COMMENT TO ARTICLE 24. CONDUCTING SUBSURFACE USE OPERATIONS IN THE SAME TERRITORY BY DIFFERENT PERSONS TO THE CODE OF THE REPUBLIC OF KAZAKHSTAN "ON SUBSURFACE AND SUBSURFACE USE"

Home / Codes / COMMENT TO ARTICLE 24. CONDUCTING SUBSURFACE USE OPERATIONS IN THE SAME TERRITORY BY DIFFERENT PERSONS TO THE CODE OF THE REPUBLIC OF KAZAKHSTAN "ON SUBSURFACE AND SUBSURFACE USE"

1. Different subsurface users may carry out subsurface use operations on the same territory (combined territory), unless otherwise provided by the provisions of the Special Part of this Code.

2. The procedure for conducting operations by subsurface users in a combined territory is determined by an agreement between them. The Agreement defines the conditions and procedure for carrying out all or certain types of work on the combined territory.

The agreement is concluded in simple written form and submitted by the subsurface user to the state body that granted the right of subsurface use, no later than five working days from the date of its conclusion.

The agreement may provide for reasonable and proportionate compensation for the costs incurred by one of the subsurface users.

3. If the subsurface users fail to reach an agreement on the procedure for conducting operations in the combined territory, the priority of one subsurface user over another in conducting work in the combined territory is established. In this case, the subsurface user who has priority in carrying out work on the combined territory is the subsurface user.:

1) conducting mining operations;

2) having the right of subsurface use granted earlier, if both subsurface users carry out mining operations;

3) having the right of subsurface use granted earlier, if both subsurface users carry out operations on exploration of minerals;

4) conducting operations for the use of subsurface space, if another subsurface user conducts operations for the exploration of minerals.

4. A subsurface user who does not have priority in carrying out work on a combined territory is obliged to take into account the time, duration, place, scope and nature of work carried out or planned by a subsurface user with such priority and not create obstacles to their implementation. The subsurface user is obliged to use his priority in good faith and reasonably, without pursuing the goals of obtaining unreasonable benefits.

5. A subsurface user who has priority in carrying out work on a combined

to the recipient who does not have priority, information on the duration, location, scope and nature of their work carried out and planned to be carried out on a common subsurface area, within one month from the date of receipt of the latter's written request. Such information may constitute a trade secret.

The time, duration, scope, location and nature of the work, information about which is provided to a subsurface user who does not have priority in carrying out work on a combined territory, may be changed by a subsurface user with such priority no more than once within three months. In this case, the subsurface user having priority is obliged to notify the other subsurface user in writing about the change in time, duration, volume, location and nature of the planned work no later than one month before such changes. A subsurface user who does not have priority in carrying out work on a combined territory has the right to complete work that has begun before receiving such notification.

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(Odilov T.A.)

1. The commented article is intended to implement the principle of rational management of the state subsoil fund, assuming the possibility of conducting certain types of subsurface use operations on one area: exploration, production and use of subsurface space. This situation is possible when combining the territories of the subsoil plots provided for use (see the meaning of "territory of the subsoil plot" in the commentary to art. 19). Alignment is the same as the territorial coincidence of the areas of the subsurface on the earth's surface. In practice, "juxtaposition" also refers to the "overlap" of territories. The combination of territories implies the combination of subsurface areas in three-dimensional space, but not necessarily (see paragraph 2 below).

The possibility of combining the territories of subsurface areas ensures the effective involvement of necessary and interested areas in the study and development, taking into account geological risks and natural features. This became possible and is explained by the concept that a subsurface user has only the right to use a subsurface area, limited to carrying out specific types of subsurface use operations, including groups of minerals, on an exceptional basis. This concept is like

It is known that it follows from the concept and content of the right of subsurface use (see comments to art. 17).

The narrowly limited content of the right of subsurface use eliminates the need for an easement institution for the use of subsurface areas when combining their territories, since in this case the issue of access to the earth's surface prevails, without which, of course, it is practically impossible to carry out subsurface use operations.

The absence of a practical need for the institution of an easement between subsurface users in this case, however, does not negate the need to resolve the problem of limited use of subsurface resources between persons who are not subsurface users and users of subsurface plots - subsurface users. This problem may arise during the implementation of infrastructure projects (laying tunnels, communications, pipelines in the subsurface) and should undoubtedly find its solution with further improvement of the Code on the Subsurface. At the same time, it is necessary to take into account the existence of the institution of a land easement, which can be applied, among other things, to a land plot issued by a subsurface user, designed to ensure the exercise of the right to conduct operations for the extraction of minerals or the use of subsurface space, between such a subsurface user and another person.

The subject of regulation of the commented article is not completely new to Kazakhstan's legislation on subsoil and subsurface use, since previously the conduct of subsurface use operations in the "same contractual territory" between two or more subsurface users was to some extent subject to regulation in paragraph 2 of Article 70 of the 2010 Law on Subsoil.

The new approach proposed by the legislator in the commented article is adapted to the applied (including for direct negotiations) and proactive auction principles for granting subsurface use rights, which do not allow determining the time of granting a subsurface area and its territory, assuming in this regard a hierarchy of priority in rights between subsurface users conducting different subsurface use operations in the same territory.

2. Prior to the adoption of the Subsoil Code, the combination of territories of subsurface areas was not a common occurrence in practice. In most cases, a combination occurred between the subsurface areas provided by the MIO for exploration or production of OPI, and the subsurface areas provided by the competent authority (i.e. at the central level) for exploration and/or production of UVS or TPI.

Figuratively, the combination of territories of subsurface areas is shown in the following figure.

The combination of the territories of a subsurface area is allowed in all cases, unless otherwise provided by the Special Part.

The inadmissibility of combining the territories of subsurface areas in a Special part is provided for by the norms on the formation of the territory of the TPI exploration site, the territory of the TPI/OPI production site and the territory of the use of subsurface space when issuing the appropriate types of licenses: paragraphs 3), 4) 5) and 7) paragraphs 2 and part 3 of paragraph 3 of art. 186, paragraphs 3 of Paragraph 2, art. 203, subclause 2, art. 250. Thus, the combination of territories of subsurface areas is not allowed under all the main types of so-called mining licenses: for exploration of mineral resources, extraction of mineral resources, and use of subsurface space. This logical line is based on the exclusive right provided for under the TPI exploration license in art. 201, according to which its holder has absolute priority over any person to obtain licenses for the extraction of TPI/OPI and licenses for the use of subsurface space within the boundaries of the exploration territory. In addition, the nature of the work carried out under each of these licenses is potentially related to mining operations, which cannot be combined between these licenses.

The inadmissibility of combining territories of subsurface areas is provided in a Special part not only between the main mining licenses, but also between territories under such licenses and territories (contractual) under similar (mining) contracts for subsurface use concluded before the entry into force of the Subsoil Code. Therefore, in accordance with clause 7 of Article 277: 1) the contract territory defined by the geological allotment to the TPI or OPI contract is equated to the TPI exploration territory.; 2) the contract territory defined by the mining allotment to the TPI/OPI contract or, accordingly, to the contract for the construction and (or) operation of underground structures not related to exploration and (or) production is equated to the territory of mining/OPI production or the use of subsurface space. Otherwise, the exclusive rights under these contracts would have been violated.

In the territories of exploration and production of hydrocarbons, cases of the inadmissibility of their combination are not explicitly provided for in the Special Part. On the contrary, the possibility of combining the territories of subsurface areas for hydrocarbons is explicitly provided for in Article 110, however, such a combination is provided only in the case of the provision of subsurface areas for operations at different depths (the principle of storeys), when the upper spatial boundary of the provided subsurface area is within the territory of the already provided Such a subsurface area is determined by its lower spatial boundary (clause 5 of Article 110). In other words, the combination of the territories of subsurface areas for exploration or extraction of UVS, both among themselves and between other subsurface areas for UVS (exploration – exploration, mining – extraction, exploration – extraction) is permissible in the absence of a combination of the subsurface areas themselves, i.e. when the upper spatial boundary of one of these areas coincides with the lower spatial boundary. the border of another section or is located below it. Otherwise, the combination of territories in other cases would contradict Part 2, paragraph 1 of art. 110 and would violate the exclusivity of the rights of the subsurface user to conduct UVS operations on the subsurface area provided to him.

The question of the permissibility of combining the territories of subsurface areas at the UVS, TPI/OPI and the use of subsurface space is also answered in a special part in the rules on the issuance of appropriate mining licenses: for exploration of TPI, for extraction of TPI/OPI and the use of subsurface space.

Thus, in accordance with paragraphs 2) of paragraph 2 of art. and part 2 of paragraph 3 of art. 186, the formation of a mining exploration territory under a license cannot be carried out at the expense of a block that fully or partially falls on the territory of a subsurface area already provided to another person for the extraction of HYDROCARBONS without his consent. A similar ban is not provided for subsurface areas for the exploration of UVS. Therefore, the exploration area of the TPI can be combined: 1) with the territory of exploration of UVS; 2) the territory of production of UVS of another subsurface user with his consent; and 3) from the territories of hydrocarbon production, when the same person acts as the subsurface user for the exploration of TPI and the extraction of hydrocarbon resources.

A similar rule when issuing a license and forming a TPI mining territory follows from Article 203, according to which: the territory of TPI mining can be combined: 1) with the territory of exploration of UVS (there is no prohibition); 2) with the territory of extraction of UVS of another subsurface user with his consent (subclause 2) of clause 2 of Article 203); and 3) from the territories of extraction of UVS, when the same person acts as the subsurface user for the extraction of TPI and the extraction of UVS (permissibility is assumed by virtue of the phrase "from another person").

As for the territory of the use of subsurface space, the Special part does not provide for the inadmissibility of combining its territory with the territory of exploration or production of UVS when issuing a license. At the same time, it is necessary to take into account the provision of paragraph 1 of Article 250, which allows the provision of a site for the use of subsurface space only if it does not contain a mineral deposit or contains insignificant mineral resources, i.e., including non-OPI resources. Thus, the legislator allows the combination of the territory of the use of subsurface space with the territory of exploration or

if the site for the use of subsurface space does not contain reserves of TPI (other than OPI) or UVS or their prospective resources, as indicated in the geological report provided with the application for a license to use subsurface space in accordance with subclause 3) paragraph 3 of art. 251.

These cases of combining the territories of exploration of TPI, extraction of TPI/OPI and the use of subsurface space with the territories of exploration and production of UVS are considered through the prism of issuing the appropriate types of licenses (in practice, these licenses are also called "mining") in the territories of exploration and production of UVS sites. However, the reverse situation, in which subsurface areas for exploration or production of UVS are provided for already formed territories of subsurface areas for exploration of TPI, extraction of TPI/OPI or use of subsurface space, is not disclosed in a special part. The resulting combination of territories is acceptable in accordance with the article being commented on, however, the priority in carrying out the work and the risks it poses to a potential subsurface user in the field of internal control should be taken into account by the competent authority, both at the planning stage within the framework of the IGFN and at the stage of negotiations with the national company in the field of internal control (par. Chapter 2, Chapter 15) or the organization of an auction for the granting of subsurface use rights (part 1, Chapter 15).

Generally, the combination of territories of subsurface areas is allowed for 3 types of subsurface use operations: on the one hand, exploration and production of hydrocarbons, and on the other hand, exploration and production of TPI, uranium, OPI, or the use of subsurface space. A special part of the Code on Subsurface Resources in relation to UVS allows the combination of territories (in Part 3, paragraph 1, Article 110, the word "coincidence" is used with an identical meaning) of several subsurface areas, in which the lower and upper spatial boundaries are at different depths, while excluding the combination of the sites themselves in three-dimensional space.

3. The commented article provides for two modes of regulation of relations between subsurface users engaged in subsurface use operations in a combined territory: conciliation and priority.

In all cases of permissible combination of territories of subsurface areas used by different subsurface users, the procedure and conditions for conducting work within the framework of subsurface use operations in the combined territory, including the use of the earth's surface for work, may be decided by them by concluding an agreement provided for in Part 1, paragraph 2.

The procedure for concluding and terminating an agreement is regulated by civil law (Subsection 2 of the Civil Code), since this does not contradict the provisions of the Subsoil Code.

Regarding the content of such an agreement, it should be noted that it is primarily determined by the Subsoil Code, while, guided by the principle of "freedom of contract", the parties can also supplement the content of the agreement and establish any conditions in it that do not contradict the legislation of the Republic of Kazakhstan, including the Subsoil Code.

The main subject of the agreement is the conditions and procedure for carrying out all or certain types of work on the combined territory. The conditions and procedure for carrying out work are understood as the time (schedule mode), duration, location, volume, nature of work and any other organizational and technical parameters, including safety parameters, which are designed to streamline the relationship of subsurface users regarding the use of the combined territory. Safety parameters, for example, may also include requirements for carrying out measures to eliminate the consequences of work or recording the nature of the work carried out by each of the parties and their consequences for the purpose of delineating the scope of obligations to eliminate the consequences of subsurface use operations related to the parties.

The period for which an agreement can be concluded is not regulated by the Subsoil Code, therefore the parties have the right to determine it independently, both for the entire estimated period of the territories' alignment, and only for a short period.

Thus, the specific design and legal content of the agreement depends entirely on the will, discretion and contractual capacity of the parties.

The agreement is not necessarily compensatory, since its content and the substance of the regulated issues do not imply otherwise. However, the agreement, of course, is compensatory if the parties wish to determine in it reasonable and proportionate compensation for the costs incurred by one of the parties as a result of the actions of the other or other subsurface users, as explicitly provided for in Part 3, paragraph 2. Also, it is not excluded that the parties determine ways to ensure the fulfillment of the obligations of the parties and liability for non-fulfillment of obligations.

An agreement is a civil law transaction concluded in simple written form, non-compliance with which will entail the consequences provided for in paragraph 1 of Article 153 of the Civil Code.

An agreement is always concluded between persons who are subsurface users, the territories of the subsurface areas of which are combined. It is important to emphasize that since in paragraph 3 the concept of "subsurface users" is given without quantitative limitation, the commented norm, taking into account the provisions of the Special Part, covers cases in which more than two subsurface users may operate within the boundaries of a combined territory (for example, two subsurface users under the UVS and one subsurface user under the TPI/OPI). In this case, legal relations related to the establishment of the procedure for conducting operations can be regulated by an agreement concluded between all subsurface users. At the same time, the agreement does not terminate involuntarily (automatically) with the loss by one of the parties of the right of subsurface use to a subsurface area with a combined territory or with the termination of the combination, since the agreement may provide for the rights and obligations of the parties, the implementation and fulfillment of which may occur after the specified circumstances.

Since when concluding an agreement, its parties are always subsurface users, in accordance with Part 2, paragraph 2 of the commented article, each of these subsurface users must submit this agreement to the state body that provided, and in its absence as a result of reorganization, most likely, which grants the right to subsurface use for the appropriate type of subsurface use operations conducted by the subsurface user on combined territory.

Tsch. 2 paragraph 2 does not provide for the consequences of violations of the deadlines for submitting the concluded agreement to the state body. However, it is obvious that its absence from the state body may be important when accepting the results of work to eliminate the consequences of subsurface use operations or inspection of the combined territory by the relevant subsurface user.

Unless otherwise provided by the terms of the agreement, the transfer of the right of subsurface use granted for conducting relevant subsurface use operations in the combined territory does not imply a change of person in the agreement. This requires making changes to the agreement. In this regard, the parties to the agreement, when concluding it, as well as the parties to transactions on the transfer of the right of subsurface use, are advised to pay attention to these circumstances.

Unlike subsurface use contracts, to which the law of the Republic of Kazakhstan peremptorily applies (paragraph 8 of Article 36 of the Subsoil Code), the Subsoil Code does not provide for such a requirement to the agreement. Therefore, the subordination of the agreement to the law of another jurisdiction is regulated by the Civil Code of the Republic of Kazakhstan.

4. With respect to any work on a combined territory that is not regulated by an agreement between subsurface users, or in the absence of such an agreement as such, paragraph 3 provides for rules of priority in the conduct of such work.

These rules are borrowed from paragraph 2 of Article 70 of the 2010 Law on Subsoil, supplemented and adjusted by the legislator when adopting the Code on Subsoil in favor of mining operations regarding the exploration of minerals or the use of subsurface space. It is no coincidence that this priority is set in favor of mining operations, since mining involves payments to the state budget and investments in a larger amount than other types of subsurface use operations. At the same time, the group of minerals (HC or TPI) does not matter./OPI) and the body that granted the right to subsurface use, since the extraction of these types of minerals can have a very important local significance.

However, when mining is carried out within a combined territory, priority in carrying out work belongs to the subsurface user whose subsurface use right was granted earlier (i.e., a mining license was issued or a contract was concluded), regardless of the group of minerals (UVS or TPI/OPI) for which mining is carried out. The lack of absolute priority for the extraction of hydrocarbons over the extraction of OPI is explained by the cardinal difference in the methods and depth of extraction of such minerals, as well as the equally important importance of OPI extraction at the local level.

The second type of subsurface use operations in the priority hierarchy is the use of subsurface space. The priority of this type of operations over the exploration of UVS or TPI is explained by the lower certainty of profitability for the country's budget and the subsurface user of the exploration results.

The lowest priority in the hierarchy is assigned to the exploration of TPI and UVS. Therefore, when combining the territory of the exploration of UVS with the territory of mining/using subsurface space or the territory of exploration of UVS with the territory of mining (see paragraph 2 in the commentary above on the inadmissibility of combining mining licenses and contracts), priority will certainly belong to operations for the extraction or use of subsurface space.

When combining the territories of the TPI and UVS exploration sites, the priority in conducting work belongs to the subsurface user, whose right of subsurface use was presented/arose earlier. The same rule applies when combining UVS exploration territories by UVS exploration sites located at different depths. However, if we are talking about two subsurface areas located on

at different depths, one of which is provided for operations on the extraction of hydrocarbons, priority in carrying out work on a combined territory is assigned to mining operations (subclause 1) of clause 3). The possibility of providing subsurface areas for operations on hydrocarbons at different depths does not exclude the emergence of a combined territory between three subsurface users: two for hydrocarbons, one – according to TPI. The relations between these subsurface users in this situation, however, are also subject to regulation according to the hierarchy of priority in the absence of an agreement provided for in paragraph 2.

It is important to note that the rules of priority apply only in conditions of legality/permissibility of combining territories (see comments in paragraph 2 on cases of inadmissibility of combining territories). In other words, in cases where the territories of subsurface areas are combined as a result of errors or violations of the provisions of the Subsurface Code on the issuance of licenses for subsurface use or the conclusion of contracts, including the rules for the formation of territories of subsurface areas under licenses and contracts for subsurface use, paragraph 3 does not apply.

5. The essence of the priority granted is disclosed in clause 4 and consists in the obligation of a non–priority subsurface user (hereinafter referred to as the "non-priority subsurface user"), when conducting work within their own subsurface use operations, to take into account and observe the time (time mode), duration, location, volume and nature of work carried out or planned by the subsurface user, such as the priority holder (hereinafter referred to as the "priority subsurface user"). However, a subsurface user, using his priority, must oblige to act in good faith and reasonably with respect to a non-priority subsurface user, without pursuing the goals of obtaining unreasonable benefits. Accordingly, a non-priority subsurface user has the right to demand good faith from a priority subsurface user, including demanding compensation for losses (Clause 4, Article 9 of the Civil Code), to perform certain actions, restrictions on certain operations, or the time and duration of their conduct.

Emphasizing that the priority in carrying out work is not absolute, paragraph 5 provides for the procedure for implementing the priority provision, which is based on informing the non-priority subsurface user about the work of the priority one in the combined territory. At the same time, information designated as confidential by the priority subsurface user in accordance with Article 28 of the CC is subject to protection in accordance with paragraph 1 of Article 126 of the Civil Code, and the non-priority subsurface user is obliged to take measures to protect their confidentiality.

In accordance with this procedure, firstly, the priority subsurface user is obliged to provide, upon written request from the non-priority subsurface user, the necessary information allowing the latter to take into account the duration, location, volume and nature of the current and planned work of the priority subsurface user when carrying out its work. The specified information, in accordance with Part 1 of clause 5, must be provided to the non-priority subsurface user within one month from the date of sending the request to the latter.

Secondly, in order to prevent the abuse of its position by the priority subsurface user, Part 2, paragraph 2 of the commented article restricts the latter in the frequency of changes in the duration, time, volume, location and nature of the work carried out by him on the combined territory, which he informed the non-priority subsurface user. This information can be changed no more than once every three months. In case of changes, the priority subsurface user is obliged to notify the non-priority subsurface user in advance in writing no later than one month before such changes.

Thus, non-compliance by a priority subsurface user with the procedure for informing about changes in the work carried out or planned by him allows a non-priority subsurface user not to take these changes into account when carrying out operations of his work. On the other hand, such non-compliance may also serve as recognition of the legality of carrying out work by a non-priority subsurface user in conditions as if the above-mentioned changes had not been made.

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Kazakh Association of Organizations of the Oil and Gas and Energy Complex KAZENERGY

Nur Sultan 2022

The Kazenergy Association expresses its sincere gratitude for the support in preparing the commentary to the following companies: North Caspian Operating Company NV, NC KazMunayGas JSC, Mangistaumunaygas JSC, Karachaganak Petroleum Operating BV, White & Case Kazakhstan LLP, Haller Lomax LLP)", "Erlicon CG" LLP, "Signum Law Firm" LLP. © Kazenergy Association, 2022 © team of authors, 2022 © authors, 2022

Dear readers!

We offer you a scientific and practical commentary prepared by a group of Russian specialists with extensive practical experience in legislation on subsoil and subsoil use and who participated in the preparation of the Code on Subsoil and Subsoil Use.

Subsurface use is a very complex and specific area of public relations, the regulation of which has its own historical background and takes into account the technological specifics of the process of subsurface development, as well as environmental, commercial, legal and other features of exploration and development of deposits.

Kazakhstan's legislation on subsoil and subsurface use has passed through several stages in its development, and has always been based on a balance of interests between the state and subsurface users, transparency, striving for the maximum possible degree of protection of the rights and legitimate interests of investors, ensuring sustainable social, economic and environmental development of the country.

The Code "On Subsoil and Subsoil Use", adopted at the end of 2017, was developed taking into account many years of accumulated experience and law enforcement practice, as well as the results of extensive discussions with experts working in the industry.

It reflects specific, important measures on the part of the state to increase the investment attractiveness of exploration and further reduce administrative barriers.

Nevertheless, practice and legislation do not stand still, constantly evolving, taking into account new challenges facing both the subsurface use industry and the economy as a whole.

In this regard, this commentary is intended to serve as an aid for a wide range of interested persons – specialists working in the industry, in

understanding the meaning of the norms, their historical context, the interrelationship and mutual influence of the various provisions of the Code.

We also hope that studying the commentary will serve as an incentive for new generations of young domestic specialists to work scientifically and practically in this important industry, for the benefit of the development of our country, current and future generations of Kazakhstanis.

Sincerely, U. Karabalin, Deputy Chairman of the Kazenergy Association, Hero of Labor of Kazakhstan