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INTERVIEW with Zh.S. Yelyubayev
Question: How would you characterize the legal framework of oil and gas companies’ operation in Kazakhstan?
Answer: So far as to say, the current legislation of the Republic of Kazakhstan that regulates in the sphere of subsoil use, specifically in the oil and gas sector, is quite normal, though I used to criticize specific provisions in my publications and in mass media. The purpose of my criticism is to have our legislation stabilized and based on generally accepted legal principles and ensuring a balance of the interests of the state, community and subsoil users.
I should note with satisfaction that the Republic of Kazakhstan started its new history by establishing in 1992 a legal institute of granting subsoil use rights under a special contract as a precedent and legal basis for the coming of transnational energy companies to Kazakhstan, specifically the oil and gas industry. For example, Tengiz, Karachaganak and other minor projects commenced due to the provisions of this regulatory legal act (Code on Subsoil and Processing of Mineral Raw Materials). Subsequently, the Decrees of the RoK President, having the force of a law («On Oil», 1995; «On Subsoil and Subsoil Use», 1996), as well as the RoK Laws: «On Production Sharing Agreements (Contracts) Applicable to Offshore Oil Operations» (2005), RoK Law «On Subsoil and Subsoil Use» (2010) set up a contractual format for granting subsoil use rights as a key legal instrument for all subsoil use entities. Based on the above legal acts a number of subordinate acts and industrial regulations were adopted to streamline relations in the sphere of subsoil use, specifically in the oil and gas industry.
The Kazakhstani legislation on subsoil and subsoil use is the most advanced in the post-Soviet region, and should the RoK Government ensure its stability, many existing problems in this industry disappeared. Law-making itching characteristic for government authorities and their desire to resolve all challenges by numerous amendments to the applicable legislation affected the legal and resulted in disruption of the process of legal regulation of subsoil use. A negative factor here is also the lack of uniform law enforcement practices, including litigation, which causes «higher temperature» in relations between government authorities and subsoil users.
Summarizing my answer I should note that perfect laws do not and cannot exist. The applicable legislation of the Republic of Kazakhstan on subsoil and subsoil use cannot be referred to the category of «model» laws and regulations; however they are able to regulate relations in the sphere of subsoil use, therefore the legal framework of oil and gas companies’ operations in Kazakhstan exists. Given equal and duly observance by the parties to legal relations of the provisions of the applicable legislation, risks in oil and gas companies’ operations can be mitigated and the rule of law can be maintained. But apart from laws general principles of legality, justice and equality of all parties to legal relations must be in effect (must work).
Question: What are the key provisions of the RoK Law «On Subsoil and Subsoil Use»?
Answer: The overview of the above mentioned legal act, in my opinion, reveals that the most significant provisions thereof are the following: subsoil is the state property; legal entities of Kazakhstan and foreign legal entities, as well as the citizens of the Republic of Kazakhstan and stateless persons enjoy equal rights and have equal obligations in the sphere of subsoil use; relations in the sphere of subsoil use are generally established on a compensatory basis; mineral resources can be both the property of the state and the property of a subsoil user; the right to use subsoil in most cases is granted under a contract; the state has a preemptive right to subsoil use; a subsoil use contract can be executed for a long term; commercial development of oil and gas fields without processing and/or utilization of natural gas is prohibited; a subsoil user should establish a liquidation fund; disputes related to performance of, amendments to and termination of a contract can be resolved both in accordance with the legislation of the Republic of Kazakhstan and on the basis of international agreements ratified by the state. Obviously, the effect of some of these provisions is subject to a number of conditions, regulations and procedures. Nevertheless, these provisions of the applicable RoK Law «On Subsoil and Subsoil Use» are very important in the regulation of relations in the sphere of subsoil use, including oil and gas industry.
Question: Can the legal regime of the subsoil users in Kazakhstan be called less or more rigid than in other countries?
Answer: I do not think that the legal regime which regulates subsoil users’ operations in Kazakhstan either less or more rigid as compared to the applicable regimes in other countries. In my perspective, the legal regime is normal and quite appropriate for the development of this sector of economy. Moreover, this regime is attractive for foreign investors. It is neither less nor more rigid than the existing regimes in other countries, though it has its own specifics, i.e. a «Kazakhstani pattern», determined by a transition from planned economy to market economy, from one political system to another; let’s call it a transition to institutions of democratic government.
However our legal regime, differs by complicated bureaucratic processes, e.g. in the sphere of drafting, concurrence and approval of project documents, obtaining different permits, corruptive nature of some of the existing procedures, unreasonable interference of various government authorities in the operations of subsoil users etc. Nevertheless these negative aspects of the legal regime in Kazakhstan do not impede the development of subsoil use in our country, which is up to date remains the «locomotive» of the economy of Kazakhstan.
Question: Do any discrepancies in the legislation of Kazakhstan regulating the oil and gas sector exist, specifically those relating to the protection of the investors’ rights, regulation of market prices or the issues of geological exploration and protection of the national interests? Как Вы видите решение данных проблем?
Answer: Of course, they exist and to a certain extent they have an impact on the investment climate and the development of the oil and gas industry. Some discrepancies are of fundamental nature; their removal would have a positive effect on the improvement of the legal framework of subsoil users, inflow of foreign investments. Other discrepancies are of local nature; to a less or greater extent they have an impact on the regulation of relations in the sphere of subsoil use. In should be noted here that relations in this sphere of economy are regulated not only by the legislation on subsoil and subsoil use. E.g. a number of subsoil use relations are regulated by civil law, environmental law, tax law, land law and investment law, therefore their rules should match the legislation on subsoil and subsoil use. For example, the RoK Law «On Subsoil and Subsoil Use» stipulates the right of the competent authority to require amendments to the terms of a subsoil use contract for the purpose of protection of the economic interests of the Republic of Kazakhstan. Given that a subsoil use contract is based on civil law, any amendments to the contract should be made in accordance with the general rules of the civil law by the agreement of the parties or court decision (Article 402 of the RoK CC), and in the procedure stipulated in the contract. As a rule contracts provide a procedure for amending a contract by agreement of the parties. It should be noted that the said Law does not contain a specific provision regulating a procedure for amending a contract; hence in this case the rules of the civil law apply. It is important in this case to determine who and how would establish a fact of violation of the «economic interests» of the Republic of Kazakhstan - the competent authority or a specific governmental official? Evidently, this circumstance should be confirmed by a doubtless expert opinion, certain economic estimates etc. There are many questions, and there are no answers thereto… Based on the above, relations pertaining to the amendment6s to a subsoil contract should be regulated by general rules of the RoK CC. Another example: the RoK Law «On Subsoil and Subsoil Use» contains regulations with respect to an opportunity to unilaterally terminate a subsoil use contract. Further, this regulatory legal act does not contain a process, procedures for and end date of termination of a contract. It is not specified what is the form of termination of a contract; except contracts executed on strategic fields (in this case the approval by the RoK Government is required). Given that special legislation does not regulate these issues, he rules of the civil law establishing a procedure for terminating a contract unilaterally shall apply. Meanwhile the current practice of terminating subsoil use contracts shows that non-judicial procedure is used and the competent authority issues respective orders which are challenged by a subsoil user in court. In the above case we see discrepancies between the current subsoil law and civil law. Another example: pursuant to Clause 5 of Article 61 of the RoK Law «On Subsoil and Subsoil Use», mandatory attachments to a contract, except contracts for state geological survey of subsoil, are geological and mining allotments, which should be designed by a winner of bidding or an entity who obtained the right to use subsoil by direct negotiations. However Article 68 of the named law which regulates a process of execution and registration of contracts does not stipulate geological and mining allotments as mandatory documents that should be available prior to the execution of a contract. In practice there are often situations where mining and geological allotments are designed and obtained by a subsoil user after the execution of a contract. Meanwhile under general rules of the civil law all attachments to a contract should be available at the execution of a contract, because they constitute an integral part of this important document affecting the rights and obligations of the parties thereto.
Such discrepancies in the subsoil legislation are numerous; therefore for the purpose of normal performance of subsoil use contracts the following fundamental principles of the civil law should have full effect: equality of the parties to legal relations; freedom of contract; good faith, as well as such legal institutes as analogy in law and analogy in statutes. Just law enforcement practice, including judicial practice, needs to be established. As per protection of investors’ interests, there applies the RoK Law «On Investments» (2003), the rules of which extend to both foreign and national investors. The Republic of Kazakhstan provided to foreign investors certain tax benefits and preferences, special conditions for export/import and currency transactions, special rules for retaining foreign workforce etc. All these special rules and conditions were fixed in contracts, and the contracts were approved, as a rule, by the resolutions of the RoK Government or special acts of the President of the country. Such approach allowed Kazakhstan to create a positive and attractive investment regime which is one the factors of economic boom, development of oil and gas and non-resource industries. Attracting foreign investments helped resolve complicated social issues, and also assertion of Kazakhstan as a serious partner in foreign relations. Currently in the conditions of somewhat political and economic stability in the country there appeared many critics of the first investment agreements and contracts for subsoil use, who believe that Kazakhstan placed itself in unfavorable conditions in its relations with foreign investors, and it’s time to revisit the executed contracts in order to secure the interests of the Kazakh state and its citizens. As a legal scholar, I could be an advocate of such proposals on the following grounds. First, at the time of execution of the first investment agreements and contracts for subsoil use, a number of key legislative and other acts were effective in Kazakhstan; they allowed the Government of the Republic of Kazakhstan and domestic business entities to attract foreign investments and to grant them certain benefits and preferences. E.g. Article 3 of the Law of the Kazakh SSR «On Foreign Investments» dated December 7, 1990 (repealed) stated that «the items of foreign investments in the territory of the Kazakh SSR may be enterprises, shared participation in the property of soviet legal entities, shares and other securities, other property, and the acquired property rights and rights to use natural resources in the Kazakh SSR to carry out economic and other activities in the territory of the Kazakh SSR». Article 9 of the named Law defined that «foreign investments are allowed in any sphere of economic and other activities, except of manufacture of products for military purpose». Legal entities with foreign participation were granted rights to independently resolve issues related to the terms of employment, dismissal, working conditions, as well as provision of benefits, guarantees and compensation to all enterprise employees (Article 12 of the named Law). Property imported into Kazakhstan as foreign investments for the purposes other than sale was not subject customs duties (Article 16 of the named Law). Pursuant to Article 20 of the above Law of the Kazakh SSR, foreign investors were granted together with benefits stipulated by the then tax legislation additional tax benefits. Thus, the statements by «contemporary critics» of invalid acts of the Government of the Republic of Kazakhstan on the transfer of subsoil to foreign investors and foreign legal entities for use allegedly without taking into account the state interests and in violation of the effective law, as well as their initiatives to revise certain privileges and preferences granted to subsoil users are groundless and unrelated to the real economic situation in early 90’s of the last century, when foreign investors were attracted as the result of the economic growth and transition to the market economy. On the contrary, present achievements of the country confirm the righteousness of the acts of the President and the Government of the Republic of Kazakhstan, while current legislative provisions guarantee stability of the executed contracts, and strict rules and grounds for amendments to these contracts. In conclusion, to give exhaustive answers to your questions I would like to say that subsoil and subsoil use legislation does not affect prices of fuels and lubricants in the Kazakhstani market. On the one hand, it seems that there is enough oil in our country to meet the needs of the consumers of gasoline and other fuel resources. However the problem is that there are only three oil refineries in Kazakhstan, which alternately become the subject of modernization, hence prices, e.g. of gasoline gradually increase by years. The subsoil users are not to blame. As a consumer myself I do not understand why during past 20 years new refineries were not built to ensure a 100% supply of gasoline and lubricants to the population, and to stop being dependent on the Russian market. I think that all these years it was profitable to export crude oil, given high prices in the international markets. Perhaps, I am mistaken. But the irony is that the oil power lacks F&L. I assume that this is the concern of the RoK Government as well as the line ministry which does not move a finger without looking up … Question: How did legislation regulating Kazakhstani content relations (procurement of goods, services and national workforce) in the oil and gas industry change during the last twenty years? Answer: Currently pursuant to the effective provision of the RoK Law «On Subsoil and Subsoil Use» there are concepts of «local content in works, services», «local content in staff», «local content in goods», which in aggregate can be named Kazakh Content. The new law introduced new definitions: «registry of goods, works and services used in subsoil operations» and «uniform methods of estimation by organizations of the Kazakh Content in procurement of goods, works and services». The last legislative innovation also expanded the scope of a subsoil user’s obligations; a subsoil user shall: provide to the competent authority a report on the performance of its obligations on the Kazakh content in staff; inform the competent authority on the amendments and/or additions made to the annual program of procurement of goods, work and services; make entries in the registry of goods, works and services used in subsoil operations. As we see, new legislative provisions, requiring that subsoil users purchase Kazakhstani goods, works and services, do not set any requirements to the producer of goods, performer of works and provider of services. This circumstance cannot motivate a producer of goods and provider of services to improve the quality of their products, their competitive capacity because the issue of their implementation has been determined at the legislative level. Thus, relations connected with the «Kazakh Content» are most difficult to regulate for a number of reasons: First, Kazakh content in subsoil use is secured by imperative rules in the legislation, which is not so attractive in business based on the market laws and contemporary production management; Secondly, there are no economic instruments to regulate relations associated with the employment of Kazakh personnel and Kazakh commodity producers; Thirdly, the system of public administration is strongly bureaucratic and there is no sole government authority responsible for the implementation of state policy in import substitution; Fourthly, frequent amendments to the legislation that regulates relations ensuring Kazakh Content in this sphere of economy do not allow establishing an efficient practice of contracting Kazakh personnel, goods, works and services. Besides this the increase of Kazakh content in subsoil use is prevented by: low competitiveness of national products; lack of sufficient current assets and advanced technologies with Kazakh producers; new and qualitative products, which would hold out for foreign analogues; lack of research and development base; high prime costs of goods and services. In conclusion it is worth to note that the development in Kazakhstan of its own industry to meet the needs of subsoil users should be a key objective of the state related to diversification of economy and development of the non-raw materials sector. It is assumed that in order to ensure Kazakh Content in subsoil use legally and in a civilized manner the following is required: creation of competitive, science-based and high-tech productions to meet the needs of the sphere of subsoil use; this process can be expedited if internationally reputed industrial brands are used through establishing joint ventures and providing them most attractive conditions for investments; implementation of international quality standards for products of national producers; training of highly-qualified and professional staff in view of maximum substitution of foreign specialists with national personnel; development of effective economic models stimulating subsoil users to revise effective contracts in order to include Kazakh Content obligations; granting to subsoil users tax benefits and other preferences in exchange for their efforts to use Kazakh goods, works and services and workforceв; simplification of the process of monitoring subsoil users’ activities related to their commitments on Kazakh Content ensuring its transparency; ensuring stability of the legislation and establishing a uniform law enforcement practice. Question: What do legislative restrictions exist in the oil and gas sector regarding foreign companies’ participation? Answer: It should be noted that in general foreign companies operating in the oil and gas sector have the same rights as the national companies. However there are certain restrictions for foreign companies set in different branches of the legislation of the Republic of Kazakhstan. Thus, e.g. migration and labor legislation of the Republic of Kazakhstan set restrictions to the use of foreign workforce, and determine a strict procedure for its employment in the territory of the Republic of Kazakhstan (quotas, permits, visas, registration etc.). However, pursuant to Article 11 of the Energy Charter Treaty, Kazakhstan committed, subject to its laws and regulations, to examine in good faith requests by investors for key personnel to enter and remain in its areas to engage in activities connected with the making or the development, management, maintenance, use, employment or disposal of relevant investments, including the provision of advice or key technical services. The Republic of Kazakhstan also committed «to permit Investors of another Contracting Party which have Investments in its Area.., to employ any key person of the Investor’s choice regardless of nationality and citizenship provided that such key person has been permitted to enter, stay and work in the Area, and that the employment concerned conforms to the terms, conditions and time limits of the permission granted to such key person». The analysis of the above provisions of the named international legal act, a party to which is Kazakhstan, reveals several important points which reflect the essence of the commitments of the country and terms of employment of foreign workforce in the energy sphere, including the sphere of subsoil use. These terms are as follows: - First, Kazakhstan’s commitments extend only to the investors from the countries that signed and ratified the Energy Charter Treaty; - Secondly, Kazakhstan complies with its commitments subject to the investors’ compliance with the laws and other regulations of the Republic of Kazakhstan regarding the entry, stay and employment of individuals; - thirdly, a permit to enter the country to work is granted only to those individuals who are referred to «key persons» and for the purpose of possession, use and disposal of investments; and - Fourthly, an investor has the right at the investor’s sole discretion to employ any «key person», if such key person has a permit to enter into the country where there are conditions for employment.
Thus, the provisions of this international treaty, a party to which is the Republic of Kazakhstan, give preference to the rules of national legislation in the employment of foreign workforce to be used in the energy sector. Meanwhile this international legal act also obliges the Republic of Kazakhstan «to examine in good faith requests by investors» for permits to employ foreign personnel; it suggests thoughtful and objective approach of the competent government authorities, excluding unmotivated and ungrounded refusal to issue permits. The application of the above provision of the Energy Charter Treaty requires the interpretation of the term «key personnel». What is understood by this term? The practice of implementation of the above Treaty shows that following may be referred to the category «key personnel»: investment project managers, key managers and supervisors handling the matters of possession, use and disposal of assets (investments); employees with rare specialties that are not available at the labor market of the Republic of Kazakhstan. The results of the analysis of Article 11 of the Energy Charter Treaty shows that its provisions maximally ensure a balance of the interests of the parties to this international treaty, of the investing subsoil users and employees; and protect the labor market of Kazakhstan from ungrounded and uncontrolled import of foreign workforce. The absence of provisions on investment-related tax privileges in the investment law can be deemed restrictions. In general, the investment climate in Kazakhstan is normal, though foreign companies operating in oil and gas sector have concerns over frequent changes to the legislation, unjust judicial practices, interference of government authorities with the activities of a subsoil user, the bureaucratic system of document approval etc. Question: Several years ago mass media discussed an issue of the Kazakhstan Government’s intention to revise a number of contracts for subsoil use in oil and gas industry, concluded in 1990s for the purpose to enhance the role and increase the share of Kazakhstan in these projects. What is the current situation in this sphere? Could the RoK Government achieve anything? Answer: This issue was both discussed and resolved. There are instances of cancellation and unilateral termination of contract. How it was done is a subject of another discussion; there are many nuances there… There were cases of appropriation of shares in major projects to the Republic of Kazakhstan, e.g. after lengthy negotiations and subsequent compromise the Republic of Kazakhstan could acquire a 10% share in the Karachaganak project. The state was indemnified for delay in the commissioning of the Kashagan Field. Thus, recent practice allowed the Government of the Republic of Kazakhstan to enhance its role in subsoil management.
However it should be noted that the Republic of Kazakhstan did not attempt any unilateral, aggressive and illegal actions aimed at the revision of major contracts executed in early and mid-90s of the last century to develop, e.g. Tengiz and Karachaganak fields. It is a positive factor for investment climate in the country. In the civilized world contracts should be revised on the basis of a voluntary expression of intention by the parties subject to a balance of interests of the state, community, subsoil users and investors. Question: How will the legislation of the Republic of Kazakhstan regulating oil and gas sector change in connection with the participation of the country in the international economic organizations EAEU and WTO? Answer: I would like to use the following thesis to answer your question: «the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and the well-being of the people of the State». (UN General Assembly Resolution No. 1803 «Permanent Sovereignty Over natural Resources», Article 1). Therefore regardless the participation/membership of the Republic of Kazakhstan in political, economic and other international associations, our subsoil legislation must be developed, first of all in the interests of the state, community and citizens of this country. Subsoil is the exclusive property of the state and constitutes the basis of the sovereignty and independence of the country. Nevertheless, the legislation of the Republic of Kazakhstan should ensure the integration of our country into the global economic relations not only in the sphere of subsoil development. We cannot be outside globalization process, as this process is not «at the gates of our country, it is in the yard», therefore our legislation should serve the development of our economy within the framework of different integration structures. Question: What ideas and solutions do you propose for improvement of the Kazakh legislation regulating oil and gas sector? Answer: In my perspective, now it is time to reflect on our experience in subsoil management during the years of independence, make a comprehensive analysis of the current legislation and law enforcement practice, international experience of subsoil development, and based on the results of such analysis and conclusions made to commence a process of cardinal reforms of subsoil legislation. Recently the Government of the Republic of Kazakhstan adopted a decision to develop a Code of the Republic of Kazakhstan «On Subsoil», which will consist of the General and Special Parts; and it will cover all types of subsoil use. The Working Group has been formed and I am its member; there has been developed the Concept of this regulatory legal act, there was reviewed the experience of the leading countries in subsoil use, e.g. of Norway, Australia, USA, UK etc., and there were engaged foreign and Kazakhstani experts, scientists in Natural Resources Law, professional and industrial associations, representatives of major subsoil users. The Concept envisages the following innovations which can be descriptively named new principles and methods of regulation of subsoil use relations: Ø Principle of non-discretionary regulation (i.e. regulation which is not subject to discretion of an official). An official or a government authority should make a decision, providing that an applicant performs all obligations or complies with the established requirements. Ø Principle of optimization and determining the entire scope of competence of government authorities. The powers of the government authorities should be well defined and clear; the law should exhaustively define the terms of exercise of these powers. Exclusion from their competence of the issues related to the sphere of economic expediency and effectiveness in favor of market mechanisms of regulation and self-regulation. Ø Principle of presumption of good faith of a subsoil user; in relations between the state and a subsoil user, the state should be based on the assumption of good faith, law obedience and expediency of actions of a subsoil user. Ø Principles in the sphere of rational and complex use of subsoil. Avoidance by the state of imposition of economic, technical conditions and parameters of field development, except for requirements related to human safety and environmental protection. Ø Principle of «performance-based regulation». Requirements to ultimate/interim results. A subsoil use chooses methods for achieving results at its sole discretion. Ø Transition to the methods of economic incentives. Introduction of progressive payment rates for subsoil use and minimum financial obligations for the period of exploration (instead of social obligations, signatory bonus, land tax, property tax etc.). Ø Open access to information. It suggests open access to geological information as well as to decisions of competent authorities for all interested parties at the designated internet resources and other sources. Ø Transition to international reserve estimation standards. It is necessary to envisage a transition to the international reserve estimation standards as most flexible and market-based methods. Ø Separation of prospecting and evaluation works from the entire exploration phase. Ø New foundation for subsoil operations (license, contract). Ø Guarantees to investors, e.g. a guarantee of return of investments made, unconditional transition from exploration to production, stability of provisions of production contracts at the stage of exploration, guarantees of stability of legislation. Exceptions can be stipulated in case of national security, including the issues of environmental safety. Ø Alternative methods of dispute resolution. It is proposed to envisage an opportunity of alternative methods of resolution of disputes between a subsoil user and the competent authority, including Kazakhstani arbitration courts and/or international arbitration. Ø Improvement of the fiscal system: exploration incentives; cancellation of signature bonus, historical costs; introduction of progressive payment rates for subsoil use instead of land and property tax, social and other deductions; relief from VAT on geological exploration; cancellation of commercial discovery bonus as a punishment for discovery; simplification of the procedures for applying benefits to low-profitability fields and fields with complicated conditions of production; etc. If these legislative innovations have been made a basis of the new RoK Code on Subsoil, we can say that the reform of subsoil legislation has passed successfully. But another task will come up - to ensure the stability of this legislative act and secure it from hasty amendments and additions. Thank you for an opportunity to discuss very interesting issues which has been the subject of my studies for over 16 years.
Sincerely, Zhumageldy Sakenovich Yelyubayev, Doctor of Law, Professor, Corresponding Member of the St. Petersburg Academy of Science and Arts (RF)
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