Granting subsoil use rights in Kazakhstan: current procedure and proposed amendments (by Almas Zhaiylgan, Partner; Nurzhan Albanov, Senior Associate Dentons Kazakhstan)
Granting subsoil use rights in Kazakhstan: current procedure and proposed amendments
by Almas Zhaiylgan, Partner
Nurzhan Albanov, Senior Associate
In 2013 the Government of Kazakhstan announced the lifting of the moratorium on granting subsoil use rights that had been in place for several years. In addition, last year the Government prepared draft amendments to the Subsoil Law that are currently under consideration in Parliament. Given these developments, this article focuses on currently existing procedures for granting subsoil use rights by the State as well as the related proposed amendments to the Subsoil Law. We understand that the draft amendments were prepared jointly by the Ministry of Oil and Gas (MOG) and the Ministry of Industry and New Technologies (MINT).
Currently subsoil use rights may be granted by the State either through tender or direct negotiations. Below we briefly describe the procedure and requirements entailed by both options.
1.Tender for granting subsoil use rights
As a general rule, subsoil use rights must be granted through a tender. The list of subsoil areas to which the exploration/production rights can be granted through a tender must be approved by the Government. A tender can be conducted only for subsoil areas included in this list. The latest lists, approved by the Government in December 2013, include 105 solid mineral deposits and 3 hydrocarbon fields.
A notice of a tender with its conditions must be published in periodicals distributed throughout Kazakhstan. The notice must indicate the main terms and conditions of the tender as well as, inter alia, minimum requirements for the signature bonus and local content. Any interested party must apply to participate in the tender within 1 month from the date of publication of the notice. The tender must be held not later than 4 months following publication of the notice.
A party wishing to participate in a tender must pay a non-refundable participation fee and file a participation application. Once the application is accepted, the applicant must submit a tender proposal within a specified period.
The tender proposal should contain basic information regarding the applicant, the proposed signature bonus as well as documents confirming the bidder’s ability to pay the signature bonus, the proposed level of investment into the region's social infrastructure, employment and training commitments for Kazakhstani personnel, local content in goods, work and services, proposed expenses for research and development, obligations on accession to the Memorandum of Understanding in relation to the Extractive Industries Transparency Initiative (EITI) in Kazakhstan and a copy of a document confirming payment for the acquisition of geological information. After the deadline for submission of the proposal, the proposal cannot be revoked or amended.
A tender commission must determine the winner on the basis of the following factors: (1) the amount of the signature bonus, and (2) the amount of proposed expenditures for the region's social infrastructure. The winner of the tender must be determined within 15 days (which may be extended) following the deadline for submission of the tender proposals and must be identified in the Minutes signed by the members of the Tender Commission.
The Proposed Amendments suggest introduction of a new procedure for granting subsoil use rights based on international practice. This new procedure is referred to as «competitive bidding» (in Russian: «конкурентные торги»), but for the sake of simplicity we prefer to refer to this procedure as an «auction». Granting of subsoil use rights through an auction is meant to be an additional, more simplified form of a tender.
From the explanatory notes to the Proposed Amendments we understand that the reasons behind introducing the auction are the current drawbacks of the tender procedure: i.e. extended duration of the entire process, lack of opportunity to improve proposals after submission, and so forth.
According to the proposed changes, the sole criterion for determining the winner of an auction will be the amount of the signature bonus, which may be increased during the auction. The person who offers the highest signature bonus (whose bid is not exceeded after three announcements) will win the auction and enter into a subsoil use contract. All other terms and conditions are expected to be fixed in the auction announcement and shall be automatically included in a subsoil use contract concluded with the winner.
According to the Proposed Amendments, any party is entitled to participate in an auction, provided that it (i) pays for the geological information; and (ii) registers as a participant in the auction prior to its commencement.
The period for submitting an application to participate in an auction may be no less than 1 month after the date of the announcement. The auction must be conducted no later than 3 months following publication of the auction conditions. The results of the auction must be announced on the date of the auction and later published in an official publication in the Kazakh and Russian languages, as well as on the official website of the government agency that conducted the auction.
The question of whether a given subsoil use right should be granted through a tender or an auction, will be determined by, inter alia, the relevant lists approved by the Government. Presumably, the Government will be approving lists of deposits, which must be granted either through tender or auction. However, there are certain cases where a given block will be granted only through a tender. According to the Proposed Amendments, if a subsoil user (having made a commercial discovery based on an exploration contract, and therefore having exclusive rights to proceed to production) and MOG/MINT fail to enter into a subsoil use contract for production, and this is the subsoil user’s fault, the subsoil user shall lose its exclusive right, and the relevant deposit shall be offered to other parties through a tender or direct negotiations (if applicable).
2.Grant of subsoil use rights through direct negotiations
Currently only the following types of contracts may be entered into through direct negotiations:
·production contracts with parties holding exclusive rights to obtain production rights if there is a commercial discovery under a previously granted exploration contract;
·contracts for construction and/or operation of underground facilities not connected with exploration and/or production;
·contracts for exploration and/or production operations with a national company;
·contracts for exploration and/or production operations with the subjects of industrial innovation activities;
·contracts with a sole participant in a tender when a repeated tender for exploration and/or production rights is declared invalid as a result of the submission of only one tender proposal;
·contracts for underground water production with a volume exceeding 2,000 cubic meters per day in cases provided for by law.
Generally, MOG/MINT shall determine the lists of deposits to which subsoil use rights may be granted through direct negotiations. Direct negotiations must be conducted by specially created MOG/MINT working groups.
According to the Subsoil Law, a party interested in direct negotiations must apply to MOG/MINT in accordance with legal requirements. MOG/MINT must provide a response within 2 months. If a positive response is received, direct negotiations must be conducted within 2 months from the date on which the application was submitted. If necessary, MOG/MINT is authorized to extend this deadline.
The results of direct negotiations depend on proof that an applicant is capable of performing its obligations under the subsoil use contract. This decision must be documented by a protocol of direct negotiations signed by the members of the working group. Thereafter MOG/MINT is obliged to notify the applicant of the results of direct negotiations within 10 days. MOG/MINT and the applicant enter into a subsoil use contract according to the general procedure established by the Subsoil Law. The terms and conditions offered by the applicant in its application must be reflected in the subsoil use contract.
Another recommendation in the draft amendments is the possibility to grant exploration rights through a simplified procedure («Simplified Procedure»). In our view, the Simplified Procedure is one of the most important novelties in the Proposed Amendments which is aimed at encouraging more exploration in Kazakhstan.
It is proposed that the Government approve a list of subsoil areas for which exploration rights will be granted through the Simplified Procedure. Following approval of this list, MOG/MINT will announce acceptance of applications for these areas.
Any party obtaining geological information for these areas may apply to MOG/MINT to engage in direct negotiations. The application must be considered within 10 working days. Once the application is accepted, the applicant and the competent authority commence direct negotiations over 10 working days with the possibility of an extension for the same period.
The Proposed Amendments establish an exhaustive list of grounds based on which the application may rejected. These include the following:
·the requested territory extends beyond the boundaries of a subsoil area for which an applicant obtained geological information;
·the requested territory exceeds the size limits established by the Kazakhstan Government;
·MOG/MINT has had a negative experience with an applicant (in particular, if within the past 3 years MOG/MINT unilaterally terminated a subsoil use contract with that applicant or its affiliates for the same contractual territory or portion thereof);
·the requested territory is used either partially or fully by another subsoil user or MOG/MINT has already received another application for that territory;
·granting subsoil use rights to a given applicant would violate the requirement to ensure the national security of Kazakhstan, including concentration of rights under a subsoil use contract and/or concentration of rights in subsoil use area; and
·proof that government officials provided unlawful advantages to a particular applicant over other applicants.
According to the Proposed Amendments, exploration rights must be granted through the Simplified Procedure on a «first come, first served» basis. Unless the application is rejected on any of the grounds specified above, the applicant who first submits a properly drafted application should be granted the exploration right to a given territory.
As a result of negotiations, the parties shall conclude a standard exploration contract that will include:
·an obligation to pay a signature bonus in the amount established by the Kazakhstan Tax Code; and
·an obligation to make rental payments for a contractual territory that will increase annually
The amendments also propose that a subsoil user obtaining an exploration contract through the Simplified Procedure shall be exempt from the requirement to invest in the social and economic development of the region and its infrastructure, as well as to comply with the local content requirements.
As described above, currently subsoil use rights may be granted only through a tender or, in limited cases, through direct negotiations. In the event that the Proposed Amendments are enacted, the law will provide more options for interested parties to apply and obtain subsoil use rights. In our view, this would encourage more exploration activity and increase investments into oil & gas and mining projects in Kazakhstan. In addition, the Proposed Amendments would not only introduce new simplified procedures for granting the subsoil use rights, but would also eliminate certain contradictions and ambiguities that currently exist in the Subsoil Law.
 Draft Law of the Republic of Kazakhstan Concerning Introduction of Amendments to Certain Legal Acts of the Republic of Kazakhstan Related to Subsoil Use Issues, as of 6 November 2013 (“Proposed Amendments”).
 Law of the Republic of Kazakhstan Concerning Subsoil and Subsoil Use dated 24 June 2010, as amended (“Subsoil Law”).
Rights to carry out subsoil use operations emerge as a result of one of the following: 1) granting by the State; 2) assignment by an existing subsoil user; or 3) transfer by way of succession.
 Presumably, the Government will approve a new “standard” exploration contract which will be entered into with a person to whom subsoil use rights will be granted based on a Simplified Procedure.