Comment to the articles Paragraph 2. Granting the right of subsurface use of hydrocarbons to a national company in the field of hydrocarbons on the basis of direct negotiations to the Code of the Republic of Kazakhstan “On Subsurface and Subsurface Use”
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(Mukushov A.J., Yernazarov I.B.)
The institution of "direct negotiations" for obtaining the right of subsurface use was first introduced in the Republic of Kazakhstan in 1999. Then in the Decree on Oil of 1995 and the Decree on
In 1996, the possibility of obtaining the right of subsurface use for a subsurface area (contract territory) by a national company, as well as by a contractor who conducted exploration and made a commercial discovery, was regulated without competition. In addition, contracts for the construction and/or operation of underground structures unrelated to exploration and/or production were concluded on the basis of direct negotiations without a tender. At the same time, for the first time, the concept of a national company appeared in the legislation on mineral resources.
Subsequently, in the 2010 Law on Subsoil, the possibility of concluding contracts based on direct negotiations was significantly expanded. In particular, the right to subsurface use could be obtained without competition by subjects of industrial and innovative activities, as well as persons applying for exploration operations in areas of the subsurface provided in a simplified manner.
It should be noted that in the Subsurface Resources Code, the institution of "direct negotiations" has been preserved regarding the granting of subsurface use rights only to national companies in the field of hydrocarbons and uranium, respectively.
Despite the liberalization of legislation and the gradual weakening of the role of the national company, the state still considers it as a guide of its policy in the oil and gas sector, maintaining its special status for more than twenty years.
The purpose of introducing a special procedure in relation to a national company was to protect the interests of the state in the field of exploration and production of strategic raw materials and to stimulate the development of national companies as vertically integrated organizations based on the experience of the world's leading multinational oil corporations. Along with obtaining the right of subsurface use on the basis of direct negotiations, the national company has the opportunity to obtain the right of subsurface use in case of realization of the priority right of the state to acquire the alienated right of subsurface use in respect of strategic subsurface areas (Articles 43 and 46 of the Code on Subsurface).
On the other hand, the state, along with providing such opportunities, also imposes on the national company a number of certain obligations that are difficult to call commercially profitable.
For example, the acceptance of the contract territory in case of early termination of the contract for subsurface use into trust management before the determination of another subsurface user (art. 108 of the Subsoil Code).
As a rule, a trust management agreement for property, including a subsurface area, involves the payment of remuneration (paragraph 2 of Article 886 of the Civil Code of the Republic of Kazakhstan, paragraph 2 of paragraph 3 of Article 36, paragraph 1 of paragraph 3 of Article 95 of the Code on Subsurface).
However, in practice, such remuneration under a trust management agreement for a subsurface area is "symbolic".
In turn, the Subsoil Code does not contain an alternative solution for a national company, except to take a subsoil plot into trust management and conclude an appropriate agreement (paragraph 1 of Article 108 of the Subsoil Code), which is an imperative norm fixed by the legislator.
For example, on July 21, 2010, the Ministry of Oil and Gas of the Republic of Kazakhstan prematurely terminated contracts with Tolkynneftegaz LLP and Kazpolmunai LLP. On July 22, 2010, in order to ensure a continuous technological process, JSC NC KazMunayGas was appointed trustee at the Tolkyn and Borankol fields.
At the same time, in order to maintain social stability in the region, most of the employees of former subsurface users were hired by the subsidiary of JSC NC KMG, KazMunayTeniz LLP. These trust management agreements are still valid at the moment.
Undoubtedly, this diverts significant financial and human resources of the national company, which could be used in other commercially profitable projects.
Other socially oriented projects of NC KMG JSC in the field of support for non-profit organizations of sports, culture and education should also be noted.
For example, at the expense of the funds of JSC NC "KMG", a Museum of the History of Kazakhstan was built or is being built in Nur Sultan, the Palace of Martial Arts, a golf club in Shchuchinsk, the AIBA World Boxing Academy, a climate and mud sanatorium on the shores of Lake Balkhash, apartment buildings and dormitories in Pavlodar and Atyrau, the Ak-Bulak sports and recreation complex in the Almaty region, kindergartens in various settlements of Atyrau, Mangystau and Karaganda region, regional hospitals and other medical institutions in Mangystau region, secondary schools and boarding schools in Mangystau, West Kazakhstan regions and many other facilities. Subsequently, the constructed facilities are usually transferred to state ownership.
Thus, it is obvious that a national company, in addition to implementing its economically profitable projects, performs social functions that contribute to the protection of state interests in certain conditions.
It should be noted that earlier one of the problems was the legislative delineation of the activities of national companies in the field of subsoil use, which was resolved after the adoption of amendments to the Law on the Subsoil of 2010 at the end of 2014, as well as Resolution No. 189 (put into effect by Resolution No. 854 of the Government of the Republic of Kazakhstan dated 11/30/2021 "On approval of the delineation of the activities of national Companies in the field of subsurface use").
Thus, by Resolution No. 189 of JSC NC KMG, exploration and production of oil and gas resources and groundwater were allocated for the water supply of the extraction process. Kazgeologiya JSC was assigned the geological study of the subsurface, including the search and evaluation of mineral deposits, exploration of mineral reserves and groundwater, with the exception of oil and gas, uranium and its compounds, and gas from coal basins.
Prior to that, Kazgeologiya JSC could theoretically apply for oil and gas exploration projects, but in practice there were no such cases.
There was a similar situation with respect to TPI, when the state-controlled socio-entrepreneurial corporations Tay-Ken Samruk JSC and Kazgeologiya JSC could compete with each other.
For example, in 2007. The Government of the Republic of Kazakhstan was instructed as a pilot project to create JSC National Company Social and Entrepreneurial Corporation Saryarka with one hundred percent state participation in its authorized capital, one of the main subjects of activity of which is exploration, extraction, processing of minerals, including common ones, with the exception of the following minerals: gas (except methane extracted from coal seams), oil and uranium.
Similar provisions were contained in the Decrees of the President of the Republic of Kazakhstan on the creation of SECS "Ertis", "Ontustik" and "Zhetisu", "Kaspiy", "Tobol" and "Batys".
Subsequently, Tay-Ken Samruk JSC was established, one of the main activities of which was to ensure effective subsurface use activities in the field of exploration, development, production, processing and sale of mineral resources.
Already in 2011, Kazgeologiya JSC was established, which was designed to reproduce the mineral resource base of the Republic of Kazakhstan, conduct a geological study of the subsurface, including the search and evaluation of mineral deposits.
Thus, the State faced the task of clearly delineating the activities of these national companies. More detailed questions about the conditions and procedure for granting the right of subsurface use to the national
Companies in the field of hydrocarbons based on direct negotiations will be discussed in the comments to the relevant articles.
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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
