KAZAKHSTAN: GOVERNMENT TO PRESENT DRAFT OF NEW SUBSOIL LAW

UNCLAS SECTION 01 OF 02 ASTANA 001910

SENSITIVE
SIPDIS

STATE PASS TDA FOR DAN STEIN
COMMERCE FOR DANICA STARKS, ENERGY FOR TYLER TILLER

E.O. 12958: N/A
TAGS: EPET EINV PGOV KZ
SUBJECT: KAZAKHSTAN: GOVERNMENT TO PRESENT DRAFT OF NEW SUBSOIL LAW
TO PARLIAMENT

SUMMARY


1. (SBU) The Government of Kazakhstan will present to Parliament in
October a draft of a new law on subsoil use. The proposed
legislation would require separate contracts for exploration and
production operations, put shorter time limits on exploration
contracts, enhance the government's authority to terminate contracts
not in compliance with the law, and require tax stability clauses in
individual contracts to be approved by parliament. In addition,
under the terms of the legislation, no future contracts would be
structured as production sharing agreements (PSAs). A Ministry of
Energy official explained to us that the new legislation is aimed at
ironing out "contradictions" in several existing laws. International
oil companies are concerned with several of the provisions in the
proposed legislation -- but there does not appear to be the same
level of anxiety that was manifested over the October 2007 subsoil
amendments. END SUMMARY.

NO NEW PRODUCTION SHARING AGREEMENTS


2. (U) The Ministry of Energy and Mineral Resources announced on
September 8 that it will present to Parliament in October a draft of
a new law "On Subsoil and Subsoil Use." If passed on schedule, the
Ministry expects that the new law would come into effect in January

2009. The existing subsoil law has been amended five times, most
recently in October 2007. The new law would supersede all current
legislation on oil production and exploration, mineral resources
mineral management, and production sharing agreements (PSAs).


3. (U) Under the government's proposed draft, no future subsoil use
contracts would be structured as PSAs. Tax stability clauses in
contracts would still be permitted, but parliament would have to
ratify them to make them legally valid. There would be separate
bidding procedures and contracts for exploration and production
operations. A company awarded exploration rights would nevertheless
be given priority rights to negotiate a production contract with the
government following an oil or gas discovery. However, if the terms
of the production contract were not agreed to within a set time
period, production rights would be opened to other bidders through a
public tender.

MORE AUTHORITY TO TERMINATE CONTRACTS


4. (U) Under other terms of the draft law, exploration contracts
would be limited to six years, with the possibility for an extension
for an evaluation period. (NOTE: Current law provides for
exploration contracts of up to six years, with the possibility of
two extensions of two years each -- for a total of 10 years -- in
addition to an additional extension for an evaluation period. END
NOTE.) Companies would be required to establish equal terms,
conditions, and pay for Kazakhstani and foreign workers. The
government would also put greater emphasis on promised social
contributions in evaluating bids on subsoil contracts.


5. (U) The proposed draft fully incorporates the October 2007
amendment to the current subsoil law which allows the government to
force amendments to existing subsoil contracts of "strategic
significance" -- or even terminate such contracts -- where the
economic interests of Kazakhstan are so threatened as to create a
"national security risk." In addition, the proposed draft provides
the government with enhanced authority to terminate any subsoil
contracts for non-compliance with any law. The Ministry of Finance
in particular pushed for such authority. According to the Ministry,
more than half of the 400 oil and gas companies operating in
Kazakhstan do not consistently fulfill the terms of their contracts,
especially those concerning taxation.

REASSURANCES FROM ENERGY MINISTRY


6. (SBU) Timur Toktabayev, Director of the Department of Subsoil
Investment in the Ministry of Energy and Mineral Resources, told
Energy Officer on September 24, that the main purpose of the new law
was to codify and reconcile existing legislation. Toktabayev served
on the working group that prepared the new draft subsoil law and he
claimed there were more than 60 contradictions in the various
existing laws pertaining to subsoil. The inter-governmental working
group was also tasked with strengthening the monitoring and
enforcement provisions of production contracts, particularly
financial and technical clauses. For example, production contracts

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will be monitored more closely to ensure that companies meet
specific production milestones for the entire block under contract
and do not simply hold subsoil use licenses without working to
develop the field. Toktabayev was eager to reassure Energy Officer
that the Government of Kazakhstan will continue to respect the
sanctity of contracts and the principle of tax stability. He said
the government does not want to trigger new legal battles with
companies and will continue to prefer the negotiated settlement of
disputes to litigation and arbitration.

INTERNATIONAL COMPANIES EXPRESS SEVERAL CONCERNS


7. (SBU) International oil companies operating in Kazakhstan,
including ExxonMobil, ConocoPhillips, and Chevron, are currently
reviewing the draft law and will provide comments and suggestions to
the Government through the KazEnergy business association headed by
President Nazarabayev's son-in-law, Timur Kulibayev. They have
indicated to us that their primary areas of concern are the
separation of exploration and production contracts; the requirement
for parliamentary approval of tax stability clauses; uncertainty
over whether the provisions of the new law would require the
renegotiation of existing contracts; and the government's enhanced
authority to terminate contracts. They also maintain that the
legislation might allow the government to revoke the production
rights of one company in a consortium while allowing other partners
to continue to operate, thus giving the government direct influence
over consortium operations and composition.

COMMENT


8. (SBU) The proposed new subsoil law appears to be yet another step
-- even if a small one -- in the direction of increased Kazakhstani
government assertiveness in the energy sector. That said, while
senior officials, including Prime Minister Masimov, admit that the
government wants to strike more favorable terms for new deals, they
regularly reassure us that the sanctity of existing contracts will
be respected. In any event, the proposed new law has not aroused
anywhere near the same level of concern as the October 2007 subsoil
amendments that gave the government the power to renegotiate and
terminate contracts on "national security" grounds. END COMMENT.

HOAGLAND