KAZAKHSTAN: LOCAL CONTENT LEGISLATION AMENDMENTS NEEDED

UNCLAS SECTION 01 OF 02 ASTANA 000089

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA
STATE PLEASE PASS TO USTDA

E.O. 12958: N/A
TAGS: PGOV PREL ECON EINV EPET SOCI KZ
SUBJECT: KAZAKHSTAN: LOCAL CONTENT LEGISLATION AMENDMENTS NEEDED
TO KEEP OIL AND GAS PROJECTS ON TRACK

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REFTEL: 08 ASTANA 1910


1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: On January 20, Energy Officer received a
thorough overview of the laws and regulations governing subsoil use
and local content from a well-respected local law firm.
Negotiations between the government and foreign investors over local
content likely will continue due to ambiguous language in the law,
which fails to define a consistent methodology to calculate local
content. If unresolved, these negotiations could affect the quality
and pace of major oil-production projects, such as Kashagan. END
SUMMARY.

LEGISLATION REGULATING SUBSOIL USER OPERATIONS


3. (SBU) On January 20, Energy Officer met with Samat Daumov,
Director of the Astana Branch of Grata Law Firm and a member of the
Parliamentary advisory group on the Subsoil Use Law, to discuss
subsoil use legislation. The discussion included Decree 367 (March
20, 2009) to establish a unified methodology for local content
calculation, the Local Content Law 223 (December 29, 2009),and the
draft Subsoil Use Law, which will replace existing laws. The Local
Content Law officially comes into effect on January 22.

AMBIGUOUS METHODOLOGY LEADS TO INDIVIDUAL INTERPRETATIONS


4. (SBU) Daumov complained that ambiguity with the formula to
calculate local content has compelled subsoil users to developed
their own, individual interpretations and estimations. He asserted
that the flawed formula resulted from government pressure for rapid
legislative approval, which precluded parliament's proper
consideration of the consequences of implementation. According to
Daumov, the Ministry of Energy and Mineral Resources (MEMR) is
awaiting the reaction of subsoil users to the new law, and "will not
make further amendments unless they raise a fuss."

LOCAL CONTENT LAW STRENGTHENS STATE ROLE


5. (SBU) Daumov highlighted the Local Content Law's mandated
creation of a database of local suppliers. He also explained that
the law places responsibility for meeting local content requirements
squarely on the shoulders of the companies and strengthens the
state's oversight role by giving additional authority to the
Ministry of Energy and Mineral Resources (MEMR) to monitor local
content requirements. According to Daumov, the law requires
companies to establish a percentage of local content in contracts,
but does not explain how to address existing contracts without a
specified percentage. Daumov confided that in March 2009, following
approval of Decree 367, MEMR sent letters to subsoil users, which
recommended they amend contracts to establish a minimum
local-content provision. He asserted that small subsoil users
undertook the relevant changes while larger investors did not.


6. NOTE: On January 26, Minister of Energy and Mineral Resources
Sauat Mynbayev informed parliament that MEMR has introduced changes
to more than 500 contracts during the past two years, including
changes designed to increase local content and attract more
Kazakhstani specialists to oil and gas projects. Mynbayev
acknowledged that it has been difficult for MEMR to modify contracts
for large projects such as Kashagan, but he nevertheless reported
that the number of Kazakhstani senior managers working on Kashagan
increased from nine to 241 during the last two years. "We will
continue to press this point with the international companies,"
Mynbayev vowed, adding that all new exploration and production
contracts will contain strict requirements to employ local
subcontractors and Kazakhstani specialists. END NOTE.


7. (SBU) Daumov explained that the Local Content Law allows the
state to revoke the subsoil-production rights of users who do not
meet local-content requirements during a project's exploration

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phase. He said that the government, which is aware of Kazakhstan's
current scarcity of qualified local-specialists and subcontractors,
has asked international investors to establish consortia to develop
local content. Although he acknowledged that the law favors
domestic suppliers by creating an enabling environment for their
development, Daumov contended that it does not constitute a direct
subsidy.

SUBSOIL USE LAW NEAR FINAL APPROVAL


8. (SBU) Daumov told Energy Officer that discussion of the draft
was temporarily halted pending approval of the Local Content Law.
On January 21, the Parliament concluded debate on the draft Subsoil
Use Law, which is expected to enter into force in the near future
(reftel).

U.S. COMPANY CALLS FOR KAZAKHSTAN TO INVEST IN LOCAL CONTENT


9. (SBU) During a courtesy call with the Ambassador on January 26,
Dan Houser, Vice President for Europe and Central Asia of J. Ray
McDermott, told the Ambassador that McDermott was committed to
investing in local content in Kazakhstan, but he said the government
cannot continue to rely on international companies to develop local
skills and capacity. "Kazakhstan needs to invest in itself more.
They need to put their money on the table," he said.


10. (SBU) COMMENT: Although legislation governing local content
and subsoil use gradually is taking shape, ambiguities regarding the
calculation and implementation of local-content requirements present
an administrative barrier for subsoil-use operations. Ongoing
negotiations over what does and does not constitute local content
could slow the pace of major oil projects, such as Kashagan, unless
these issues are resolved in a timely manner. The government has
previously demonstrated a willingness to consider the suggestions of
subsoil users when implementing laws of this nature. We expect that
further amendments will be necessary, particularly if large
investors such as Chevron, ExxonMobil, and Conoco press the claim
that these restrictions will impact the pace and quality of
operations. END COMMENT.


HOAGLAND