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Zh.S.Yelyubayev Ж.С.Елюбаев
«Investment Prospects of the Oil & Gas Sector
I. Development of the laws of the Republic of Kazakhstan on investments and challenges of legal groundwork for interests of foreign investors in oil & gas sector
The raw materials base, especially oil, is for Kazakhstan a symbol of sovereignty, the means of subsistence, and the source of future prosperity. Nowadays the largest oil & gas deposits are developed. There are raw hydrocarbons on the Caspian Sea shelf, being the potential reserve of the country. After the collapse of the USSR the new countries, especially the ones of the Caspian region (Azerbaijan, Kazakhstan, Turkmenistan, Russia) did not have financial resources not only to develop rich oil deposits, but even to support the mining operations level reached during the Soviet period. Consequently, they were forced to turn to Western countries and transnational energy corporations for financial aid. In the eyes of the Western countries the Caspian Sea is the second Persian Gulf. Therefore many energy corporations were interested in investing in these countries for the large-scale development, first of all, of oil and gas fields. These investments were made in the Caspian region, and nowadays many world companies are running businesses, not only in subsoil use, but also rendering services and providing the deposits infrastructure, take part in developing the mineral resources in Caspian bordering countries. This swift invasion of the world energy companies, influential financial lobbyists, representatives of high governmental authorities of Western countries in Caspian region is explained as follows: 1) ever-increasing importance of energy resources in the economy of the developed countries, forcing them to ensure their energy security; 2) Dissociation of the Caspian bordering countries with the insufficiently developed political systems (system is oriented only at power of the country’s leader in the absence of real democratic institutes), insecurity by the valid collective agreement, for example, as OPEC countries. All they go through political and economic difficulties of the prolonged transition period; 3) Profitability of the oil business and keen competition in investing in this field. At the beginning of the 90’s of the previous century Kazakhstan did not have another way out except for attracting foreign capital to implement the field development plans. Under these circumstances in the Republic of Kazakhstan there was taken the only sound decision - to open the way for foreign investments, and this is a great endeavor of the President of the RK N.A. Nazarbayev who personally participated in negotiations with the first investors who invested their capital in subsoil use. At that time Kazakhstan raised the first significant foreign investments in oil and gas field in conditions when the proper relations regulation policy in this sector of the economy was not developed, proper legislative framework directed at developing the market economy lacked, scarcity of funds not only for the development of industry, but also for solution of topical social challenges was experienced. In these crisis conditions the foreign investor in Kazakhstan, providing significant funds to develop the oil and gas field, to the fullest extent protected their interests through signing the contract which would make it possible for him not only to return his money but also to generate income. In this complicated political and economic situation there were signed the first investment agreements and the first contracts granting the subsoil use rights which stipulated the terms of implementation of the investments projects ensuring the balance of interests of both parties. At this stage the Republic of Kazakhstan provided foreign investors some tax benefits and preferences, special terms to perform export import, and currency transactions, special rules to employ foreigners, etc. All these special rules were set forth in contracts, and contracts, as a rule, were approved by Decrees of the Government of the RK or special acts of the country’s President. Just that approach made it possible for Kazakhstan to create an attractive investment regime, being one of the prerequisites of rapid economic recovery, industrial development, and not only in the oil and gas field, but also in non-oil-gas sector of the economy. Attracting foreign investments helped to solve the most complicated social problems and favored the assertion of Kazakhstan as a serious partner in foreign economic relations. Nowadays in conditions of certain political and economic stability in the country there is much uncalled-for criticism regarding the first investment subsoil use agreements and contracts, containing the opinions that Kazakhstan put itself at a disadvantage in relations with foreign investors, that it is high time reconsidering the made contracts to ensure the interests of the state and the Kazakh society. Not sharing the similar opinions, finding this point of view mistaken, which does not consider a number of legal, political, and economic aspects, we’ll refer to the basic provisions: Firstly, in the period of entering into the first investment subsoil use agreements and contracts in Kazakhstan there were already many valid legislative and other acts which made it possible for the Government of the Republic of Kazakhstan and domestic business entities to attract foreign investments and provide them specific tax benefits and preferences. For instance, the Law of the Kazakh Soviet Socialist Republic dated 7 December 1990 No.383-XII (void) established that the «subject of foreign investments in a Kazakh Soviet Socialist Republic there can be the enterprises, share interest in the property of Soviet legal entities, shares and other securities, other property, as well as purchased property rights to use the natural resources in the Kazakh Soviet Socialist Republic to run business and other activity in Kazakh Soviet Socialist Republic» (Article 3). Pursuant to Article 9 of this Law, foreign investing was allowed in any fields of business and other activity, except for military activity. The legal entities with foreign ownership were granted a right to take decisions on the terms of employment, dismissal, work schedule, as well as provision of benefits, guarantees, and compensation to all company’s employees on their own (Article 12). The property imported in Kazakhstan as investments of foreign investors not held for sale was not imposed charges (Article 16), etc. Secondly, the Code of the Republic of Kazakhstan «On Subsoil Assets and Mineral Processing», which was valid at the time, dated 30 May 1992 (void) envisaged the possibility of the lease of the subsoil assets to companies with foreign ownership, as well as to foreign legal and natural persons on terms of contract or concession (Article 10). Besides, subsoil assets were provided to the mentioned entities on the basis of the lease agreement which, in particular, envisaged: period and terms of lease of subsoil assets; environmental requirements; quotas for the annual volume of leased mineral deposits; payment dates and amounts of payments for leasing the subsoil assets; subsoil assets protection measures; special terms on the used technology; provided benefits (Article 14 of the Code), etc. Thirdly, at that time there were valid other regulatory legal acts making it possible for the state to lease subsoil assets and land plots to foreign investors. For instance, the Land Code of the Kazakh Soviet Socialist Republic dated 16 November 1990; Regulation «On Procedure for Leasing Land to Joint Ventures, Companies, International Associations, and Organizations, Foreign Legal Entities and Citizens to Carry out the Activity in the Republic of Kazakhstan» approved by Decree of the Government of the RK on 3 July 1992 under No. 1516-XII (void); Regulation «On Procedure for Exploitation (Transfer, Exchange, Sale) of Information about Subsoil Assets approved by Decree of the Government of the RK dated 8 December 1992 No.1034 (void) and others.
Thus, with high confidence, it is possible to assert the existence, during that period of vital necessity in foreign investments, of specific legal groundwork for their attraction. Claims of modern critics against the country’s President and the Government of the Republic of Kazakhstan regarding the lease of subsoil assets to foreign investors and foreign legal entities allegedly without considering interests of the state and with violation of applicable laws, as well as their initiative to reconsider the benefits and preferences granted to subsoil users. some of which cannot be recognized as reasonable, since they are detached from the real economic situation of the beginning of the 90’s of the previous century. Additionally, the current success of the country certifies the correctness of actions of the President and the Government of the Republic of Kazakhstan, and currently valid laws provide for guarantees of stability of made contracts, as well as terms of making changes and amendments in these contracts. The legislative acts which at that time were based on the fundamental principles and rules of the civil law, especially the institutes of property and law of obligations were involved. Besides, please note that in the applicable investment laws there are more contraventions with the fundamental legal entities of civil law. For example, the Law of the RK «On Investments» provides for the right of the authorized public authority to unilaterally terminate the agreement which conflicts with the general provisions of the civil law, comprising the rule that any agreement can be terminated by consent of the parties or judicially. However it should be recognized that for the previous decade the investment laws of Kazakhstan were changed, amended and improved, the investment law appeared and firmly established in the legal science as a field of Kazakh law, fundamental works dedicated to legal regulation of the investment activity were published, that is, for the short historical period there was created the investment law system and the investment legislation system. Unfortunately, it should be noted that from the end of the 90’s there has taken place the throwback from the reached level of attractiveness of the investment climate. In general this is a common phenomenon, since from 2000 Kazakhstan has almost emerged from the internal crisis, created the respective market-driven economic base, set up the necessary political government institutions, created the non-governmental bank system, attracted large foreign investments, including in oil and gas field, therefore, as a sovereign state was entitled to change the rules of the game, create the new legal base conforming to new economic realities and political situation in the country. The new investors, including the foreign ones, had to run their business according to new legislative requirements, therefore, the adoption of the new Law of the RK «On Investments» (8 January 2003) was rather natural. There was a need in the single regulatory legal act for domestic and foreign investors. However, we consider mistaken the conceptual and methodological approach of the legislator in developing and adopting this law. More perfect and more progressive provisions of the Law of the RK «On Foreign Investments» should be taken as a basis of its provisions, and not base the new law on normative rules for domestic investors. At the same time, more preferable is a conceptual idea of the applicable Law of the RK «On Investments», the point of which is that the national regime and general national laws are applied to both domestic and foreign investors: pursuant to these laws any investor is provided the investment preferences just in the priority lines of business, the list of which is approved by the Government of the RK at the level of classes of the general classifier of types of economic activity. It is known that the subsoil use field, especially the oil and gas sector, has always been and remains the most attractive sector of the economy in which the investors try to put money, since this sector is the most profitable, making it possible to get return on investments earlier than in other sectors of the economy. Therefore, irrespective whether these subsoil use operations are included in the list of priority lines of business, making it possible to get the specific investment preferences, the subsoil use field will always be of interest for foreign investors. For the investor the political and economic stability in the state, the stability of the national laws and contract provisions are the most vital. Any actions of the state directed at reconsidering the previously made subsoil use contracts and investment agreements, the attempt to apply the provisions of the new laws to relations which had arisen before it came into force, decrease the attractiveness and reliability of the investment climate. Let’s consider the issue of legal protection of interests of foreign investors in subsoil use field. General guarantees of legal protection of the investors’ activity in the Republic of Kazakhstan equally apply to the activity of foreign investors. Subject to applicable investment laws, the investor is provided full and absolute protection of rights and interests. The Law of the RK «On Investments» (2003) establishes that: 1) the investor is entitled to compensation of damages as a result of promulgation by the public authorities of the acts not conforming to the legislative acts of the Republic of Kazakhstan, as well as a result of illegal actions (omissions) of the officials of these authorities; 2) investor is guaranteed the stability of terms of the investment agreement made between the investor and the public authority, unless the agreement is amended by consent of the parties. Here it should be borne in mind that these guarantees are not in force in cases of: Ø changes in laws of the Republic of Kazakhstan and/or coming into effect and/or change of the international agreements which amend the procedure for and terms of import, production, sale of excisable goods which according to the tax laws, comprise, particularly, crude oil and gas condensate; Ø changes and amendments made in the legislative acts to ensure the national and environmental protection, health care and good morals. In conformity with the law, the investor may at his own discretion use the income generated from his activity after paying the taxes and other compulsory payments to the budget. Besides, the guarantees of the state provided pursuant to the Law of the RK «On Subsoil Assets and Subsoil Use» are also applied to the activity of the investors running their business in the subsoil use business. For example, the subsurface user is guaranteed the protection of his rights in accordance with the laws. The changes and amendments in laws aggravating the situation of the subsurface user are not applied to contracts made before introducing these changes and amendments. These guarantees are not applied to changes in the field of national security protection, defense potential, environmental security, health care, taxation, and customs regulation. Thus, the national laws comprise clear and particular provisions on stability of contracts, being a favorable legal regime for investors and subsurface users. The weakness of these provisions is that having provided for legislatively the exceptions from the general legal regime, ensuring the guarantees of stability of the investments agreements and subsoil use contracts, the state did not develop the clear mechanisms of their realization, giving complete control to the officials and the competent authority. This can be a prerequisite for the subjective interpretation and, as a result, cause reconsideration of contracts. It has to be admitted the lack of the necessary legal mechanisms regulating the procedure for and terms of application to subsurface users of changes in laws related to national security, defense potential, environmental security, health care, taxation, and customs regulation. For instance, there are no rules for reconsidering the valid contracts regarding the mentioned fields which would clearly specify the whole mechanism of and the procedure for making changes and amendments in the investment subsoil use agreements and contracts. One cannot but pay attention to the new legal institutes referred to in subsoil assets and subsoil use laws, granting, in particular, the competent authority the right of unilateral termination of the subsoil use contract. This provision of law directly influences the legal regime of stability of valid contracts. Summarizing the mentioned information, we state that the subsoil assets and subsoil use laws, as well as the investment laws of the Republic of Kazakhstan need improvement in terms of exclusion of provisions conflicting with the general principles and rules of civil legislation, international legal acts, and creation of the proper regime for reconsidering the valid contracts with the transparent and clear procedure for their realization.
II. Problems of improvement of legal regulation of the investment activity and remedies of investors in oil and gas field
The necessity to strengthen the role of the state in natural resources sector has become the most vital task nowadays. The state must have its share in all strategic facilities of the country, especially in subsoil use field, strategic deposits do not have to be privately owned or owed by the foreign investors. The state through its institutes (national companies, national holdings, etc.) should have a blocking stake and shares in legal entities, developing the strategic mineral deposits. This is very important from the point of view of national security protection. Kazakhstan is actively involved in foreign economic relations. Therefore it should be kept in mind that a too high role of transnational corporations and financial and production groups has become the material weakness of globalization of the world economy. Overdependence on investors needs to be balanced, and relations with them have to consider more of the interests of the society, in particular, if it refers to subsurface use. Meanwhile, the development of the competitive, hi-tech, and knowledge-intensive production, in particular, in the oil and gas sector, to ensure sustainable economic growth needs high level of domestic and outward investments. The investment policy pursued nowadays is characterized by a number of benefits, among which there should be mentioned the preservation, in whole, of the favorable investment climate to attract investments, create and develop the financial market, form new institutional investors, strengthen the role of national companies as commercial legal entities. Besides, the instability of laws, internal struggle among the authorized public authorities for the sphere of influence in the investment sector and in the subsoil use field, corruptness of civil servants, inconsistent economic policy complicate the integration of the investment processes in Kazakhstan’s economy. Foreign capital poorly favors the development of the industrial sector, since it’s almost in full directed to extractive industries, mainly to E&P and metal industry. Moreover, the analysis of the investment structure shows that foreign investors, with few exceptions, invest more in current assets or fixed assets with short useful life period. The previous stimulation policy of foreign investments inflow caused that domestic and foreign investors were unequally treated. Besides, domestic investors, and in our country there are even multi-millionaires, invest in the economy of the developed European countries where they keep their capital and are afraid of importing it in the country to invest in the own economy, since there are no transparent and reliable mechanisms of payback to the country. The outflow of own capital from the country continues, and this is a negative sign. In this regard it is necessary to emphasize a number of factors, impeding the increase in raised investments, including the foreign ones, in particular: Ø low business activity on the market of Kazakhstan business entities; Ø instability and inefficiency of laws and regulatory economic measures; Ø low cash liquidity worsened by the non-payment crisis; Ø acute shortage of accurate and complete information about the economic situation; Ø high level of corruption; Ø inefficient monitoring of the activity of investors; Ø frequent change of the managers of branch ministries, not favoring the effectiveness of the work of central authorities and not ensuring the succession of taken decisions. It should be noted that appeals to refuse foreign investments reflecting particular attitudes in the society are not based on knowledge of the actual state of affairs in the country. If to talk about the state investments and equity of domestic investors, that’s not enough to finance even the projects in the field of agriculture, processing industry, transport, etc., being of vital importance for the country. Therefore, considering foreign investments and investors as an important source of capital funds, technologies, experience in the field of management and marketing, Kazakhstan in the current decade should not neglect an opportunity to attract foreign investments in the development of the country’s economy, including oil and gas field. The policy of the state, legal and administrative measures from the point of view of national interests should create the conditions conforming to tasks of attracting foreign investments and interests of the investors. Besides, it is necessary to develop the mechanisms making it possible to block or, at least, to mitigate the unwanted for the country’s economy consequences of transactions of foreign investors. It appears that to improve the investment climate there can be taken the following measures in the form of the respective legal forms: 1) ensuring high degree of development and stability of legislation; 2) ensuring predictability of the state policy and succession of investment decisions; 3) formation of the effective, fair, and uniform law enforcement practice, timely enforcement of court and arbitrary decrees on the investment disputes; 4) improvement of laws on the investment activity directed at ensuring the existence of clear, transparent and unique legal institutes and rules; 5) legislative and specific guarantees of protection of foreign investments, rights and legal interests of the investor; 6) exclusion of unpopular administrative measures as, for example, unilateral termination of the contract. As important tools of state investment policy, there are also economic factors, possibility to provide the investors tax and customs benefits and preferences, since the stabile and uniform tax regime is not always enough for the inflow of investments. A stabile tax regime, as a rule, is characteristic for the economically developed countries. If still to pursue the object to apply the general tax regime to all business entities, including the investors, working in the subsoil use field, the tax and customs rates should be decreased and correspond to the generated income. The activity on reinvestment of generated income in the field of subsoil use in other industries, for example, in the processing industry, agriculture, mechanical engineering, and other socially oriented sectors require the creation of the legal regime. Return to creation of free economic zones in the field of socially important fields, which can give rise to increase in the investment inflows in these fields can favor this. The interest of foreign investors in oil and gas field should be used to solve critical state problems on economic recovery as a whole. To achieve the result, the subsoil use contracts and the investment agreements should contain clear and specific terms of the obligations of subsoil users-investors to place orders on supply of equipment and spare parts with domestic companies, employment of domestic staff, deduction of the defined amounts for construction and renovation of the social facilities. These terms have to be set forth in the agreements and should not depend on imperative laws and mood of the public servants.
III. Issues of law enforcement practice of settlement of the investment disputes in subsoil use field
The issue of the uniform law enforcement practice has always been topical, since it strikingly reflects the quality of the applied laws and the level of interpretation of their rules, the degree of protection of the parties involved in legal relations, and efficiency of remedies. It should be noted that for the last decade in the Republic of Kazakhstan there has formed a particular judicial, administrative, prosecutors and arbitrary practice on consideration of the investment disputes and disagreements arising from subsoil use contracts. One cannot admit that this practice meets legal requirements, since there are examples of some court mistakes, facts of illegal bringing of subsoil users and investors to responsibility which does not favor the strengthening of legality and law order in this field. We consider that the issues and problems of the law enforcement practice in the field of subsoil use and investment activity need thorough scientific study not only for the purpose to improve the applicable laws and ensure the protection of rights and legal interests of subsoil users and investors, but primarily to ensure legality and fairness which will definitely favor the strengthening of the attractive investment climate in Kazakhstan.
IV. Issues of international obligations of Kazakhstan
In this regard we cannot but say about the international obligations of the Republic of Kazakhstan on protection of investments. Firstly, our country has signed a number of Agreements with foreign states on mutual protection and support of foreign investments, pursuant to which it has entered into an obligation to render every kind of assistance to investors and not take actions directed at terminating or complicating the investment activity. As a general rule, the international agreements signed and ratified by the Republic of Kazakhstan, have priority (prevailing) over the national laws (Article 4 of the Constitution of the RK). Secondly, regarding the subsoil use field, the Republic of Kazakhstan ratified the Energy Charter Treaty[1] (Decree of the President of the RK No.2537 dated 18 October 1995) and under this deed undertaken to «encourage and create the stabile, competitive, favorable, and public terms for the investors», being the parties of the Energy Charter. Let’s note the major provisions of this international legal act, which are compulsory for all its signers: Ø Provide all foreign investors a less favorable «regime» of the investment activity in comparison with the one provided to national investors or investors from other countries. Ø Limit to a minimum the exceptions from the established «regime» of the investment and other useful activity. Ø Gradually eliminate the restrictions existing for the investors. Ø Follow that the national laws ensure the effective remedies and enforcement of rights in respect of the investments, investment agreements. Ø Not allow in respect of the investors nationalization, expropriation or other measures with the similar to nationalization and expropriation consequences. If they are allowed with a view to protect the state interests and follow the legal procedures, there should be made a «payment of quick, reasonable, and effective compensation». Thus, according to the available international legal obligations, the Republic of Kazakhstan may not and should not take measures or adopt legislative acts, infringing upon the rights and legal interests of the investors. Unfortunately it should be noted that for the last two-three years the state of affairs in Kazakhstan with the protection of investments and performance of international legal obligations has left much to be desired. There are many examples: adoption of acts conflicting with own laws and international legal acts; taking illegal measures directed at attaching the property and income of the investors and subsoil users on the basis of doubtful acts passed by the courts and other authorized public agencies; violation of obligations on ensuring the stability of «contract provisions» and «tax regimes» established by the agreements. These and other illegal actions of the state and its authorities do not favor the improvement of the investment climate in the country, formation of the positive image and rating of the country on the international level. On the other hand, investors, especially the foreign ones, should not strive to get significant benefits and preferences from the state in comparison with those provided to national investors, especially in the field of small and medium-sized business. A chase for superprofit, neglectful attitude to the country and its people, to the existing laws and the legal system cause defense reaction of the state. All relations require the balance of interests, respect for law and made agreements. Only in this case it will be possible to reach the necessary positive result and high harmony in relations among all parties involved in the investment process.
[1] Energy Charter was adopted on the 17 December 1995 in Lisbon, Portugal.
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