Legal Aspects of Regulation of Land Relations In the Process of Fulfillment of Obligations under a Subsoil Use Contract (Experience of Tengizchevroil JV) (Zh.S.Yelyubayev’s Speech at the Conference on Issues of Land Relations. May 21, 2004, Atyrau)

Zh.S.Yelyubayev’s (Ж.С.Елюбаев)

Speech at the Conference on Issues of Land Relations

(May 21, 2004, Atyrau)

Legal Aspects of Regulation of Land Relations In the Process of
Fulfillment of Obligations under a Subsoil Use Contract
(Experience of Tengizchevroil JV)

A whole set of laws and regulations of a different status govern the relations associated with the possession, use and disposal of land in the Republic of Kazakhstan. However, the basic legal act in this field is the Land Code of the Republic of Kazakhstan (the «Land Code»). I hope that some other participants of this forum will elaborate on its provisions. My intention is to speak about the legal aspects of regulation of land relations in the process of carrying out obligations under a subsoil use contract and to share with you the experience that Tengizchevroil JV («TCO») has accumulated in this field so far.

Most probably, you know that TCO is one of the largest investors in the Kazakhstan oil and gas industry as well as one of the largest subsoil users. Being the subsoil user, TCO is, at the same time, a large land user, which falls under the provisions of the ROK land use legislation.

Pursuant to Art. 10 of Decree of the President of the Republic of Kazakhstan having the force of a law «On Subsoil and Subsoil Use» (the «Subsoil Decree») the right to subsoil use is granted for:

1. state geological subsoil survey;

2. exploration;

3. production;

4. construction and operation of underground facilities not related to exploration and/or production.

Such a right to subsoil use must be stipulated in the relevant Contract for Subsoil Use (Art. 42 of the Subsoil Decree) with a clear determination of the Contract Area. Note that according to the Subsoil Decree (Art. 1(7)) the Contract Area means the area determined by the Geological^[1] or Mining Allotment^[2], which on the subsoil user is entitled to carry out his subsoil use operations that are provided for by the Contract. So, proceeding from the legislative interpretation of the terms Geological and Mining Allotments, the subsoil user’s Contract Area is not equal to the Land Plot, which determines the surface outline of the Contract Area. Hence, the conclusion is that the subsoil user, having entered into a relevant Subsoil Use Contract, is legally obliged to register Land Plots within its Contract Area.

Since pursuant to the provisions of the ROK Land Code land plots can be either in ownership or in a permanent or temporary use of legal entities, the subsoil user himself should decide which land relations regime to select and execute his rights to the land accordingly.

According to Art. 44 (4-1) of the Subsoil Decree, «conclusion of a Contract [for subsoil] serves as a ground for an immediate formalization of the rights to the land plot by local executive bodies. The boundaries of the land plot in question shall be limited by the area that the subsoil user actually uses in a way breaking the land surface within the term of actual use of the land plot».

Paragraph 2 of Art. 32 (4) of the existing Land Code also specify that «the Contract for subsoil use provides grounds for an immediate formalization of the rights to the land plot».

So, in accordance with the legislative provisions, immediately after the execution of a Contract for subsoil use, the subsoil user gains both the right to land and the obligation to formalize this right on the basis of the land legislation. At the same time, this provision certainly obliges the competent state body responsible for land relations to grant to the subsoil user all the rights to the land within its Contract Area. The right of choice of the type of land use belongs, in our opinion, to the subsoil user.

The practice evidences that, as a rule, the subsoil user executes ownership rights to the land under immovable assets (capital buildings, constructions etc.) through obtaining a relevant state deed of ownership for land, while the other land plots needed for carrying out subsoil use operations and other types of economic activities related to the subsoil use are registered for a temporary use by making a Lease Agreement. TCO also currently holds to the same practice of legalization of land plots located within the Contract Area, though historically it made it by a somewhat specific way, which I will elaborate on a bit later.

The above allows us to make the following conclusions:

1. A Subsoil Use Contract does not give the subsoil user an unconditional right to land use.

2. A Subsoil Use Contract provides grounds for an immediate formalization of rights to the land plot by local executive bodies; proceeding from the sense and content of the above-mentioned legislative provisions (Art. 44 (4-1) of the Subsoil Decree, Art. 32 (4) (2) of the Land Code), these bodies can not refuse to register the subsoil user’s land plots, because it would cause a breach of the subsoil user’s right to carry out his primary activities (for example, rights to carry out Exploration of subsoil or Production of hydrocarbons).

3. The subsoil user’s right to land use is formalized in accordance with the provisions of the ROK Land Code and other legal acts regulating land relations.

Now I would like to tell you about the land use practice in TCO.

The Tengiz Project Agreements, which in their aggregate constitute a Contract for Exploration and Production of Hydrocarbons, were entered into and approved by special Decree of the President of the Republic of Kazakhstan^[3] and Resolution of the Government of the Republic of Kazakhstan^[4] on April 6, 1993, soon after the disintegration of the Soviet Union, when the legal basis matching the market economy, which would regulate subsoil use operations with the use of foreign investment, was not formed yet.

One of the first large western investors that came to Kazakhstan oil and gas sector, specifically, to the Tengiz oil field, was transnational corporation Chevron. Naturally, it was interested very much in obtaining necessary guarantees for an unimpeded enjoyment of its rights to the use of subsoil and land.

The then legal acts that regulated the issues of both subsoil use and land use did not cover all the aspects of the activities of joint ventures using foreign capital.

The ROK legal acts that regulated the subsoil and land use relations in early 90s of the last century were mostly of a «permissive» nature. Granting land plots to legal entities, including subsoil users, depended a lot on will and desire of the competent state body and government officials. The fact that a business entity had a right to subsoil use did not serve as an implicit basis for obtaining the right to land use. Moreover, under some of the provisions, the legal entity that claimed to the right to subsoil use had to obtain first a permit for occupation of the land plots on the would-be area of subsoil use.

For example, pursuant to Art. 15 of the ROK Code «On Subsoil and Processing of Minerals» of May 30, 1992 (is currently invalidated), concession of subsoil for minerals production was subject, among other things, to prior obtaining of the land plot in accordance with the ROK Land Code of November 16, 1990 (is currently invalidated).

Provisions of Art. 12 and 16 of the ROK Code «On Subsoil and Procession of Minerals» also stipulated that the land relations associated with geological survey of subsoil and pilot commercial development of subsoil should be exercised in accordance with the country’s land legislation.

Pursuant to the ROK Land Code of November 16, 1990, land plots could be granted to joint ventures and foreign legal entities, in particular, under concession agreements, to lease only. The same was provided by the Regulations «On the Procedure for Granting Lands to Use to Joint Ventures, International Associations and Organizations, Foreign Legal Entities and Individuals for Performance of Activities in the Territory of the Republic of Kazakhstan» approved by Resolution #1516-XII of July 3, 1992 (is currently invalidated).

So, under the Kazakhstan legislation of early 90s, the existence of the right to subsoil use did not serve as an unconditional ground for granting land use rights. That was why TCO, and its foreign partner, transnational oil corporation Chevron, were interested in obtaining a full guarantee for land use rights on the basis of the Tengiz Project Agreements from the Republic of Kazakhstan and the Kazakhstan partner. Such a guarantee was given to TCO.

Under the Project Agreement (one of TCO major documents), TCO was given the Contract Area of 4,000 sq. km for a term of 40 years, of which 2,462 sq. km were intended for Exploration and 1,568 sq. km for Production of hydrocarbons.

Pursuant to Clause 12 (B) of the Project Agreement, the Republic of Kazakhstan acknowledged and agreed for and on behalf of itself and all state and regional (local) authorities, ministries and committees that TCO should be entitled immediately after the Agreement came into effect to commence its operations, own and possess assets, occupy the land upon which they may be situated without any requirement to obtain, for those purposes, any further consents, approvals, allocations or licenses or have any expert review conducted provided that TCO should thereafter liaise and cooperate with all relevant state and regional authorities, ministries and committees in the Republic of Kazakhstan in order to ensure that formalities required by Kazakhstan law are observed. The same clause stipulates, however, that such formalities shall not add to, delete or otherwise alter the substance of this Agreement.

So, the above-mentioned provision of the Project Agreement, on one hand, granted to TCO the right to occupy the land without any additional consents, approvals, licenses, expert reviews and other actions, on the other hand, it obliged TCO to observe the formalities on this issue required by the ROK legislation. However, such a procedure for legal execution of land plots was not to deprive TCO of the exclusive right to occupy the land within the Contract Area, i.e. the competent bodies of the Republic of Kazakhstan were not entitled to refuse to allocate and register land plots for the needs of TCO and/or its contractors within TCO license area.

Since the Project Agreement and the whole set of major TCO documents were approved by a special Decree of the President and Resolution of the Government of the Republic of Kazakhstan, all provisions of the Tengiz Project Agreements, including the one specifying for TCO exclusive right to land use within the Contract Area, shall be deemed binding on all the parties.

In development of these provisions, before the final execution of all the documents on the land plots within TCO Contract Area, TCO, Atyrau Oblast Administration and Atyrau Oblast Land Resources Management Committee entered into a Protocol, recognized by the Parties as a provisional document (item 6 of the Protocol). It provided for a TCO work area of 381,196 hectares, which company started to pay the land tax for, as well as determined land plots under particular facilities (including, for instance, roads, wells, dwelling and industrial constructions, etc.) of 2,245 hectares, which TCO began to pay the agricultural damages for.

Under the same Protocol, in order to legally formalize TCO rights to the specified land plots, the Parties undertook to draft and execute a special document by a form used in the Republic of Kazakhstan (item 6 of the Protocol). This evidences that as long ago as in 1995 TCO expressed its intent to legally formalize its exclusive right to the land use in accordance with the legislation of the Republic of Kazakhstan.

Beginning from the date of the Protocol, TCO has registered its rights to land plots both within the Contract Area and beyond it (under TCO facilities in the city of Atyrau, for example) by facilities, in strict compliance with the requirements of the land legislation of the Republic of Kazakhstan, fulfilling so the mandatory provision specified in Clause 12(B) of the Project Agreement, the one stipulating for the observance of the formalities provided by the Kazakhstan law.

Thus, TCO has carried out the work on legalization of its rights to the land plots within the Contract Area, specifically:

1. made an aerial survey of the Contract Area and drew relevant maps of the land plots;

2. made an inventory of the land plots based on the maps drawn;

3. obtained state deeds of title for some land plots under company’s immovable assets;

4. made Lease Agreement for a temporary use of the land plots required for performance of primary subsoil use activities;

5. obtained relevant state deeds for granting the remaining land plots on the basis of servitude.

All TCO land use rights are secured by the relevant instruments of the competent state bodies, in particular, Resolutions of the Atyrau Oblast Akim #195 of September 26, 2003, and #118 of May 22, 2003, Decisions of the Akim of the Zhylyoi District of the Atyrau Oblast #85 of June 6, 2003 and #210 of December 4, 2003, Decision of the Akim of the Beineu District of the Manguistau Oblast #139 of July 23, 2003, Lease Agreements and Servitude Agreements with local executive bodies.

However, TCO relations with various state bodies on the issue of execution of TCO rights to the land within the Contract Area went through many «cloudy» days too. I would like to provide you with more details on some differences and disputed of this kind between TCO and state bodies.

For example, sometimes local executive authorities transferred certain land plots located in TCO Contract Area to other economic entities for use, which breached TCO subsoil use rights. We believe that pursuant to Art. 44 (4-1) of the Subsoil Decree^[5], a local executive body ought to find out what was TCO’s position before granting a land plot located within TCO Contract Area to another business entity or individual. If any particular land plot located within the Contract Area, was necessary for TCO, it could not be transferred to another person’s use. For the sake of justice, I would like to add that the local executive bodies themselves later annulled such unlawful deeds based on written TCO applications/complaints.

I will give a couple of examples of the above.

On April 9, 2002, Akim of the Zhylyoi District of the Atyrau Oblast decided to transfer to lease to Neftestroiservice LLP (NSS) a land plot with an area of 1.03 hectares. This plot was located in the 4th microdistrict of Tengiz Rotational Village and intended for dwelling premises built thereon. Based on this Decision, a Lease Agreement was made between the District Akim and NSS for a term of 10 years.

This was a gross violation of the requirements of the national legislation and TCO rights. Under the Assets Purchase and Sale Agreement of April 2, 1993^[6], the Kazakhstan party transferred to TCO assets, namely, buildings and constructions located in the 4th microdistrict of Tengiz Rotational Village, including the above-mentioned dormitory accommodations, as a contribution to the charter fund. Naturally, the land under these buildings belonged to TCO as well and nobody had the right to alienate it without TCO’s consent. It was after our repeated written appeals, about 6 months later, that the new Akim of the Zhylyoi District decided to cancel the initial decision on transferring to NSS the land plot that belonged to TCO.

Another case, the same Akim of the Zhylyoi District transferred a land plot with an area of 0.3 hectares that belonged to TCO to another business entity, Service Zholshy LLP, by its Decision of October 14, 2002. This decision was cancelled by the new Akim by TCO written request only in the end of the last year.

These facts evidence that local executive bodies themselves violate the requirements of the legislation of the Republic of Kazakhstan, breaching thus the rights and legitimate interests of economic entities. The issues of land allocation should be treated in a very careful manner to avoid violation of the law and the rights of the subjects of land relation.

I would like to give you a number of other examples when, we believe, local executive bodies groundlessly hindered TCO from legalizing land plots that TCO had priority rights to both in fact and by the ROK law.

As you may know, the technology of production in Tengiz implies separation of gas, sulfur and other associated products from oil. In accordance with the approved technology, the separated sulfur, for example, is placed and stored on specially designed sulfur pads. I should mention that this is a perfectly lawful operation provided for by the Technology Scheme of the Tengiz oil field approved by the competent state bodies. However, in 1999-2002 TCO encountered certain difficulties in obtaining and legalizing the land plots required for construction of the sulfur pads. TCO applications for land plots that were necessary for this purpose were refused. The refusals were explained by a number of different reasons varying from the allegation that the sulfur storage in the open air was inexpedient and hazardous to the demands to increase the sulfur sales. We could discuss today the technology of storage of sulfur, one of TCO products which in demand, limited though, in the world and domestic markets, but this would be off-topic. I would like to mention only that TCO produces and stores sulfur in accordance with the approved technology and existing standards, including international.

So, local executive bodies, refusing or hampering allocation of land for TCO sulfur pads in the Contract Area, grossly violated the legislative requirements (Art. 44 (4-1) of the Subsoil Decree, Art. 32 (4) (2) of the Land Code) and infringed on TCO right to obtain and register land plots needed for its economic activities provided for by the Subsoil Use Contract.

I can not omit another dispute between TCO and state bodies. This is the issue of lawfulness of the use by TCO of soil borrow pits for its own business needs (filling for roads, construction sites, dams etc.). I would like to cite a number of arguments evidencing that TCO uses the borrow pits located in TCO Contract Area quite lawfully and the claims of the state agencies are groundless.

I have already noted that under Art. 12(B) of the Project Agreement TCO had the right to occupy land within its Contract Area to immediately carry out its operations. Since the whole set of the Tengiz documents, including the Project Agreement, was approved by the ROK Presidential Decree and the Resolution of the ROK Cabinet of Ministers, these documents became legally binding for all subjects of relations associated with the implementation of the Tengiz Project.

Borrow pits that TCO develops are located near the company’s production facilities and the soil extracted therefrom is used exclusively for TCO own needs, not for commercial purposes.

The trilateral Protocol signed between TCO, Atyrau Oblast Administration and Atyrau Oblast Land Resources Management Committee in 1995, which we have already spoken about, provided TCO with a work area of 381,196 square km and defined land plots for different facilities, including land plots for borrow pits with an area of 200 hectares.

Subsequently, during the next several years, keeping in mind that this Protocol was a provisional document, TCO duly formalized its rights to the most part of the land plots under the borrow pits by entering into Lease Agreements. At that, it was stipulated in the Lease Agreements that these land plots were intended for development of borrow pits.

It should be also noted that under Art. 13 (4) of the Subsoil Decree, the right to subsoil use in the form of Production for internal needs of common minerals (which include construction sand among other things) is granted simultaneously with transferring the land plot, where the common minerals are located, to ownership or use.

The right of business entities to the production of common minerals for internal needs in the allocated land plots was also provided for by Art. 47 (3) of the ROK Land Law of January 24, 2001, which was in force at the moment this dispute arose.

Similar provision is contained in the current ROK Land Code. Art. 42 (1) of the Land Code provides that the right to subsoil use in the form of production of common minerals is granted at the moment when the land plot, where the common minerals are located, is transferred to ownership or use.

In view of these legislative provisions and the provisions of the Land Lease Agreements made for the purpose of the borrow pits development for internal needs, TCO did not have to make any special contract for Exploration and Production of common minerals, all the more for Production of a simple soil, which does not even fall under the category of common minerals. We believe therefore that the requirements of the state control bodies to TCO concerning the execution of a Contract for Exploration and Production of common minerals is neither fair nor based on the law. Meanwhile, it should be mentioned that by now the parties have come to a mutually acceptable compromise and this dispute is already settled.

Finally, I would like to express a number of proposals which would help to ensure an unconditional compliance with the requirements of the legislation of the Republic of Kazakhstan regulating both the subsoil and land use relations.

Firstly, all bylaws and departmental acts on the issues of subsoil use and land use should be brought into accordance with the existing legislative acts, all contradictions and differences therein should be eliminated.

Secondly, it is necessary to strive to an equal partnership between all the subjects of land relations and relations in the sphere of subsoil use; any dictate from the side of the state bodies and government officials should be excluded.

Thirdly, all disputes on the issues of subsoil use and land use should be solved within the framework of the law and by legal means. The disputes that arise on these issues should not adversely affect other legal relations that form in the course of business activities of legal entities.

Fourthly, state competent bodies responsible for subsoil use and land use should summarize the law enforcement practice in these spheres of activities of legal entities and work out recommendations aimed at prevention of breaches of the existing laws.

^[1] Geological Allotment - a schedule to the Contract for Exploration or combined Exploration and Production, which is an integral part of the Contract and determines in chart and descriptively the segment of subsoil, where the subsoil user is entitled to carry out Exploration (Art. 1 (2-1) of the Subsoil Decree).

^[2] Mining Allotment - a schedule to the Contract for Production, combined Exploration and Production, Contract for Construction and/or Operation of Underground Facilities Not-Related to Exploration and/or Production, Contract for Mining Common Minerals for Commercial Purposes, which is an integral part of the Contract or an independent document, in case of a Servitude; it determines in chart and descriptively the segment of subsoil, where the subsoil user is entitled to carry out Production, Construction of Underground Facilities Not-Related to Exploration and/Production or enjoy Servitude (Art. 2-2 of the Subsoil Decree).

^[3] Decree of the President of the Republic of Kazakhstan #1168 dated April 6, 1993 «On Activities of Tengizchevroil Joint Venture».

^[4] Resolution of the Government of the Republic of Kazakhstan #260 dated April 5, 1996 «On Approval of Agreements on Formation of Tengizchevroil Joint Venture».

^[5] «Execution of a Contract [for subsoil use] serves as a ground for an immediate formalization of the rights to the land plot by local executive bodies» (item 4-1, Art. 44 of the Subsoil Decree).

^[6] One of the Major Documents on the Tengiz Project approved by Resolution of the Cabinet of Ministers of the Republic of Kazakhstan #260 of April 5, 1993 «On Approval of the Agreements on Formation of Tengizchevroil Joint Venture».