A brief overview of the Code of the Republic of Kazakhstan "On subsoil and subsoil use"

Alert

28 November 2018

13 min read

As it is known, the Code of the Republic Kazakhstan "On subsoil and subsoil use," which was adopted 27 December 2017 (the "SSU Code"), came into force on 29 June of this year.

It is a new comprehensive legislative act that has replaced the previously existing legislation on subsoil, which is designated to regulate, in many ways, a new and difficult sector of the economy for the country - subsoil use. It comprises general and special parts, the institution and norms of which secure the basis of regulation in the sphere of subsoil use and regulate various types of relations arising from the use of subsoil, including those or other subsoil use operations in relation to the various subsoil resources. We offer a brief overview of some of the most important and new provisions of the SSU Code.

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Licencing system

The SSU Code envisages the introduction of the licencing system, in accordance with which the subsoil use right is granted to the interested parties by issuing the licences for certain types of activities in the subsoil use field, including the geological study of the subsoil resources, exploration and production of solid commercial minerals (SCM), production of common commercial minerals (CCM), subsoil space consumption, gold mining. At the same time, the previously existing contracting system, which serves as the basis for the emergence of subsoil use rights, is preserved in relation to the operations on exploration and production hydrocarbons and production of uranium. Herewith, subsoil plots are provided for the territories determined by the management programme of national mineral resources. This programme establishes the direction of development of the industry and prospects of the provision of plots for the purposes of subsoil use, as well as the geographical coordinates of the subsoil plots provided for exploration and production of SCM and hydrocarbons.

Procedure of granting subsoil use rights, types and terms of subsoil use operations

If executed earlier, the process of granting a subsoil use right could last up to one and a half to two years; now, applications for a licence must be considered by the authorised body within ten working days, and the term for a contract execution for subsoil use is reduced to 40 working days from the date of publication of the auction results.

The SSU Code establishes a new procedure of granting subsoil use rights on the basis of licences by the principle of "first come, first served" for the following types of operations:

1) geological study of the subsoil resources (for a period of up to three years);

2) exploration of SCM (for six consecutive years with the possibility of a single extension for five years);

3) production of SCM (for a period of not more than 25 consecutive years with the possibility of an unlimited number of renewals for a period not exceeding the initial term of the licence);

4) production of CCM (for a period not exceeding ten consecutive years);

5) subsoil space consumption (for a period of not more than 25 consecutive years with the possibility of an unlimited number of extensions for a period not exceeding the initial licence period); and

6) gold mining (for a period of three years with the possibility of a single extension for three years).

The granting of the subsoil use right, according to the results of an auction by the execution of the contract, is provided for:

1) exploration and production of hydrocarbons (for a period of not more than six consecutive years, and on the subsoil section of the sea or on complex projects – no more than nine years with the possibility of extension depending on the conditions of operations up to three and six, to nine and 15, to 12 and 18 years, respectively);

2) production of hydrocarbons (for a period not exceeding 25 years, and for production at large and unique deposits not more than 45 years with the possibility of extension for 25 consecutive years); and

3) production of uranium (for a period not exceeding 25 years, including a period of pilot industrial mining, with the possibility of extending for 25 consecutive years).

Instead of the three types of contracts for hydrocarbons stipulated by the previous legislation ("exploration", "production" and "combined exploration and production"), the SSU Code defines only two types of contracts, namely "exploration and production" and "production", and establishes clear conditions for the end of the exploration period, the transition to the preparatory period and production. It is important to note that the availability of approved project documents is no longer one of the conditions for execution of a suboil use contract for hydrocarbons, which greatly simplifies the procedure for the contract execution. The preparation of such project documents will now be carried out after the execution of the contract, which, inter alia, should encourage subsoil users to prepare project documents as quickly and efficiently as possible; without which, it is prohibited to proceed with subsoil use operations.

Identification of subsoil sites

The SSU Code provides that, for the purpose of territorial identification of a subsoil site for mineral exploration operations and geological study of subsoil resources operations, the territory of the Republic of Kazakhstan is conventionally divided into blocks, one side of each is equal to one minute in a geographic coordinate system. Twenty-five blocks form a subsection of blocks, each side of which is equal to five minutes in a geographic coordinate system. One hundred blocks form a block section, each side of which is ten minutes in a geographic coordinate system. Each block, subsection, and block section have their identifying coordinates and individual codes assigned by the authorised body for the subsoil study. The territory of an exploration site or a geological study site may consist of one or more blocks. If a territory consists of two or more blocks, each block of a given territory must have a common side with at least one other block of it.

The SSU Code also envisages the possibility of transforming subsoil sites provided for use through their expansion, reduction, separation or addition depending on the type of mineral – while the previous subsoil legislation provided only separation of the subsoil use area from the contract territory. As a requirement for the conversion of subsoil use area, the SSU Code envisages the condition that the converted subsoil areas should be used by only one body.

Changes of individual obligations of a subsoil user

The SSU Code excludes the obligations of a subsoil user engaged in exploration of hydrocarbons for the payment of contributions to the training of Kazakhstani personnel, the financing of research and development work, and the socio-economic development of regions. These obligations arise only from the second year of the hydrocarbon production period – each is in the amount of 1% of the annual production costs or investments under the subsoil use contract.

For exploration and production of SCM, in addition to the obligations of the subsoil user to pay the subscription bonus and payment for the use of land plots, the SSU Code establishes obligations for the annual minimum costs for these operations. The amount of minimum expenses is determined on the basis of the monthly calculation indicator (MCI), which effective on 1 January of the reporting year and depends on the number of blocks that the subsoil user has and the year of the exploration period or the size of the production area. In this case, the number of expenses for operations under a licence for exploration or production of SCM may include expenses for management and administrative needs, accounting, research, staff training and other similar expenses. The share of such expenses shall not exceed 20% of the total expenses indicated by the subsoil user in the relevant report.

Work programme and project documents

In relation to contracts for exploration and production of hydrocarbons, the SSU Code establishes that the winner of the auction for granting subsoil use rights within 20 working days after the publication of the auction results develops and submits to the competent authority a programme of work for the exploration period, which becomes an integral part of the contract and contains general minimal indicators by volume, description and deadlines. Further, within a year from the date of registration of the contract for exploration and production, the subsoil user prepares an exploration project for the entire exploration period. Thus, the work programme is no longer a detailed document, as was previously required, but should contain only general conditions and information about works during the exploration period that were already known during the auction. This will allow the subsoil user to structure detailed project documents within a reasonable one-year period, and subsequently, in the event of changes to the project, will relieve the parties to the contract from the need to make changes to the contract.

With regard to the work on the SCM, the exploration plan is a project document for exploration operations, and for production, such document is a mining plan. These documents are developed and approved by the subsoil user independently, with the passage, in cases established by law, environmental assessments and approvals with the authorised bodies in the field of environmental protection and industrial safety. Copies of the exploration plan and the mining plan are submitted to the competent authority, and only after that, the subsoil user is entitled to carry out operations.

Access to information on subsoil use

One of the most important novels of the SSU Code is the principle of accessibility of information in the sphere of subsoil use that it enshrines. At the same time, the Subsoil Code provides open and free access to information on auctions, government decisions, licences and contracts for subsoil use, as well as to geological information, with the exception of data that are commercial secrets of subsoil users or information relating to state secrets. In accordance with the SSU Code, information on subsoil use – including data on subsoil users and operations conducted by them – will be published and made publicly available on specific Internet resources.

Transition to international reserves assessment

The Code envisages the introduction of the international system for the accounting of reserves SPE-PRMS, which, after a certain period, will lead to a complete transition from the current standard for calculating reserves of the State Reserves Committee of the Republic of Kazakhstan to international rules for calculating resources and structuring a report of a competent person on the Kazakhstan public reporting code on the results of geological exploration works, mineral resources and mineral reserves (KAZRC Code), which is developed in accordance with the general criteria adopted by the world mining community using the Template of international reports (version 2013) of the International CRIRSCO Committee (Committee for Mineral Reserves international reporting standards).

Ensuring the liquidation of the subsoil use consequences

Since the previously existing procedure for financing of liquidation works in the form of a fixed percentage of contributions to the so-called "liquidation fund" could not ensure the formation of such amount of financing that would be sufficient to eliminate the subsoil use consequences, the SSU Code establishes, instead of the previous procedure, securing means of financial liquidation, which was unknown to the previously existing legislation, as a bank or corporate guarantee, a pledge of bank deposit and insurance.

Requirements for the purchase of GWS

The SSU Code, taking into account the requirements of the WTO, of which the Republic of Kazakhstan is a member, retains government regulation on the procurement of goods, works and services (GWS), obligations of subsoil users on reporting on the procurement of GWSs and local content during the operations on exploration and production of hydrocarbons, production of SCM and uranium. The share of local content in works and services acquired for carrying out operations on subsoil use, established in terms of contracts for subsoil use, and licences for the production of solid commercial minerals, must be at least 50% of the total volume of acquired works and services during the calendar year.

Amendments to the licence and subsoil use contract

The SSU Code has simplified the procedure for reviewing an application for making changes and additions to subsoil use licences by reissuing them, as well as to subsoil use contracts by concluding addendums to the contracts on amended terms. In particular, the state body that issued the licence is now obliged to reissue it within seven working days from the date of receipt of the application, and the application for supplementing the subsoil use contract is subject to consideration within 20 working days, after which, the competent authority executes an addendum to the contract and sends to the applicant his signed copy.

Transfer of subsoil use rights or related objects

The SSU Code introduced some new provisions on the transfer of subsoil use rights and facilities related to subsoil use rights. In particular:

1) the range of strategic subsoil areas, to which the priority right of the state applies, is now limited to only very large oil and gas fields, fields located in the Kazakhstani sector of the Caspian Sea and uranium fields. Moreover, the list of such strategic subsoil areas is approved by the Government;

2) the transfer of a subsoil use right under the SCM or related facilities is now carried out without the application of the priority right of the state and only on the basis of the permission of the competent authority;

3) the list of cases is expanded where the consent of the competent authority to transfer the subsoil use right or related objects is not required; and

4) an application for obtaining permission to transfer the rights of subsoil use or related objects is now submitted by the acquirer.

Disclosure of information on persons and organisations controlling the subsoil user

An important requirement established by the SSU Code is disclosure of information on legal entities and individuals, as well as states and international organisations that directly or indirectly control the subsoil user. Disclosure of such information should be made during the granting of the subsoil use right, acquiring the subsoil use right or related objects as a result of the transition, as well as in each case when there is a change in the composition of persons and/or organisations that directly or indirectly control the activities of the subsoil user.

Retention status for SCM production

The previous legislation on subsoil contained only a mention of the possibility of a temporary cessation of operations on subsoil use, but did not define any grounds, nor terms, or order of such suspension, associating it only with the requirement of conservation of the subsoil use object. In contrast to this, the SSU Code introduces, a new for subsoil legislation, an institution on the right of a subsoil user conducting operations on the production of solid minerals to keep a plot. In cases stipulated by the code (the unprofitability of starting or continuing production under given market conditions, the occurrence of force majeure circumstances, the absence of the technology by the subsoil user that would allow production in compliance with environmental safety standards, etc.), the subsoil user has the right to apply mining retention status to the competent authority. This status allows the subsoil user for a period of up to five consecutive years, with a possible extension for another five years, to continue to retain the rights for the production site, but is freed from the need to mine on it, as well as from performing a number of other duties, accompanying mining operations. At the same time, the holding time is not included in the production period, since, in accordance with the Code, mining is extended for the entire retention period.

SCM Recycling Agreement

Another notable innovation is the norms of the SSU Code, which provide an opportunity for the subsoil user to conclude an agreement on the processing of SCM with the State. Under a such agreement, the State undertakes to provide the subsoil user with a range of tax, customs and other preferences, and the subsoil user must make investments of at least 7,000,000 times the MCI in the priority project for the processing of SCM.