Kazakhstan is rich in mineral resources, and mining is the backbone of its national economy – exploiting more than 90 types of mineral deposits, 1,200 types of mineral raw materials and vast reserves of tungsten, chromium, uranium, copper, iron ore and petroleum ranked among the top 10 in the world.
Subsoil use rights in Kazakhstan can be acquired by obtaining a subsoil use license or a subsoil use contract, last updated in 2017 under the Code on the basement and the use of the basement.
This article explains the subsoil use contract system and associated legal risks as a benchmark for companies investing in mineral-rich Kazakhstan.
In accordance with the code, the rights of use of the basement are proprietary and indivisible, subject to the regulations on land ownership. The subsurface use contract system applies mainly to the exploration and production of strategic minerals, in particular the following three types of mining activities: (1) exploration and production of hydrocarbons , including oil, crude oil and native bitumen; (2) the production of hydrocarbons; and (3) uranium production.
Parties to a subsoil use contract include the grantor, represented by the Ministry of Energy of Kazakhstan (MOE), and the grantee, either an individual, a company, or several entities requiring a clear specification of shares. In 2018, the MOE published three versions of standard contractual texts, in Kazakh and Russian, corresponding to the three types of mining activities mentioned above.
Subsoil use contracts can be executed in the following three ways to acquire the corresponding subsoil use rights:
Original acquisition. An individual or company becomes the beneficiary of subsurface rights after winning an auction held by the MOE, or after negotiating directly with the MOE and obtaining permission to perform a contract with it.
With regard to the exploration and production of hydrocarbons, the auction system can be applied to determine the concessionaire. The MOE organizes auctions based on requests from individuals or businesses and enters into a subsurface use contract with the winner.
The direct trading system applies to national companies, ie state-controlled limited companies set up by the government. The system can be applied when a national company must participate in the exploration and (or) production of hydrocarbons; and only by direct negotiation when a national company must participate in the production of uranium. Depending on the outcome of the direct negotiations, the MOE will decide whether or not to enter into a contract.
Acquisition by sale. Namely, the transfer of the rights to use the subsoil (or its shares) in accordance with the transaction rules of Kazakh civil law. Under the subsoil use contract system, the transfer of subsoil use rights (or its shares) requires the revision of the subsoil use contract. Once the buyer and seller arrive at an intention to transact, the buyer submits a request to the MOE to modify the subsurface use agreement – and the MOE ultimately decides whether or not to give approval.
Acquisition by succession. This method is only applicable in case of restructuring of a legal entity. It refers to a situation where the post-restructuring legal entity succeeds to the subsoil use rights of the pre-restructuring legal entity. The acquisition of subsoil use rights by succession does not require the approval of the competent authorities.
Restriction of equity participation when transferring uranium rights. Only the National Atomic Company Kazatomprom Joint Stock Company (Kazatomprom) has the right to produce uranium. But once Kazatomprom has signed a contract with the MOE, it is free to transfer the acquired subsoil use rights to a third party company.
In accordance with the code, Kazatomprom can only transfer its uranium production rights to a company in which it directly or indirectly holds more than 50% of the shares. If a non-state company wishes to participate in the extraction of uranium from Kazakhstan, it can do so by creating a joint venture with Kazatomprom, which must control more than 50% of the shares.
Preeminent right of the State. The State of Kazakhstan has a strong right of pre-emption over land plots classified as strategic subsoil plot, including state priority for shared acquisition of alienated subsoil use rights related to a strategic plot – as well as shares and other securities, namely those associated with land rights to the strategic plot to be issued on the organized stock market.
Kazakhstan’s strategic subsoil includes plots with oil reserves of more than 50 million tons or natural gas reserves of more than 15 billion cubic meters – in the Kazakh region of the Caspian Sea – and plots of basement with uranium deposits.
Early termination of the government contract. The MOE can unilaterally decide to terminate a contract early if the contract for the use of the subsoil is deemed prejudicial to the interests of the State, or if the concessionaire fails to comply with its obligations under the code or the contract.
For example, in February 2022, the government decided to early terminate 148 solid resource contracts and 27 hydrocarbon contracts due to unsatisfactory performance of contractual obligations.
Before investing, a potential investor in the subsoil sector of Kazakhstan should take care to select the appropriate method of acquiring subsoil use rights in accordance with local regulations for different types – and reasonably arrange its investment structure. investment in advance, in accordance with relevant restriction requirements, such as equity percentage restriction.
It should also take into account the legal risks associated with the state’s right of first refusal and early termination of the contract by the government.
After obtaining a subsurface use contract, investors should strictly abide by the laws and the contract, and fully fulfill their obligations to avoid early termination of the contract by the government.
Wang Jihong is a partner and Chen Haobi is a partner at Zhong Lun Law Firm
Zhong Lun Law Firm
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