Kazakhstan’s Draft Mining Code Likely To Make Development Of Major Deposits More Costly While Increasing Kazmunaygaz’s Profile

Kazakhstan's Draft Mining Code Likely To Make Development Of Major Deposits More Costly While Increasing Kazmunaygaz's Profile

The draft Mining Code was discussed at the Foreign Investors’ Council meeting chaired by President Nursultan Nazarbayev on 22 June: it points to increased state interference in the sector along with higher regulatory cost burdens, and may leave existing operators of the country’s main energy deposits facing severe future uncertainties, IHS Markit writes.

IHS Markit perspective
Outlook and implications
  • The issuance of subsoil permits will take place at open auctions with conditions being attached regarding social responsibility and local content.
  • The authorities will retain the right to designate state-owned companies as shareholders where deposits are considered “major and unique”.
  • Contract extension at major and unique deposits will be contingent on meeting additional government conditions, which will increase costs and uncertainty for investors: these threaten to increase uncertainties for firms participating in existing production-sharing agreements at key Kazakh energy deposits.
Risks State contract alteration; Contract enforcement; Regulatory burden
Sectors or assets Oil and Gas; Mining

At the plenary meeting of the Foreign Investors’ Council in Astana on 22 June, the Minister of Energy Kanat Bozumbayev claimed that the new Mining and Tax Codes, which the government will submit to parliament in September, will reduce administrative barriers and increase the attractiveness of investment into Kazakhstan’s mining sector.

According to Bozumbayev, against the background of the low oil price environment, the amended arrangements will allow Kazakhstan to attract up to USD1 billion each year into oil and geological exploration. The Kazakh analytical portal Ratel.kz reports that the government has circulated the draft Mining Code to industry groups, business associations and major law firms.

However, despite the positive official claims, legal analysis conducted by a partner at the Almaty-based law firm Aequitas suggests that the new Mining Code contains certain provisions which are likely to alarm foreign mining and energy companies, and various concerns also have been raised during public discussions on the plans.

Auctioning subsoil permits

The new Mining Code mandates the organisation of open auctions for subsoil permits. In these participants will submit competing bids regarding the signing bonus, starting from an initial level included in the auction announcement. A physical or legal entity that wishes to seek investors through such permits will submit a written request, which will be processed within 10 working days by the Ministry of Investments and Development (MID). If the MID approves the request, an auction announcement will then be made. This will contain a range of conditions that auction participants will need to accept up front. These will include estimated minimum expenditures on various social commitments: these will include training Kazakh cadres during the extractive phase, research and development to be undertaken within Kazakhstan during the extractive phase, and socio-economic development and infrastructure of the region where extraction is to take place. The auction conditions also will contain minimal requirements with regard to maintaining local content .

KazMunayGaz’s role enhanced

Under certain circumstances, depending on the significance of the subsoil deposit, MID also retains the right to introduce additional conditions, including the compulsory allocation of shares to national companies in the final contract. This is likely to increase the role of Kazakhstan’s state-owned KazMunayGaz. The new Mining Code specifically stipulates that if MID designates a national company to be a shareholder, its share in the charter capital of an operator must not be less than 50%.

Potential “mine field” in contract extension

The new Mining Code limits the duration of exploration to six years with the exception of offshore exploration or complex projects requiring drilling wells with a depth of more than 6km, which can proceed for eight years. The exploration term can be extended only once and for three years, with the aforementioned exceptions allowed a six-year extension. The contracts also will establish a maximum period of 25 years for extraction activities: this will be increased to a 45-year term at the major and unique deposits. At these projects, the government also will have the right to attach supplementary conditions to the contract extension, which can go beyond those included in the initial contract. Such conditions could entail new requirements for an investor, including creation of new facilities or the modernisation of existing processing capacity. Additionally, it may require an operator to supply the oil and gas produced in Kazakhstan only to domestic refineries.

Outlook and implications

If Kazakhstan’s new Mining Code does not undergo revision to address the concerns raised at multiple public discussions organised by MID, it is unlikely to result in the revitalisation of the extractive sector. Potentially of greater concern, it may also increase risks in existing projects. The original production-sharing agreements (PSAs) for Kazakhstan’s three major oil and gas deposits – Kashagan, Karachaganak and Tengiz – are due to expire in 2041, 2038 and 2033 respectively. The new proposals relating to contract extension at the major and unique deposits threaten a significant increase in regulatory burdens and costs for the firms participating in the consortiums which operate these offshore oil fields. Having spent billions of dollars already, foreign energy companies in Kazakhstan may face a stark choice between withdrawal or accepting the risk of potentially sizeable and as yet undefined additional burdens, with a significant increase in project uncertainty risks, in clear contrast to the goal of attracting incremental new investment.