Commentary to article 20. Grounds for the emergence and acquisition of the right of subsurface use to the Code of the Republic of Kazakhstan “On Subsurface and Subsurface Use”  

1. The right of subsurface use arises on the basis of:

1) subsurface use licenses;

2) the contract for subsurface use.

2. The right of subsurface use is acquired in the following cases::

1) granting the right of subsurface use;

2) transfer of the right of subsurface use (share in the right of subsurface use) on the basis of civil law transactions;

3) transfer of the right of subsurface use by way of succession during the reorganization of a legal entity, with the exception of transformation or inheritance.

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(Ereshev D.E., Ilyasova K.M.)

1. The 1992 Code on Subsoil and Processing of Mineral Raw Materials did not contain a separate article on the issue of the grounds for the emergence and acquisition of the right of subsurface use, since at that time the right of subsurface use as an institution of property law was not formed, although the right to use the subsoil was mentioned in the 1992 Code. The specified Code contained rules on the provision of subsurface resources for certain types of subsurface use: geological exploration, mining and use for other purposes (Articles 12, 13). The procedure for providing subsurface resources for mining and use for other purposes was defined, for example, in Article 15. In order to acquire the right to use subsurface resources for such purposes, a person had to, in accordance with paragraph 1 of the said article: 1) receive, upon request, an act on mining allotment from the bodies of the Ministry of Geology and Subsoil Protection of the Republic of Kazakhstan; 2) resolve the issue of approving the location of the enterprise (facility) and the provision of land in accordance with the Land Code of the Kazakh SSR; 3) to ensure the carrying out of design and survey work, the development of a project for the use of subsurface resources and its examination; 4) to conclude a contract for the use of a subsurface area.

However, this was not enough to acquire the right to use the subsoil. Thus, paragraph 2 of Article 15 of the 1992 Code on Subsoil and Processing of Mineral Raw Materials provided that "registration with the authorities of the Ministry of Geology and Subsoil Protection of the Republic of Kazakhstan of an act on mining allotment, a permit for land allotment, a project for the use of subsoil, an agreement on the provision of a subsoil plot for use is the basis for the right to use the subsoil for mining minerals and use for other purposes". It followed from this rule that the right to use mineral resources arose due to the registration of relevant documents with a government agency. Thus, the 1992 Code on Subsurface Resources and Processing of Mineral Raw Materials for the purposes of acquiring the right to use subsurface resources attached legal importance to the registration of these documents.

The 1992 Code on Subsoil and Processing of Mineral Raw Materials did not provide a specific definition of the concept of "subsoil use rights." According to paragraph 1 of Article 11 of the said Code, users of subsurface resources had the right to use subsurface resources in accordance with the purposes for which they were provided. Paragraph 2 of the said article provided for the main responsibilities of users of the subsoil. Thus, the content of the right to use the subsoil was determined by establishing the rights and obligations of users.

It should also be emphasized that the 1992 Code did not provide for the possibility of turnover of the right to use mineral resources. For this reason, the issues of the transfer of the right to use the subsoil were not regulated in it.

The right of subsurface use as a property right was first formulated and fixed in the Decree on the Subsoil of 1996. As in the 1992 Code on Subsurface Resources and Processing of Mineral Raw Materials, the emergence of the right of subsurface use under the 1996 Decree on Subsurface Resources was due to the occurrence of certain legal facts (legal structures). In particular, according to Article 12 of the Decree on the Subsoil of 1996, the right of subsurface use arose by:

provision;

transfers;

transfer by way of universal succession.

The main difference between the 1996 Decree on Subsoil and the 1992 Code on Subsoil and Processing of Mineral Raw Materials was not only in the methods and procedure for granting the right to use the subsoil, but also in the possibility of turnover of the right to use the subsoil through transfer from one person to another or transfer in the order of universal succession.

At the same time, the transfer of the right of subsurface use and the transfer of the right of subsurface use by universal succession were considered as ways of the emergence of the right of subsurface use. This approach was based on the fixation of a specific entity at a certain point in time as the holder of the right of subsurface use, which is true from the perspective of the entity. The right of subsurface use may belong to one or several specific entities, it is part of the property of subsurface users and is the subject of turnover.

The same approach was laid down in the 2010 Law on Subsoil, which also linked the emergence of the right of subsurface use with certain legal facts that occur when granting, transferring or transferring the right of subsurface use by way of succession.

The legislator's approach to the grounds for the emergence of the right of subsurface use in Kazakhstan has repeatedly changed. According to the 1992 Code on Subsoil and Processing of Mineral Raw Materials, this depended on the type of use of the subsoil and the nationality of the subject (Articles 12-20). For example, for geological exploration, the subsoil was provided on a competitive basis by the Government of the Republic of Kazakhstan: 1) enterprises, organizations, institutions and citizens of the Republic of Kazakhstan on the basis of a project for geological study; 2) enterprises with foreign participation, foreign legal entities and individuals on the terms of a contract or concession. In addition, to begin work on the geological study of the subsurface, registration of the project for geological study and permits for

occupation of a land plot for exploration, contract or concession in the bodies of the Ministry of Geology and Subsoil Protection of the Republic of Kazakhstan (art. 12).

According to the Decree on Oil of 1995 and the Decree on Subsoil of 1996, in the original versions, in order to obtain the right to use the subsoil, it was necessary to obtain a license followed by the conclusion of a contract for subsoil use. By the Law of the Republic of Kazakhstan dated August 11, 1999 No. 467-1 "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Subsoil Use and Oil Operations in the Republic of Kazakhstan" (hereinafter referred to as the Law of the Republic of Kazakhstan dated 08/11/1999) to the Decree on Subsoil of 1996 and the Decree on Oil of 1995. Changes were made, according to which the mixed license and contract system was replaced by a contract system. In accordance with the amendments and additions made to the Decree on Subsoil by the Law of the Republic of Kazakhstan dated December 01, 04.  No. 2-III "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on subsoil use and oil operations in the Republic of Kazakhstan" for certain types of minerals (groundwater) and types of subsurface use (construction and operation of underground structures not related to exploration and production), the contract system was replaced by a permissive one.

The contractual or licensing system (for certain cases) for granting subsurface use rights is also preserved in the 2010 Law on Subsurface Resources.

It should be noted that in accordance with the previously existing legislation of the Republic of Kazakhstan on subsoil and subsoil use, a special legal regime was provided for granting the right to use subsoil for the extraction of common minerals to meet the own needs of owners and land users within their land plots and their extraction of groundwater. According to the provisions of the 1992 Code on Subsoil and Processing of Mineral Raw Materials, the right to extract OPIUM and fresh groundwater arose after obtaining permission from the local Council of People's Deputies (paragraph 2 of Article 17). According to the Law on Subsoil of 1996, the granting of the right of subsurface use to extract OPI for own needs and groundwater in volumes not exceeding fifty cubic meters per day was carried out simultaneously with the provision of the land plot under which OPI and groundwater are located to private ownership or land use. When providing a land plot for temporary land use, the conditions for using OPI for their own needs and groundwater in volumes not exceeding fifty cubic meters per day could be stipulated by a temporary use agreement.

land use (clause 4 of Article 13). The 2010 Law on Subsurface Resources (clause 9, Article 35) provided for norms similar to those stipulated in the 1996 Law on Subsurface Resources.

With the adoption of the Subsoil Code, both a licensing and a contractual system are in effect in the field of subsoil use. In contrast to the legislation in force before 08/01/1999, in the Subsoil Code, both the license and the contract are independent grounds for the right of subsurface use, depending on the types of subsurface use operations and (or) types of minerals.

2. The right of subsurface use is derived from the state's ownership of the subsoil and is not absolute, i.e. it has spatial and temporal boundaries, as well as has other boundaries of law and special conditions. For this reason, when granting the right to subsurface use, the state must determine the scope of the rights granted, the conditions for their implementation, the boundaries of the subsurface area in respect of which these rights can be exercised, etc. In this regard, the right of subsurface use cannot exist without means of identification (individualization) of the specified properties in relation to a particular subsurface area, therefore, it can arise only on the basis of the appropriate means of identification (individualization), which, according to the Code on Subsurface Resources, is a contract or license.

The turnover of the subsoil use right is also key for the subjects of relations in the field of subsoil use.

Thus, the right of subsurface use can be acquired either directly from the state, or as a result of civil law transactions or by way of succession (during the reorganization of a legal entity or inheritance). The possibility of turnover of the right of subsurface use allows the state, without violating the constitutional norm on the exclusivity of the state's ownership of the subsoil, to involve its subsoil in economic turnover, to extract economic benefits from this in the form of attracting investments, taxes, and employment.

3. Clause 1 establishes that the right of subsurface use may arise on the basis of a contract or license. The Subsoil Code, unlike previous legislation, does not include the acquisition of ownership rights or land-use rights to land plots among the grounds for the right of subsurface use to extract OPI for purposes unrelated to entrepreneurial activity, due to the fact that such extraction is not classified as subsurface use operations (art. 237, para. 4). The Subsoil Code also does not include permits as grounds for the right of subsurface use.

Thus, the Subsoil Code provides only two grounds for the right of subsurface use, namely, a contract or a license.

Paragraph 2 of Article 20 establishes 3 ways of acquiring the right of subsurface use. The first way is to grant the right of subsurface use. Although the Subsoil Code does not disclose what is meant by granting the right to use the subsoil, based on the historical context, it is necessary to understand that in this case, granting implies granting it by the state, as the owner of the subsoil.

The second way to acquire the right of subsurface use is to transfer it on the basis of civil law transactions.

To the third independent method of acquiring the right of subsurface use, subp. 3) paragraph 2 of the commented article refers to the transfer of the right of subsurface use in the order of succession during the reorganization of a legal entity, with the exception of transformation or inheritance.

The editorial board of the sub-item. 3) paragraph 2 of the commented article should be considered unsuccessful, since it follows that when a legal entity is transformed or inherited, there is no transfer of the right of subsurface use by way of succession. However, this does not correspond to other provisions of the Code on Subsoil and the concept of the Code as a whole on the acquisition of the right of subsurface use.

So, in the sub-item. 9) and 10) paragraph 2 of Article 44 of the Code is established:

"2. The authorization of the competent authority provided for in paragraph 1 of this article is not required in the case of:

9) transfer of the right of subsurface use, objects related to the right of subsurface use, in the order of succession on the basis of a transfer act during the transformation of a legal entity;

10) transfer of the right of subsurface use (shares in the right of subsurface use), objects related to the right of subsurface use, in the order of inheritance;"

Thus, during the transformation of a legal entity and inheritance, there is also a transfer of the right of subsurface use. However, such a transition does not require the permission of the competent authority.

Being by its nature a proprietary right, the right of subsurface use may arise on the basis of a contract or license. The contract and the license have different legal nature. The contract is a civil law contract. In our opinion, a license is by its nature an administrative act.

The different nature of the basis for the emergence of the right of subsurface use determines the specifics of the regulation of emerging relations. In the first case, the terms of the subsurface use right are determined by the contract, in the second – by an administrative act. However, it should be noted that both

in another case, civil law relations arise. Thus, a contract and a license are the grounds for the emergence of proprietary (right of subsurface use) and binding relations. There may also be public-law relations related to the protection of the subsoil and the environment, the rational use of the subsoil, etc.

It should also be noted that the conditions for carrying out subsurface use operations are determined not only by a contract or license, but also by project documents, as well as applicable legislation (articles 23, 24, 25, 26, etc. The Subsoil Code).

The right of subsurface use has a special legal regime due to the fact that it is derived from the ownership of the State. However, unlike the subsoil owned by the Republic of Kazakhstan, which is inalienable, Article 20 allows for the turnover of the right of subsurface use. Exceptions to this are provided for by the Code on Subsoil (paragraph 2 of Article 40).

It is noteworthy that when granting the right of subsurface use, a license is issued or a contract is concluded. Along with this, in accordance with paragraph 3 of Article 74 of the Code, the state geological survey of subsurface is carried out on the basis of an agreement concluded between the authorized body for the study of subsurface and the contractor in accordance with the legislation of the Republic of Kazakhstan on public procurement. However, it should be borne in mind that on the basis of a contract for the geological study of subsurface, the right of subsurface use does not arise, and the specified agreement is not a contract for subsurface use. It should also be noted that the state geological survey of subsurface resources is conducted on the basis of a contract concluded in accordance with the legislation on public procurement, and not the Code on Subsurface Resources. Moreover, in Article 22 of the Subsoil Code, the state geological survey of the subsoil is not classified as a type of subsurface use operations. Therefore, there is no contradiction between Articles 74 and 20 of the Subsoil Code.

Taking into account that the provisions of sub-item 3) paragraph 2 of art. 20 and sub-paragraphs 9) and 10) paragraphs 2 of Article 44 of the Code contradict each other and the exclusion of the transformation of a legal entity and inheritance from the methods of acquiring the right of subsurface use is a violation of the property rights of the subsurface user, it is necessary, in our opinion, from the sub-clause. 3) paragraph 2 of art. 20, delete the words ", except for transformation or inheritance.".

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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