Subsoil use in Kazakhstan

Currently, subsoil use activities in the Republic of Kazakhstan are regulated by the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use” dated December 27, 2017 No. 125-VI (hereinafter referred to as the “Subsoil Code”), which came into force on June 29, 2018.

Subsoil use regimes in the Republic of Kazakhstan

The Republic of Kazakhstan has licensing and contract regimes for subsoil use.

Under the licensing regime, the right to subsoil use arises on the basis of a license issued by the relevant competent authority. Currently, the following types of licenses are issued:

No.	Type of subsoil use license:	Duration for which the license is issued:
1.	License for geological exploration of subsoil	three years
2.	License for exploration of solid minerals (hereinafter referred to as “TPI”)	six consecutive years
3.	License for the extraction of solid minerals	no more than twenty-five consecutive years
4.	License for the extraction of common minerals	no more than twenty-five consecutive years
5.	License to use subsoil space	no more than twenty-five consecutive years
6.	Mining license	three years

Under the contract regime, the right to subsoil use arises on the basis of a subsoil use contract between the competent authority in the field of subsoil use for hydrocarbons (hereinafter referred to as the “Ministry of Energy of the Republic of Kazakhstan” or “ME RK”) and the subsoil user. The following types of contracts are currently concluded:

No.	Type of subsoil use contract:	Duration for which the subsoil use contract is concluded:
1.	Contract for exploration and production of hydrocarbons (hereinafter referred to as “HCS”)	The validity period of the specified contract is determined sequentially by the following: ·     an exploration period lasting no more thansixconsecutive years, and in a subsoil area offshore or for complex hydrocarbon exploration projects - no morenineyears; ·     preparatory period (if necessary) lasting no more thanthreeyears; And ·     production period lasting no more thantwenty fiveyears, and in large and unique fields - no moremagpie fiveyears.
2.	Hydrocarbons production contract	The validity period of this contract is determined by the preparatory period (if necessary) and the production period sequentially fixed in it, the duration of which is similar to the corresponding periods of the contract for exploration and production of hydrocarbons.
3.	Uranium mining contract	The validity period of such a contract is determined sequentially by the following: ·    a period of pilot production, the duration of which is no more thanfouryears, with a corresponding reduction in the maximum duration of the uranium mining period; And ·    production period, the maximum duration of which at the conclusion of the contract is no more thantwenty fiveyears, including the period of pilot production.

Obtaining subsoil use rights

The right to subsoil use can be obtained by an individual or legal entity in the following ways:

• obtaining the right to subsoil use from the state (obtaining a license or concluding a contract for subsoil use);
• acquisition of subsoil use rights from an existing subsoil user or acquisition of participation interests/shares in a subsoil user or its parent company.

Obtaining subsoil use rights from the state

Obtaining subsoil use rights under a license

To obtain the right to subsoil use under a license, an interested individual or legal entity submits an application to the relevant competent authority. The competent authority reviews the application within ten working days and, based on the results of the review, either issues a license or refuses to issue it.

After the license is issued, the subsoil user is obliged to pay a subscription bonus in the amount established by the tax legislation of the Republic of Kazakhstan for the corresponding type of license.

There are some features of the process of obtaining a license for exploration or production of solid minerals. In particular, applications for licenses that include the same area are considered in the order of their receipt and a license is issued to the person whose application was received by the competent authority in the field of subsoil use for TPI (hereinafter referred to as “Ministry of Industry and Infrastructure Development of the Republic of Kazakhstan" or "MIIR") first.

In addition, a license for exploration or production of solid minerals is issued only in relation to subsoil areas (blocks) included in the management program of the state subsoil fund (hereinafter referred to as “Program").

Licenses for exploration of solid minerals in respect of subsoil areas included in the Program for the first time, in the case of several applicants for the same subsoil area, are issued on the basis of an auction.

Obtaining the right to subsoil use under a contract for exploration and production or hydrocarbon production

The right to subsoil use under an exploration and production or production contract may be obtained through an auction. In this case, the auction can only be held in relation to subsoil areas included in the Program.

The signing bonus is paid by the auction winner after the auction results are published.

Within forty working days from the date of publication of the auction results, a contract is concluded with the auction winner (subject to payment of the signature bonus) in accordance with standard contracts approved by the Ministry of Economics of the Republic of Kazakhstan. Deviation from the standard contract is permitted only in established cases, limits and manner. For example, if the geological reserves of a hydrocarbon deposit exceed one hundred million tons of oil or fifty billion cubic meters of natural gas, the provisions of the hydrocarbon production contract must contain one of the obligations that are not enshrined in the approved standard contract.

Today, the question remains open as to whether several persons can participate in an auction as a consortium, since the legislation does not give an unambiguous answer to it.

Obtaining the right to subsoil use under a contract for exploration and production or production of hydrocarbons jointly with a national company

The right to subsoil use under a contract for exploration and production or production of hydrocarbons can be obtained jointly with the national company in the field of hydrocarbons (JSC National Company Kazmunaigas, - hereinafter -"KMG") based on direct negotiations.

In this case, the interested legal entity (consortium of legal entities) must be recognized as a strategic partner that meets the requirements approved by KMG, and must also undertake an investment financing obligation (exploration financing under a joint activity agreement and (or) financing agreement). In this case, the joint activity agreement must provide for the strategic partner’s obligation to pay the signature bonus or reimburse the amount of the signature bonus paid to KMG.

Obtaining subsoil use rights under a uranium mining contract

The right to subsoil use under a uranium mining contract can be obtained from the state only by a national company in the uranium field (JSC National Atomic Company Kazatomprom).

However, there are still subsoil users under subsoil use contracts for uranium that were concluded before the Subsoil Code came into force. Due to stability provisions, such subsoil users have the opportunity to obtain the right to extract uranium. At the same time, the Ministry of Economics of the Republic of Kazakhstan may disagree with this position.

Acquisition of subsoil use rights from an existing subsoil user or acquisition of participation interests/shares in a subsoil user or its parent company.

The right to subsoil use (share in the right to subsoil use), as well as participation interests/shares in a subsoil user or its parent company can be acquired on the basis of compensated or gratuitous civil law transactions.

For the purposes of state regulation of transactions with participation interests/shares in a subsoil user or its parent company, the Subsoil Code establishes a definition

“objects related to the right to subsoil use” (hereinafter referred to as “Objects"), which means:

• participation interests, shares, shares and other forms of equity participation, as well as securities confirming ownership or convertible into shares, participation shares, shares and other forms of equity participation in a legal entity that has the right to subsoil use (i) under a contract for exploration and production or production of hydrocarbons, (ii) under a contract for uranium production, (iv) under a license for exploration or production of solid minerals;
• participation interests, shares, stocks and other forms of equity participation, as well as securities confirming ownership or convertible into shares, participation shares, shares and other forms of equity participation in a legal entity or other organization that have the ability to directly and (or) indirectly determine decisions made by the person holding the right to subsoil use specified above.

Alienation of the subsoil use right (share in the subsoil use right) under a contract, license for exploration or production of solid minerals, license for the use of subsoil space, as well as Objects is carried out with the permission of the competent authority.

A permit is issued to the acquirer of subsoil use rights or Objects, except for cases where the acquisition is carried out as part of the issue of shares or other securities for circulation on the organized securities market. Without such permission, the transaction is considered void from the point of view of Kazakhstan law, and the implementation of a transaction without permission may serve as grounds for termination of a license or contract for subsoil use (if the transaction entailed a threat to the national security of the Republic of Kazakhstan).

The Subsoil Code provides for cases in which permission from the competent authority for the alienation of subsoil use rights (or shares in it) and Objects is not required. For example, permission is not required if one of the parties to the transaction is a national company or the alienation occurs between organizations in each of which at least ninety-nine percent of the shares are owned by the same person.

Carrying out subsoil use operations

Carrying out subsoil use operations under a subsoil use contract

Conducting operations under a subsoil use contract depends on the type of contract, as well as the stage specified in it.

For example, under a contract for exploration and production of hydrocarbons, subsoil users carry out operations that correspond to the sequential stage specified in it.

During the exploration period, the subsoil user has the right to carry out any work to search for and evaluate deposits, including their trial operation.

If the subsoil user receives a positive conclusion from the state examination of subsoil in relation to the report on the calculation of geological reserves, a production site and a preparatory period may be assigned under the contract.

During the preparatory period, the subsoil user has the right to:

• development, approval and examination of a field development project;
• if necessary, development of a hydrocarbon field;
• production of hydrocarbons in a volume not exceeding production volumes during trial operation of such a field.

Based on the initial field development project, approved by the subsoil user and receiving positive conclusions from the required examinations, the hydrocarbon production period is determined.

During the production period, the subsoil user has the right to carry out a range of works related to the extraction of hydrocarbons from the subsoil to the surface.

Carrying out subsoil use operations under a subsoil use license

Under a subsoil use license, the subsoil user has the right to carry out subsoil use operations corresponding to the type of license.

For example, under a license for solid mineral exploration, a subsoil user has the right to use a subsoil plot for the purpose of conducting exploration operations for any types of solid minerals, including searching for solid mineral deposits and assessing their resources and reserves for subsequent production. Under a license for the extraction of solid minerals, a subsoil plot can be used for:

• TPI extraction (extraction),
• use of subsoil space for the purpose of carrying out mining operations, locating mining and (or) mining and processing industries, man-made mineral formations;
• exploration of the production site (operational exploration).

Under some licenses, the subsoil user is required to comply with annual minimum expenditure requirements. In particular, under a license for the exploration or production of solid minerals, the subsoil user is required to comply with the requirements for annual minimum expenses for subsoil use operations.

Purchase of goods, works and services for subsoil use operations

In the Republic of Kazakhstan, there is state regulation of the procedure for the acquisition of goods, works and services by subsoil users and their contractors (hereinafter referred to as “TRU"), used during operations:

• for exploration or production of hydrocarbons and uranium;
• for TPI extraction.

In addition, subsoil use contracts, as well as a license for the extraction of solid minerals, contain obligations regarding the share of local content in works and services, the amount of which must be at least fifty percent of the total volume of works and services during the calendar year.

Subsoil users are also required to provide a report on purchased GWS and the amount of local content in them.

Regulation of subsoil use contracts concluded before the entry into force of the Subsoil Code

The Subsoil Code provides that subsoil use contracts concluded before the entry into force of the Subsoil Code remain valid. Subsoil users who have the right to subsoil use under such contracts can switch to a new subsoil use regime.

In particular, subsoil users under contracts for solid minerals can switch to a licensing regime. Subsoil users under contracts for hydrocarbons have the right to switch to the terms of subsoil use provided for by the Subsoil Code by concluding a contract in a new edition that corresponds to the standard contract.

TPI resource and reserve assessment report

Current legislation provides for the preparation of a report on the assessment of solid mineral resources and reserves in accordance with the Kazakhstan Code of Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves (KAZRC Code), which was developed based on the template of the International CRIRSCO Committee (Committee for Mineral

Reserves International Reporting Standards).

Authors:Maxim Burak,Partner;Ruslan Byurabekov,Lawyer

GRATA International Kazakhstan, Nur-Sultan.