| ||||||||||||||||||||
|
|
|
Zh.S.Yelyubayev (Ж.С.Елюбаев) Presentation at the International scientific-practical Conference «Caspian Sea: Legal Status and Regime, Security of the Region and Protection of Environment» (Almaty, September 23-25, 2005 год)
Some Issues of Concluding and Executing Subsoil Use Contracts
Dear participants of the Conference!
This topic put by us on the agenda of the Conference is not less important than the issues of the legal status of the Caspian Sea, preservation and rational use of its biological resources, transportation of hydrocarbons to the world markets etc.
We all see today that development of hydrocarbon reserves of the Caspian Sea and its littoral zone has entered an important phase. An active study of subsoil in the area of the sea began, hydrocarbons production started, foreign investors are involved from countries that do not belong to the states of the littoral zone of the Caspian Sea. It is no secret that there exist differences between the Caspian countries themselves with regard to the procedure of developing offshore deposits of hydrocarbons and possibility to attract investments from other states located far from the Caspian region.
An analysis of trends in development of minerals problems in the world shows that in the nearest future there will be an inevitable growth of demand for products made of oil and gas. Already now a significant growth of oil and gas prices is observed in the world markets, due to which both developed countries and those with developing economy demonstrate and will show economic and political activity in minerals-rich regions of the world, the Caspian Sea region being one of them.
Under these circumstances the legal regulation of relations associated with exploration, production and transportation of hydrocarbons is the most important task for legal system of the Caspian region states. Bearing in mind that at present all five states of the Caspian region to a considerable degree are busy with strengthening their state institutions of power and development of their economy, it is natural that they cannot do without foreign investments on the part of Western developed states and transnational companies. We all know that not only traditional European states but also USA, China, India, Japan and a number of other countries geographically located far from the Caspian Sea show interest in the Caspian region. However, not all these states and transnational companies will come to this region, if the Caspian region countries have a stable legislation in the field of subsoil use protecting the rights and interests of all participants of legal relations.
In this connection, an effective and reasonable legislative regulation of issues of concluding and executing subsoil use contracts will be a guarantee for successful development of subsoil in the area of the Caspian Sea rich in minerals. A stable and progressive legislation of the Caspian region countries will enable them to conduct subsoil activities taking into account environmental safety of the region. As a specialist responsible for providing legal services to the first-rate oil company Tengizchevroil and knowing not through hearsay the problems in the subsoil use sphere, I would like to share with you the existing practice of the legislative regulation of relations associated with subsoil use, speak about the existing problems and touch upon the issues of improving the legislation.
As is known, the basic legal acts of the Republic of Kazakhstan regulating relations in the subsoil use sphere are the following: the Law «On Subsoil and Subsoil Use» dated 27 January 19961, Law «On Petroleum» dated June 28 19952, Law «On Production Sharing Agreements (Contracts) in Offshore Operations» dated 8 July 2005 (hereinafter - Law on PSA). I would like to dwell on some provisions of these acts.
It should be noted that adoption of the two first legal acts in the form of Presidential Decrees of the Republic of Kazakhstan together with other acts in the period of the parliamentary crisis of 1995-1996 served as a good foundation for development of the oil and gas industry in Kazakhstan with involvement of foreign investments. For the first time in the independent Kazakhstan, relations associated with subsoil use, especially with oil and gas exploration and production were regulated by legal acts having the force of law. It stabilized the situation in the oil and gas industry, and the interests of the state and investors who are subjects of these legal relations were protected at the legislative level. These acts also served as a legal basis for conclusion of the well-known subsoil use contracts with foreign investors - leading transnational oil companies. The availability of a systematized oil legislation opened a way for new investments, and not only into the oil and gas sector. All this can be assessed as a positive factor.
However, life does not stand still, and the law enforcement practice of the last ten years in the sphere of subsoil use showed also imperfect sides of the above-mentioned acts, which sometimes leads to conflicts between participants of relations in this sphere of business. In my presentation I will only speak about subsoil use associated with oil and gas exploration and production, and I will also dwell on some provisions of the Law on PSA. To our mind, timely elimination of the existing contradictions in the legislation and its further improvement will promote formation of positive law enforcement practice, which will allow to a maximum degree exclude conflict situations and disputes between participants of legal relations in the subsoil use sphere. Finally, it will positively tell on the investment attractiveness of the Republic of Kazakhstan economy.
For example, pursuant to Article 13 of the Law «On Subsoil and Subsoil Use», granting the subsoil use right to exploration, production, combined exploration and production shall be exercised through signing a contract between a contractor (subsoil user) and a Competent state agency of the Republic of Kazakhstan, represented now by the Ministry of Energy and Mineral Resources (hereinafter - MEMR). One may assume that contractor having obtained the right to the said types of subsoil use should get no more right-attesting (right-granting) documents from state bodies. One comes to such opinion on the basis of an interpretation of the said law provision.
In the meantime, the subsoil use practice knows examples where MEMR and its structural units or other state agencies having controlling and supervisory functions demand unfoundedly, to our mind, from contractor to conclude an additional contract or obtain a license and/or permit for certain types of activities that in essence constitute a chain in a single technological or production chain of the very process of subsoil use.
For example, if a contractor carrying out oil production in conformity with duly approved design and technical documents and work programs injects reservoir fluids or drilling sludge back to underground horizons, then the said state agencies treat these actions of the subsoil user as a violation of the legislation and demand from it entering into a separate subsoil use contract. However, this is quite a simplified approach resulting in infringement of rights of subsoil user
_________________________________ 1 As worded in the ROK Law dated 1 December 2004. 2As worded in the ROK Law dated 1 December 2004.
who already has the right to oil production.
To resolve such vexed issue one should refer to the rule of the Law «On Petroleum» (Article 1.4) that contains a legislative interpretation of the term «production» meaning «any operations associated with extraction of oil to the surface, including the following: Construction and operation of underground and surface industrial equipment and installations…; Extraction of oil to the surface, organization and maintenance of the working process in production wells; Processing and cleaning oil from mechanical admixtures and formation water; Extraction of accompanying components from oil and utilization of natural and associated gas; and finally Injection of drilling sludge into underground formations.»
So, if drilling sludge and formation waters received as a result of primary refinement of oil are injected by the subsoil user into underground horizons (built or natural) within earlier approved design and technological documents, there is no need to conclude an additional contract with MEMR, since contractor already has the right to oil production as per the basic contract, and the cited types of work, albeit associated with subsoil use, are covered by the legislative concept of «production».
Such understanding of provisions of the said laws and their correct interpretation to a maximum degree protects the right of subsoil user and in no way encroach on the state interests. As for a different interpretation of this provision of the law, it leads to a significant violation and restriction of subsoil user’s basic rights. Because, for instance, a full ban on the process of injection of formation water and drilling sludge into the subsurface without an additional contract jeopardizes realization of subsoil user’s basic right, e.g. to oil production, as it cannot realize this type of activities without compliance with all technological process stipulated by subsoil user’s design documents. And if such contractor proves to be a foreign investor, such approach of state controlling bodies will also entail violation of investor’s rights, which will already negatively affect the investment image of the country.
It should be noted that a subsoil use contract is not a simple civil law agreement, but a special contract, which by its structure and contents is a very complicated document subject to mandatory expert examination in several central governmental departments. In particular, the following types of expert examination are conducted: legal, environmental, economic, tax, health and sanitation, subsoil protection, mining supervision and Kazakh contents. Preparation and finalization of such contract takes considerable time amounting to many months, it is a labor-intensive process, and that is why subsoil users quite painfully treat such unfounded demands from state controlling bodies. Probably, the last word here belongs to MEMR and its territorial units who should promote correct interpretation of the above-mentioned provisions of the law and formation of correct and positive law enforcement practice.
Let us refer to Article 42.2-1 of the Law «On Subsoil and Subsoil Use» stipulating that in a subsoil contract « the terms and conditions of taxation shall be established in accordance with the new legislation of the Republic of Kazakhstan». A conceptual analogue to this provision is contained in Article 52 of the Law «On Petroleum» reading that «in conducting oil operations contractor shall be a payer of taxes and other mandatory payments pursuant to the Republic of Kazakhstan legislation».
Such categorical provisions do not always play a positive role in the course of negotiations on concluding a contract with potential subsoil users, as they exclude a possibility to obtain any tax benefits and preferences, if such potential subsoil user is not an investor in the sense of provisions enshrined in Chapter 5 (Investment tax preferences) of the ROK Tax Code. And as a rule, and more often than not, a possibility of granting such preferences in concluding a subsoil contract is considered by Competent state agencies only in relation to foreign investors. Under such circumstances, national investors find themselves in a less favorable situation than the foreign ones.
Unfortunately, state competent agencies do not always consider and do not treat all contractors on subsoil contractors as investors, as the ROK Law «On Investments» (Article 1) gives a very narrow interpretation of the terms «investment» and «investment activities». For example, if at the stage of signing a subsoil use contract a potential contractor does not plan to increase fixes assets but only invests its property as a share in the charter capital, then it is also difficult to obtain tax preferences. It often happens so that a subsoil user at the initial stage of subsoil development, e.g. in oil production, uses the available production potential, and plans to expand production and increase fixed assets only emerge when the project develops successfully and there is a financial advantage. But by that time, the subsoil use contract is already signed, and the state by that stage, as a rule, does not demonstrate any interest in granting the subsoil user any tax preferences.
I think in order to preserve attractiveness of the oil and gas industry for investments the above-said provisions of laws should be improved in the direction of legislative enforcement of possibilities of more flexible granting of benefits and preferences to subsoil users. It is very important at this stage of the Caspian Sea shelf development.
One more issue, to our mind, worthy of attention and discussion is a question of applicable law in the sphere of subsoil use.
For example, Article 4 of the Law «On Subsoil and Subsoil Use» establishes a general rule stating that «the relations emerging during subsoil use operations shall be regulated» by the Republic of Kazakhstan legislation. The provisions of Article 53-1 of the Law «On Petroleum» are still more specific. Pursuant to the cited rule of the said law «in relation to conducting oil operations on the territory of the Republic of Kazakhstan and offshore oil operations the law of the Republic of Kazakhstan shall be exclusively applied», further in this provision it is noted that «in contracts entered into with a competent body terms and conditions on application of a foreign law may not be established».
Under Article 31 of the Law on PSA «with regard to relations on conducting combined oil exploration and production or oil production on terms and conditions of production sharing the law of the Republic of Kazakhstan shall be exclusively applied».
There is also an exception to the general rules that is contained in item 3 of Article 53-1 of the Law «On Petroleum» where it is stipulated that «with regard to relations on conducting offshore oil operations on exploration and production, combined exploration and production carried out in near-border fields the law of the state opposite or adjacent to the Republic of Kazakhstan may be applied, if it is directly provided for by an international treaty of the Republic of Kazakhstan.
As we see from the cited legislative provisions, the key terms for defining the applicable law in the sphere of subsoil use are the following: «subsoil use operations», «oil operations» conducted on exploration and production, as well as the term «offshore operations». Thus, all other relations of contractor (subsoil user) not associated with «subsoil use operations», «oil operations» and «offshore operations»3 and emerging during the implementation of the subsoil use contract may be regulated by another applicable law elected by parties when signing the subsoil use contract.
Such interpretation of the above-cited provisions practically is not perceived by competent state agencies who think all relations arising in connection with the subsoil use should be exclusively regulated by the Republic of Kazakhstan law. To our mind, this is an erroneous position that should be revised in order to form a uniform and correct practice of oil legislation application4.
Disputes arise also in connection with the application of Article 63-1 of the Law «On Subsoil and Subsoil Use» when competent state agencies on the basis of interpretation of this legislative provision and other by-laws on the issue5 obligate subsoil users to hold biddings (tenders) in all cases of their acquisition of goods, work and services. In the meanwhile, we think, it is a wrong position of state controlling bodies, since the operating legislation determines that an open or closed bidding (tender) for acquisition of goods, work and services shall only be conducted by subsoil user where such are acquired for purposes of conducting «subsoil use operations». It should be noted that the «Rules of Acquisition of Goods, Work and Services in Oil Operations» approved by the ROK Government Resolution #612 dated 7 June 2002 as a follow-up of this legislative provision still more narrowed the criteria for conducting such bidding. The authors of these Rules seem not to have taken into account that circumstance that the terms «subsoil use operations» and «oil operations» are similar but not identical concepts.
Due to this, subsoil user shall be entitled to choose for itself the regime of acquiring goods, work and services, if these goods and services are acquired not for the purposes of conducting «subsoil use operations» and «oil operations». Such actions of subsoil user should be regulated by rules of the civil law of the Republic of Kazakhstan. However, despite the requirements of the law a very funny situation is formed in the everyday life when subsoil users are «made» buy pencils and toilet paper through holding a tender. A paradox, indeed…
One cannot help but dwell on still another acute problem. Pursuant to Article 62 of the Law «On Subsoil and Subsoil Use», subsoil user shall have the right to «use at its discretion the results of its activities, including raw minerals, if otherwise not provided for by the contract». Naturally, every subsoil user in order to obtain the best financial advantages from its activities is interested in selling its products against prices not lower than the world prices; as a rule, it is achieved through export of products, e.g. oil and gas, to the world raw materials markets. As is known, some foreign subsoil users in Kazakhstan under the contract have the right of free export of their products. In general, it is a normal situation evolving within the operating legal field.
But what do we see in practice. Unfortunately, from year to year, tough requirements towards subsoil users producing oil and gas are imposed by MEMR who insists on selling a part of the products to the internal market in order to normalize the situation with selling combustive-
___________________ 3 «Oil operations» - work on exploration, production, construction and/or operation of underground oil storages and tanks conducted on land, within rivers, lakes and other internal water reservoirs, as well as oil offshore operations (see Article 1.20 of the Law «On Petroleum»; »Offshore operations» - exploration and production conducted at sea (item 21 of the Law «On Petroleum» 4 See for more detail «Scientific commentary of Article 53-1 of the Law «On Petroleum», Yu.G.Basin and M.K.Suleimenov, KPLA magazine «Subsoil Use and Law», #1, 2005, Almaty, «Complex». 5See «Rules of Acquisition of Goods, Work and Services in Oil Operations» approved by the ROK Government Resolution #612 dated 7 June 2002.
lubricating materials, naturally, at prices significantly lower than the market ones. Of course, these intents of the competent state agency are understood, since the satiation of the domestic market with oil products and retention of prices at the level of purchasing power of the population is a major duty of the government. However, there also exists a law, whose provisions should be undeviatingly observed, first of all by the authorities themselves.
If we refer to Article 67 of the Law «On Subsoil and Subsoil Use», the Republic of Kazakhstan indeed has a priority right to acquisition of subsoil user’s minerals at prices not exceeding those of the world market.
A provision more favorable for the subsoil user is contained in Article 35 of the Law «On Petroleum» where it is stated that «the Republic of Kazakhstan shall have the top-priority right to acquisition of oil from the share of a foreign subsoil user or non-governmental subsoil user of the Republic of Kazakhstan at world market prices», i.e. at prices not lower than the world ones. As regards the requisition of minerals from the subsoil user, it happens in extreme cases described in the law (Article 68 of the Law «On Subsoil and Subsoil Use», Article 36 of the Law «On Petroleum») and on compensatory conditions.
Hence, the conclusion to what extent the requirements of the competent state body towards subsoil users, especially foreign and non-governmental ones, on selling a part of their products (oil and gas) at prices considerably lower than the world ones are legal. Probably, here some other market mechanisms should work, but not a state unlawful dictates. The state’s proposals to subsoil users on providing the domestic market with hydrocarbons should be mutually beneficial for both parties, in the first place from the economic point of view. For example, now we know about counteroffers from some subsoil users on a possibility to sell a part of their products at world prices minus transportation costs. One would think it is an acceptable scheme of mutual relations.
I cannot help but also focus your attention on the problem associated with the new wording of Article 30-5 of the Law «On Petroleum» taking effect. Introduction of this regulation into the law resulted in that practically all subsoil users producing hydrocarbons were «outlawed» and announced infringers of the said legal act, since pursuant to this provision of the law, industrial development of oil and gas fields without utilization of associated and/or natural gas was prohibited. This imperative regulation was introduced without taking into consideration the present state of the oil and gas industry when not a single oil and gas production in Kazakhstan occurs without gas flaring. Moreover, such gas flaring by subsoil users is done on the basis of already duly approved design, technical and other technological documents6 ensuring the technology of oil and gas production with a possibility of gas flaring. It should be noted that development and approval of such design, technical and technological documents actually is realization of contractual terms and conditions, and they are realized on the basis of mandatory provisions of by-laws and departmental acts adopted as a follow-up of legislative requirements. In other words, availability of such documents testifies to the legal activities of subsoil users.
As for reorientation of large-scale oil and gas production to a new technology excluding gas flaring requires a reasonable time amounting to several years, and considerable capital investments boiling down to hundreds of millions of US dollars.
Thus, the new wording of Article 30-5 of the Law «On Petroleum» does not contribute to _________________________ 6 For example, «Technological scheme of oil field development», «Oil field development project», «Oil field construction project», «Sanitary protective zone of an industrial facility» etc. raising efficiency of oil and gas production, it subjected subsoil users to significant financial expenses consisting of mandatory payments made by subsoil users in connection with gas flaring. The adoption of this legislative regulation also entailed infringement on subsoil users’ rights stipulated by the contract. Unfortunately, in this case the state presented itself as an unfair party in interrelations with subsoil users, first of all in mutual relations with foreign investors who put multibillion investments into Kazakhstan’s economy.
As a citizen of Kazakhstan, I am also interested in environmental well-being of the country, but as a lawyer I cannot welcome ill-conceived actions of the government that undermine its authority and reputation. The adopted laws should be executed and if they are not, albeit for objective reasons, then they discredit the legal system of the state.
What should be the way out of the existing situation in connection with the said regulation of the Law «On Petroleum»? I think that given that this legislative provision has the right to existence, since it is designed to ensure environmental security of the country and health of the population, it should not be repealed, but it is necessary through passing an additional law to declare a moratorium on its action for a period of up to five years, simultaneously increasing the rates of mandatory payments for gas flaring. Such a deadline will allow subsoil users to conduct modernization of their production aimed at full utilization of gas. They will be interested in reorientation to a new production, since in the period of the moratorium, they will incur significant financial expenses in connection with making mandatory payments for emissions into the atmosphere, and on expiry of the moratorium, their actions will fully contradict the law. It will be a reasonable and just step on the part of the state.
Having highlighted in my presentation imperfect provisions of the Republic of Kazakhstan laws regulating the sphere of subsoil use, I did not pursue the aim of criticizing the power structures and the existing legislation of the country. As well as many my colleagues working in this branch of Kazakhstan’s economy, I want my country to live in a legal field with laws working and protecting not only the interests of the state, but also those of all subjects of legal relations, with economy developing more successfully, with democratic institutions becoming firmly established, and state officials, in the first place, themselves strictly abiding by the laws, and the investment climate of the country becoming still more attractive. It will be a win-win situation.
It is fair to note that the legal system of Kazakhstan and its legislative base are the most progressive in the post-Soviet space, but as the saying goes, there are no limits to perfection. And the issues of perfecting legislation should be dealt with not only by those who adopt it but also by those who execute and apply it. Only in such harmony the highest degree of Legality, Law and Order, Justice and Responsibility of all for the state of our common World can be achieved.
Доступ к документам и консультации
от ведущих специалистов |