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 ASTANA 00001910 002 OF 002 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