been simplified. Kazakhstan is aiming to enter the world market in the field of exploration. By simplifying the legislation, this industry is expected to attract investments from foreign engineering companies.

Out of President Nursultan Nazarbayev's 100 concrete steps, 2 steps were dedicated to the energy sector: Step No. 74, "Increasing transparency and predictability of the subsoil use sector by introducing the CRIRSCO mineral reserves international reporting standards"; and Step No. 75, "Introducing a facilitated contracting method for all mineral resources by using the best international practices".

Implementation of international reporting standards on mineral reserves

The mineral resources complex of Kazakhstan is supported by an increase in exploration. Moreover, international capital markets are one of the main sources of funding for such works. To identify the main areas of investment in exploration and reduce possible risks, investors arrange an independent audit of public reporting of reserves performed by the member organisations of the International Register "ROPO"; therefore, it has become more urgent to establish Kazakhstan's system for reporting reserves according to international standards. Thus, in order to duly implement step No. 74 noted above, the following are needed:

1. This year a shift must be made to an international system of accounting standards on reserves of solid minerals (CRIRSCO) by establishing national organisations of Kazakhstan CRIRSCO, and international standards must be developed and implemented.
2. By 2018 the transition must be made to an international accounting standards system for hydrocarbon reserves (the Society of Petroleum Engineers' Petroleum Resources Management System (SPE-PRMS)), which will be done by creating national organisations of Kazakhstan SPE-PRMS, and by developing and implementing international standards until 2018 inclusive.
3. Domestic experts must be trained and lists compiled of geological reporting resources and reserves of mineral resources in accordance with international standards. The timeframe for this is 2015-2017.

Removing administrative barriers

In order to fulfil the aforementioned step No. 75 and to stimulate investment in geological prospecting and exploration, a reduction of the tax burden, the elimination and reduction of administrative barriers and the simplification of procedures are being discussed. Furthermore, by the end of 2016 the new Subsoil Use Code will be developed. There are also plans to amend the tax code to ensure that subsoil users are obliged to pay a percentage of profits, rather than of financial turnover.

As a result of such innovations, the volumes of proven recoverable reserves, now estimated at 3.9 billion tonnes, will more than double. In addition, this will create a resource base that will act as a "safety cushion" in the event of increased global economic instability. It will also maintain a high level of oil production and Kazakhstan will rank among the 12 largest oil suppliers within the international market.

Developments in the government's policy, strategy and approach

According to Kazakhstan's strategic plan of development for 2020 and the concept of the transition to a "green economy", the country should increase the share of renewable energy in the total energy mix to at least 3%. In particular, under the action plan for the development of alternative and renewable energy in Kazakhstan for the years 2013-2020, there are plans to enter into operation around 28 solar energy facilities with a total installed capacity of 713.5 MW by the end of 2020. There will also be a number of investment projects implemented in other areas of renewable energy.

By forming a legislative platform for renewable energy in Kazakhstan, best international practices have been taken into account. As a result, on 4 July 2013 there was an advanced law of the Republic of Kazakhstan, entitled "On supporting the use of renewable energy sources", which is aimed at supporting both investors and ordinary consumers. The basic concept of the law is to introduce a system of fixed "green tariffs", which will ensure that investors get a return on their investment, help clarify the value of tariffs for renewable energy facilities, and ensure the purchase of electricity by creating a settlement and financial centre to support the industry.

The process of implementing projects in Kazakhstan in the field of renewable energy consists of the following stages:

• Preparation of land for construction.
• Development of design documentation and passing of examinations.
• Connection to electric grids.
• Conclusion of a contract to purchase electrical energy, settlement and financial centre.

The government puts maximum effort into each of these stages, which are carried out as quickly as possible for the benefit of investors. It should also be noted that the Ministry of Energy has published an informative guide for potential investors on its official website, including a complete list of the documentation required for the implementation of projects in the field of renewable energy in Kazakhstan.

Developments in legislation and regulations

The existing Subsoil Use Law was adopted back in 2010 and was drafted by the Ministry of Gas and Oil. It is for this reason that most of the law's provisions were related to the gas and oil industry and did not address those issues that may arise in connection with the exploration and mining of solid minerals. This was one of the reasons for amending and simplifying the existing law in December 2014. Some of the main initiators of this law were subsoil users themselves, who pointed out the following flaws in the existing law:

1. There were too many examinations that an investor had to pass in order to obtain a contract for geological exploration. In the new draft law, however, the number of required examinations is reduced by 60%.
2. The so-called model (basic) contract was considerably amended, where 98% of all provisions reiterated those norms that were already set out in law. As a result, the content is significantly reduced and simplified, with 8 clauses now as opposed to 28.
3. Restrictions were put on the government's priority right to buy any item representing the subsoil use right that is put up for sale, a right that now only applies to strategically important fields.
4. Previously, geological information was not free and some geological data was secret, posing a serious obstacle for the development of the geological exploration industry. Investors now have free and quicker access to geological information.
5. Under the original law, procedures for exploration and the mining of minerals were the same and investors engaged in exploration had to pay taxes according to the same terms as those engaged in the mining of minerals. However, exploration and mining require entirely different approaches and conditions and only a small part of subsoil may be commercially efficient. Such inconsistencies have been eliminated in the revised law.
6. The feasibility study has been removed from the list of mandatory project documents.
7. Subsoil use rights are to be granted through a competitive bidding process aimed at simplifying the existing procedures in the subsoil use industry. Expenses on infrastructure development of a region will be set by the competent authorities in the form of fixed rates. Potential subsoil users will be fully aware of these before competitive bidding opens. The subsoil use right will be granted to the party who offers the state the greatest amount of subscription bonuses during bidding. This is expected to ensure bidding transparency and eliminate corrupt practices.
8. The introduction of simplified procedures for granting subsoil use rights will be based on a "first come-first received" basis, with an annual increase in the rate for subsoil use. This way, the investor who applies first to a land lot will be granted the subsoil use right.

In the opinion of those responsible for developing the law, the introduction of the above practices and amendments will speed up and improve the efficiency of mineral exploration works.

Judicial decisions, court judgments, results of public enquiries

As a global trend, an increasing number of cases brought before international arbitration bodies and international courts between the state and investors have been noted over the past few years. The most common complaints by foreign investors are presented in the billions of dollars. According to publicly available data provided by the Ministry of Justice, there are a number of cases where plaintiffs include in the amount of the claim not only compensation for direct losses, but also compensation for moral damages, lost profits and their arbitration costs. For example, the amount of the claims of "Karatube International Oil Company LLP" amounted to more than US$1.2 billion. Companies such as AES Corporation and TauPower B.V. demanded compensation from the state for US$1.29 billion, and KT AsiaInvestmentGroup B.V. demanded compensation for approximately US$1.5 billion.

In these cases, Kazakhstan defended claims of a total of approximately US$2.9 billion and the plaintiffs' claims were dismissed. Moreover, in the case of "Karatube International Oil Company LLP" the International Centre for Settlement of Investment Disputes decided that the state's US$3.2 million costs for arbitration should be covered by the plaintiff.

However, not all arbitration proceedings are completed fully in favour of Kazakhstan. For example, the arbitration claims initiated by Anatoly Stati, Gabriel Stati, by companies AscomGroup SA and TerraRafTransTraiding Ltd. were partly upheld. The initial amount of the claim was approximately US$5 billion, however the tribunal agreed with the state's arguments regarding the overestimation of the value of assets and rejected the plaintiffs' application for the recovery of non-pecuniary damage, awarding only about 10% of the initial claim to the plaintiffs.

Proposals for changes in laws and regulations

Kazakhstan's existing legislation on subsoil use is the result of the legal regulation of the appropriate scope of public relations at the empirical level, and is based on the short-term rather than the long-term interests of the industry. Since its introduction in 2010 the current law "On Subsoil and Subsoil Use" has been amended 20 times and a number of disadvantages have already been identified during the course of its implementation. The control, supervision and regulation of subsoil users are carried out by a number of different government agencies on the basis of numerous different laws and sub-legislative regulations. This fact negatively affects both the conditions for doing business in mineral resources, and the investment climate in the country as a whole.

An effective measure for improving subsoil legislation could be to codify the legislation on subsoil and subsoil use. This is supported by the fact that almost all other important areas of natural resources (land, forests and water) in Kazakhstan are regulated by their own codified statutes. The hydrocarbons and solid minerals sector requires clearer differentiation and regulation, which must be specific to these industries. In order to improve subsoil legislation, it is necessary to legitimise it as an independent legal area, and to form a codified set of interrelated laws and regulations, the main part of which should be the Subsoil Use Code.

The Code will provide the following conceptual innovations:

1. Simplification of exploration, including the simplification of procedures associated with obtaining exploration rights in order to attract investment, create a market for small and medium sized companies, and transition to methods with economic incentives.
2. Improvement of governance in the subsoil use sector, i.e. rejecting the concept of complete state control over subsoil and mining companies, and transition to new principles in the field of sustainable and multiple use, including the adoption of international standards for the calculation of reserves.
3. Guarantees for investors, including the establishment of mechanisms to protect investments by guaranteeing return on investment by granting rights from the exploration phase to the production phase, and the creation of favourable investment conditions by guaranteeing the stability of the law for at least ten years.
4. Improving the fiscal system.
5. Optimising the tax regime during an exploration period, introducing fiscal stimulus during an exploration period, and improving the taxation system.
6. New ways of granting rights, i.e. contracts (hydrocarbons, production of solid minerals in strategic fields), licences (common minerals, exploration and production of solid minerals in non-strategic fields), and resolution (exploration of solid and common minerals).

As mentioned above, only the concept of the Subsoil Use Code has been developed so far. The first draft was adopted by the Kazakh parliament in June 2015 and there are plans to adopt it by the end of 2016.

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