Brief Analysis of Draft Law ”On State Regulation of Production and Turnover of Certain Types of Petroleum Products”
Dr. Olga Chentsova, Managing Partner of Aequitas Law Firm
Angelika Novozhilova, Lawyer of Aequitas Law Firm
On July 11, 2002, a Decree of the Government of the Republic of Kazakhstan repeatedly submitted a draft Law of the Republic of Kazakhstan, On State Regulation of the Production and Turnover of Certain Types of Petroleum Products (the “Draft Law” or the “Draft”), for the consideration of the Majilis of the Parliament. The implementation of the Draft would involve amending certain legislative acts of the Republic of Kazakhstan on the issues of the state regulation of the production and turnover of certain types of petroleum products.
This paper provides a brief legal analysis of certain provisions of the Draft Law.
General Characteristic of the Draft Law
The drafting of the Draft Law, On the Regulation of the Production and Turnover of Certain Types of Petroleum Products, is the embodiment of the policy pursued for a number of years, which is directed towards the increase of the state influence in the sphere of production and turnover of petroleum products. This trend was earlier provided for in a number of governmental programs for the social and economic development of the Republic.
On the whole, we believe that presently there exists the need in adoption of such law. Its actuality and usefulness is partly confirmed by annual seasonal increase of prices of fuel and lubricants during a period of the spring- autumn fieldwork, abuse in the sphere of quality of petrol and diesel fuel sold in the retail trade.
The Law, which to a certain extent regulates the issues of the production and sale of petroleum products, could be served as a legal basis for the protection of the rights of petroleum products consumers, the protection of the domestic market of petroleum products and its domestic producers (local refineries) and also the protection of the population and the environment of the Republic when rules of petroleum products transportation are violated.
The main objective in the development of the Draft Law was the resolution of the above and similar problems. The attempt to resolve them is partly seen in the Draft, and a number of its rules may be called useful and timely.
At the same time the Draft has the tendency towards excessive state regulation of some issues related to the production and turnover of certain types of petroleum products despite earlier made critical comments regarding this issue.
According to the Draft the new Law will enter into effect upon expire of six months from the date of its official publication. Evidently, such sufficiently extended period is stipulated by the fact that state agencies and enterprises operating in the sphere of the production and turnover of petroleum products need considerable time for bringing their work in compliance with the new legislative requirements both in the part of technical, contractual and legal support to their business.
The Draft Law will regulate the relations arising in the process of the production and turnover of petrol (except for aviation fuel), diesel fuel and mazut.
The Draft has only 15 Articles, which determine:
• the concept of the state regulation of the production and turnover of petroleum products;
• competence of state agencies with respect to the regulation of the production and turnover of petroleum products; and
• mandatory terms for the production, realization and transportation of petroleum products.
Below we will briefly address each of the above-mentioned aspects.
It is noteworthy that the internal structure of the Draft is not always logical. Specifically, certain provisions of the Draft Law use the concept of “oil processing organizations” when it establishes some special requirements and restrictions, for example, when dealing with state monitoring or fixing of prices (tariffs) in the oil processing. It seems that the term “oil processing enterprises” is outside the scope of the proposed sphere of effect of the Draft Law (since it, being sufficiently wide, covers producers of all types of petroleum products, but not only those who fall under the effect of the Draft). Therefore, the possibility arises for extending its application and imposing excessive regulation on the part of the state agencies. In our view, it would be more correct to use throughout the Draft the term “producer of petroleum products”.
Correlation with the Current Legislation
Some provisions of the Draft duplicate the effective rules of the law (for example, the authorities of the Government to establish restrictions on the import and export of petroleum products as a means for the protection of domestic market or certain issues of the antimonopoly regulation).
At the same time many provisions of the Draft Law are novelties, including the following:
• licensing of the activity related to the production of petroleum products;
• certification of service stations and warehouses of petroleum products;
• keeping of passports of production;
• establishment of the minimum volume of petroleum products production for the petroleum products producers;
• establishment of agreeing of deadlines for the performance of repair and restoration operations of oil processing organizations;
• permanent monitoring of the production and turnover of petroleum products; and
• keeping by the authorized state agency of the unified database on the production and turnover of petroleum products.
The Legal Analysis of Certain Provisions of the Draft Law
1. The State Regulation of the Production and Turnover of Petroleum Products.
In accordance with the Draft the state regulation of the production and turnover of petroleum products will comprise the following:
• licensing of the activity related to the production of petroleum products;
• establishment of the minimum volumes of the production of petroleum products;
• supervision of the turnover of petroleum products, including by declaring, monitoring, using of accompanying invoices and keeping of the unified database on the production and turnover of petroleum products; and
• state control of the quality of petroleum products.
Licensing of the Activity Related to the Production of Petroleum Products
As regards the licensing of the activity related to the production of petroleum products, it is evident that the legislation will undergo further amendments, including the establishment of the procedure for licensing and determination of licensing requirements, since such procedure and such requirements are not established.
Establishment of the Minimum Volumes of the Production of Petroleum Products
The Draft Law stipulates that the state agency in the area of energy will establish the minimum volumes of the production of petroleum products and coordinate the activity of oil processing organizations for providing for their minimum volumes. Presently, the Ministry of Energy and Mineral Resources is such an agency, which retains its powers in the area of fuel and energy sector of the industry and subsoil use. The possibility of suspension of the license effect is provided as a mechanism for ensuring the implementation of the said authorities in case of violation of the conditions of the petroleum products production.
The Draft Law does not contain a mechanism for ensuring the delivery of oil and gas condensate to refineries for processing for the purpose of providing for their production of the established minimum volumes of petroleum products. In this connection and also taking into account the planned amendments to the Law On Petroleum one should probably anticipate the establishment of regulation (apparently including the quoting) of mandatory supply of crude oil and gas condensate by oil producing enterprises to producers of petroleum products. The failure to supply crude oil by the oil producing enterprises is not listed among the circumstances that exempt the producers of petroleum products from sanctions for the non-implementation of requirements to the minimum volume of production (namely, suspension of the license’s effect).
As to state guarantees for ensuring the sale of finished petroleum products produced within the framework of such minimum volumes, neither the Draft nor the current legislation, nor draft laws assumed to be adopted or discussed, contain such guarantees.
Since we are not experts in macroeconomics, we do not attempt to forecast the possible economic implications (both positive and negative) of the tendencies, contained in the Draft Law, towards the planning of the economy in the sphere of the production and turnover of petroleum products. However, we are certain that any steps in this direction should be carefully reviewed, and the Draft should contain definite compensation mechanisms in case of unplanned market fluctuations (including the guarantees of the sale by the producers of finished petroleum products or compensation in case of impossibility to sell them), and also the guarantee of profitability of the production and sale of petroleum products and turnover of oil in the market of Kazakhstan.
In the light of the planned regulation, it should be noted that it considerably restricts the business activity guaranteed by both the Constitution and the Civil Code of the Republic of Kazakhstan.
Supervision of the Turnover of Petroleum Products, Including by Declaring, Monitoring, Using of Accompanying Invoices and Keeping of the Unified Database on the Production and Turnover of Petroleum Products
The entities that carry out production and/or sale of petroleum products shall be obliged to submit to the authorized state agency declarations on the volumes and remainder of the production and/or turnover of petroleum products in accordance with relevant forms to be additionally approved.
The Draft Law stipulates that in the sale of petroleum products by the plant-manufacturer to wholesale buyers to the warehouses of petroleum products, to service stations and to the retailers (to the end consumer) and also in the sale of petroleum products from warehouses of petroleum products to services stations or to the retailers (the end consumer) shall, in the mandatory procedure, have accompanying invoices.
The authorized state agency shall keep the unified electronic database of information on the production and turnover of petroleum products. The information to such database shall be received from their producers who should be equipped with accounting devices that provide for the automated transfer of information on the volumes of production to the authorized agency. Service stations and petroleum products warehouses shall have the electronic (computer) system of accounting of their purchase and sale. On the basis of such database the authorized agency will compile mutually coordinated balance of the production and turnover of petroleum products on the national and regional levels.
Therefore, we again see that the influence of the state to a considerable extent applies to the freedom of business activity of organizations engaged in the production and turnover of petroleum products. Such all-embracing collection of information can make private companies sufficiently vulnerable, taking into account that the Draft Law does not provide for the regime of confidentiality of such information.
State Control of the Quality of Petroleum Products
The analysis of the Draft Law allows assuming that in the near future obligatory certification of petroleum products may be introduced through which the control of their quality will be carried out. Service stations and petroleum products warehouses will also be subject to the certification.
Furthermore, the Draft assumes only enterprises that have the relevant licenses may carry out compounding, addition of additives and components to commodity petrol for the purpose of increasing the octane number, compounding, addition of additives and components to substandard petroleum products for the purpose of obtaining petrol of a specified quality and addition of additives to diesel fuel.
2. Competence of Government Agencies in Regulating Production and Turnover of Petroleum Products.
The Draft Law provides for a rather detailed description of authorities of various government agencies in regulating the production and turnover of petroleum products, including those of the Government, the authorized government agency, and the government agencies in the field of standardization and certification, power engineering, economy and trade, antimonopoly policies, environment control, and transport. The Draft envisages that certain regulating functions with respect to the production and turnover of petroleum products can be administered by other government bodies, except for the licensing agency.
The Draft Law has once again failed to determine which government agency should license the production of petroleum products, although it provides for the relevant authority of the RK Government to appoint such agency. We believe that a rule on the licensing agency should be included in the Draft Law (at least descriptively) especially considering that the authorities of the other government agencies have been detailed in the Draft Law.
In some instances the wording of the Draft with respect to the competence of the government agencies appears somewhat little thought-out (for example, it is not clear why specify that the Government shall have the right to issue normative legal acts in the field of state regulation of production and turnover of petroleum products when such an authority, only in a more general sense, is fixed both in the RK Constitution and the RK Constitutional Law on Government).
It is proposed to amend the Petroleum Law to modify the powers of the RK Government and the Competent Authority for production and turnover of petroleum products. We would like to specifically note that the Draft Law deals only with the turnover of individual types of petroleum products, while the proposed amendments to the Petroleum Law would cover the powers of the Government and the Competent Authority in regulating the production and turnover of oil as such, that is, as Article 1 of the Petroleum Law defines “crude oil, gas condensate, and natural gas, including hydrocarbons received by refining the crude oil and natural gas and processing the shale oil or tar sand”.
In the light of the proposed amendments to the Petroleum Law and expected enactment of the Draft, the correlation of the powers of the RK Ministry of Energy and Mineral Resources as the Competent Authority under the Petroleum Law and apparently as the government agency in the field of power engineering may be of a special interest. This Ministry would concentrate in its hands the powers with respect to both the petroleum operations (exploration, production, construction and operation of oil and gas pipelines, etc.) and the production and turnover of specific products of oil refining.
It is not clear at the moment which of the government agencies would be appointed the authorized government agency to administer state regulation of production and turnover of specific petroleum products, since the Draft separates its authorities from those of the government agency for power engineering (Ministry of Energy and Mineral Resources). It would be logical in our view if the Ministry of Energy and Mineral Resources were vested with the powers of the authorized government agency. The second likeliest candidate for the role of the authorized government agency appears to be the government agency for economy and trade.
3. Mandatory Conditions of Production, Sale, and Transportation of Petroleum Products.
We believe that the enactment of the Draft Law would entail certain consequences for different players in the market of petroleum products.
The Draft Law establishes an obligatory requirement for the refineries to pursue a license for production of specific range of petroleum products.
According to the Draft Law, only the refineries holding a special passport approved by the government agency for power engineering would be allowed to produce the petroleum products and only at the address as specified in the license, and such permission would be subject to the availability of compulsory controlling instruments ensuring automatic transmission of the production volume information to the authorized government agency.
It would be prohibited to the producers of petroleum products to sell crude oil and /or gas condensate. They would be obliged to submit to the approval of the authorized government agency and the government agency for power engineering the schedule of repair and recovery work except for the cases requiring immediate measures to ensure the continuing safety of the production process.
In addition, the Draft Law provides for a tight price control – every year, from March 1 to May 31 and from August 1 to October 31, the producers of petroleum products would be obliged to sell not less than 50% of the produced products at a price not higher that their average annual petroleum products’ price for the previous year adjusted to the inflation index.
The proposed amendments to the Certification Law would apparently establish mandatory certification requirements for the service stations. (Presently, the legislation provides only for certification of products, processes, work, and services. Since the service stations cannot be related to any of the above, it is proposed to introduce the certification of business units, which would cover the service stations and the petroleum products warehouses). One of the conditions of certification of a service station would be its equipment with an electronic (computer) petroleum products accounting system.
Petroleum Products Warehouses
Certification is also proposed for the petroleum products warehouses and it would also be subject to the availability of an electronic (computer) system for accounting the incoming and outgoing petroleum products. The same price control system is envisaged for the petroleum products warehouses as for the refineries.
Petroleum Products Transportation Companies
Transportation of the petroleum products would be allowed only for the vehicles specially equipped and qualified in accordance with the requirements established for transportation of dangerous cargoes and the safety rules. In specific cases an accompanying note would be required for transportation.
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