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Draft Law on Production Sharing Agreements Applicable to Offshore Oil Operations

By Vadim Shneyer, Associate (Michael Wilson & Partners, Ltd)

 

Late September 2003, the National Company KazMunayGas and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan submitted to the Government of the Republic of Kazakhstan for the proposed Draft Law on Production Sharing Agreements Applicable to Offshore Oil Operations (the "Draft Production Sharing Law") for their consideration.

The Draft Production Sharing Law was apparently prepared by the experts from KazMunayGas and the Ministry of Energy and Mineral Resources of the Republic of Kazakhstan and already agreed with some other State Agencies.

Daniyal Akhmetov, the Kazakhstani Prime Minister, stressed the necessity of such a law at a meeting of the Government of Kazakhstan held on 7 August 2003. He stated "it is necessary to speed up the drafting of a law on production sharing agreements that will account to a maximum extent for the interests of the State in the implementation of new oil projects". Further, he stressed that "such a draft law is now being urgently prepared and will be submitted to the Parliament this year".

The enactment of the Law on Production Sharing Agreements, as well as a number of other normative acts, is encompassed by the State Programme for the Development of the National Sector of the Caspian Sea and which was approved by Government Resolution No 843 of 21 August 2003 ("Caspian Sea Development Programme").

The Caspian Sea Development Programme provides for a number of measures to be carried out with the purpose of ensuring and achieving the rapid development of the Kazakhstani Sector of the Caspian Sea, including the adoption of laws changing the principles of subsoil use, taxation and transportation in relation to offshore oil operations.

Despite the fact that the full text of the Draft Production Sharing Law was not published and is not officially available to us yet, we can assume that this law will materially change the principles of offshore oil operations in Kazakhstan by providing for the mandatory participation of Kazakhstani companies and entities, private or State-controlled, in the production sharing agreements applicable to offshore oil operations and management of oil projects, provided such companies and entities meet world standards and other requirements.

We should note that the idea of ensuring participation of local privately-owned and state-owned entities and companies in the development of oil projects is already actively pursued by the Kazakhstani authorities. Thus, pursuant to the Rules on the Representation of State Interests in the Contracts with Oil Contractors approved by the Government of Kazakhstan on 29 June 2002 (the "Rules"), the National Company KazMunayGas must hold at least a 50% interest in all contracts concerning the development of oil blocks put up for investment tenders announced by the Kazakhstani Government. The Rules also provide that the National Company KazMunayGas determines who will be the project operator, which could be either itself, its subsidiary or any other entity.

The Draft Production Sharing Law will apply only to the procedure for granting the right to conduct oil operations in the Kazakhstani Sector of the Caspian Sea and Aral Sea and, accordingly, will have a very specific field of application.

The authors of the draft suggest giving the draft priority in comparison with other legal acts regulating subsoil use.

More than 30 articles of the Draft Production Sharing Law regulate the procedure for entering into production sharing agreements, the obligations of subsoil users, the order of compensation of expenditures, the distribution of powers between the relevant Kazakhstani State Agencies and other issues relating to the activities of oil investors. We should further note that the Draft Production Sharing Law does not provide for any preferred taxation treatment of production sharing agreements. However, these might yet be included in the amendments to the Kazakhstani Tax Code being prepared now by other State Agencies.

Furthermore, it is unclear whether the new law will have retrospective effect, i.e. apply not only to production sharing agreements concluded after its enactment, but also to production sharing agreements concluded before its enactment.

State officials in their official statements stress the importance of the Draft Production Sharing Law for Kazakhstan. Thus, Kazakhstani Prime Minister Daniyal Akhmetov said at a recent meeting of the Working Group for Improvement of Legislation concerning subsoil use and oil operations on 30 September 2003 that changes and amendments to the legislation would increase the transparency of subsoil use contracts, improve environmental protection and encourage investors to bring advanced technology into the Kazakhstani market and possibly establish domestic production complexes for such technology.

Basing on the available information about the Draft Production Sharing Law, our conclusion is that this law is rather different from similar laws adopted in other CIS countries. In contrast to the laws on production sharing agreements in oil operations adopted in other CIS countries and that are aimed to attract foreign investments, the Draft Production Sharing Law rather seems to be aimed at ensuring the participation in offshore oil projects of Kazakhstani privately and state-owned oil and service companies.

After the enactment of this law, foreign investors will be obliged to share the oil and export profits with the Republic of Kazakhstan. Moreover, they will be obliged to share the operatorship/project management role with National Company KazMunayGas in order to have access to the development of attractive offshore oil projects.

 

 

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Foreign Investment in Kazakhstan Energy Sector

 

 

 

 

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