Changes in Kazakh Legislation and the Interests of Foreign Investors in the Oil Sector
Alexander Lesser, Managing Partner, Lesser, Zhakenov & Newton
Over the past few years we have been gathering in the Kazakhstan International Oil and Gas Conference to discuss the rich energy and natural resources of the Republic of Kazakhstan and the prospects for their development. Today I would like to briefly mention the key Kazakhstani legislation affecting foreign direct investment in the oil & gas sector of the Republic, the full potential of which is now widely acknowledged with the discovery of the Kashagan Field.
Amendments to the Petroleum Law and Resource Code
As of this writing, we are awaiting potentially significant changes to legislation relating to hydrocarbon development projects. Amendments to both the Decree of the President of the Republic of Kazakhstan having the Force of Law “On Petroleum” No 2350 dated 28 June 1995 (the “Petroleum Law”), and the Decree of the President of the Republic of Kazakhstan having the Force of Law “On Sub-soil Resources and the Use of Sub-soil Resources” No 2828 dated 27 January 1996 (the “Resource Code”) are expected in the near future.
As I am sure many of you know, the last significant amendments to the Petroleum Law and the Resource Code took effect on 1 September 1999. Today I will discuss one of the most important aspects of these amendments: the abolition of the requirement to obtain a license for oil projects. Under current law, the legal right to explore for and extract oil in Kazakhstan rests on a single foundation: the hydrocarbon contract between the resource user and the Kazakh Government. This simplification of the law has undoubtedly been a great benefit to the development of Kazakhstan’s oil industry.
However, the abolition of the licensing requirement has also raised certain practical questions which some of you may have experienced. I will mention a few examples.
License Surrender. Some investors holding licenses issued prior to 1 September 1999 have asked whether it is desirable to surrender their licenses to the Kazakh Government, and instead rely solely on their hydrocarbon contract as evidence of their resource rights. This question is of particular concern where a license contains unfavorable terms, or conditions that may not have been fully satisfied. We have generally advised against license surrender for several reasons. First, because the date of license issuance may be used as evidence of investment activity that triggers protection under the Law of the Republic of Kazakhstan “On Foreign Investment” No 266-XIII dated 27 December 1994 (the “Foreign Investment Law”). Second, although licenses are not required in Kazakhstan today, they might in future again become a legal requirement, and in that event it may be useful to have one. Third, there is no clear mechanism for license surrender. Much time and money can be wasted in the effort.
License Replacement. Because oil licenses are no longer issued, investors who have lost or misplaced their original license have found the Government unwilling to issue a replacement. In such situations, the Government has been willing to issue a letter confirming that it holds an original in its archives.
License vs. Contract. Investors who had licenses but not hydrocarbon contracts on the effective date of the amendments find themselves in an unclear position vis-?-vis their rights in the event of an attempted suspension or termination by the Government. The amendments expressly provided that licenses issued prior to the effective date would remain valid, and that provisions of the Resource Code relating to license suspension or termination (prior Articles 38-41) would continue to apply to such licenses. At the same time, suspension or termination of contracts executed after the effective date is governed by the new Articles 45-46 of the Resource Code. While the prior and new provisions are similar, they are not identical. Some investors have experienced difficulty as a result.
Legislation Affecting Energy Infrastructure Projects
Oil companies do not need to own the land on which they extract oil. Kazakhstani legislation gives them an exclusive right to use land – or offshore zones – for that purpose. With the development of infrastructure around the Caspian Sea, however, the ownership of land may become a critical issue for various types of projects, such as office and residential projects, processing and storage facilities and other projects where investors must obtain rights to immovable property. So I would like to briefly mention Kazakhstani legislation relating to land.
The private ownership of land in Kazakhstan has been the subject of continuing evolution since independence from the Soviet Union in 1991, particularly as it relates to foreign legal or physical persons. The ownership of land in Kazakhstan is governed by various normative acts, including the Law of the Republic of Kazakhstan “On Land” No 2717 dated 22 December 1995 (the “Land Law”), the Law of the Republic of Kazakhstan “On State Registration of Rights in Immovable Property and Transactions involving Immovable Property” No 2727 dated 25 December 1995, and various implementing decrees issued by the Government of Kazakhstan, including the Decree “On Confirmation of the Procedure for Registering Private Ownership of Land and Land Use Rights” No 760 dated 20 June 1996 and other decrees and government decisions relating to land ownership, including decisions of local Akims (collectively, the “Property Legislation”).
The Land Law does not prohibit the ownership of land by foreign legal entities. However, the Property Legislation as a whole does not clearly and adequately set forth a procedure for registering such ownership, thus leaving the process of registration subject to uncertainty, including the possibilities that unpublished local decisions might affect the process or that registration authorities might obstruct or delay registration based on differing interpretations of the Property Legislation.
In general, we recommend that foreign investors wishing to own immovable property in Kazakhstan do so through a wholly-owned single purpose subsidiary registered in Kazakhstan, rather than through an offshore company.
Another area that deserves brief mention today is dispute resolution. The Foreign Investment Law expressly provides that disputes involving foreign investors may be the subject of international arbitration. We strongly recommend that foreign investors ensure that project documents offer the option of international arbitration as an alternative to local adjudication of disputes. Apart from the international arbitration tribunals in Europe, we also recommend that the Arbitration Court of the Moscow Chamber of Commerce be considered as an alternative, particularly where amounts in dispute do not warrant the expense of a European proceeding.
If Kazakhstan is chosen as the forum for dispute resolution, we recommend recourse to the Arbitration Commission of the Kazakh Chamber of Commerce, rather than to the Kazakh courts. However, the finality of Arbitration Commission decisions has been adversely affected by the adoption of Kazakhstan’s new Code of Civil Procedure in July 1999. Under prior law, Kazakh court review of Arbitration Commission decisions was limited to procedural matters, whereas under current law, the Kazakh courts may initiate a reconsideration of the merits of a case and possibly overturn an arbitration decision. Accordingly, the safest course, as noted, is to ensure that project documents allow foreign investors several options.
Other Legislative Developments
I think it is important to mention that major amendments to the Presidential Decree «On Taxes and Other Compulsory Payments to the Budget» No 2235 dated 24 April 1995 (the «Tax Code») are also expected soon, but I will leave discussion of the Tax Code to others here today.
Finally, as many of you know, Kazakhstan has since our last gathering adopted new laws and decrees relating to employment, including the employment of foreign workers, that are important for investors to understand.
Alexander Lesser is a graduate of Columbia Law School in New York and fluent Russian-speaker with substantial international experience in New York, London and the former Soviet Union. He is a Managing Partner of Lesser, Zhakenov & Newton, a law firm that has facilitated transactions involving more than US $ 695 million in foreign direct investment in the Republic of Kazakstan since 1995, primarily natural resource development projects. The firm has four partners and three associate lawyers, all bi-lingual in English and Russian.
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