On November 15, Mazhilis approved and forwarded to the Senate a draft law, On Amendments and Additions to the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use,” to improve the subsoil use sector.
The main goals and directions of the draft law include enhancing the investment attractiveness of geological exploration and hydrocarbon extraction, optimising procedures for state expertise of basic project documents, and reducing financial and administrative costs for subsoil users in the development of deposits.
Below is an overview of some anticipated changes to the Code. Please note that the following overview is based on publicly available information. Therefore, there may be discrepancies with the final version of the draft law that will be adopted.
1. Enhancing the Investment Attractiveness of Geological Exploration and Hydrocarbon Extraction
Refusal of Unjustified Drilling
According to the proposed revision, a subsoil user has the right to refuse drilling as stipulated in the work program of the contract on exploration and mining. In the case of an independent well in a subsoil area, refusal can only occur if seismic exploration has been conducted. In this case, the subsoil user will be required to pay a penalty for non-compliance with contractual obligations or obligations outlined in the work program. According to the legislator, aside from the financial consequences, the decision to refuse drilling carries negative reputational consequences for the subsoil user.
Additionally, a subsoil user may declare the refusal of drilling not later than 3 (three) years from the contract signing on exploration and mining. This timeframe addresses the transition to exploratory drilling after the geological exploration period. During this period, the subsoil user must decide whether to proceed with drilling or not.
It should be noted that the state’s direct interest is obtaining results from seismic exploration, which constitute important geological information. This information shall contribute to the further potential discovery of hydrocarbon resources.
Additionally, corresponding changes have been made regarding the possibility of early return of the entire subsoil area based on the results of seismic exploration. The amendments entail the performance of liquidation works after the subsoil user declares the return of the subsoil area following seismic exploration. The plan for the liquidation of consequences of subsoil use for hydrocarbons must be submitted not later than 2 (two) months from the date of the termination of subsoil use rights or the submission of the application for the refusal of the entire subsoil area.
2. Optimisation of Procedures for State Expertise of Basic Project Documents
Notification for Approval of Exploration Project
To expedite the development of deposits located in adjacent subsoil areas under the control of the same subsoil user, amendments have been introduced to allow the expansion of one subsoil area at the expense of another.
According to the draft law, the exploration project (including amendments and additions to it), except for assessment exploration projects, offshore exploration projects and projects involving the expansion of subsoil areas, is submitted to the competent authority through a notification. For assessment exploration projects, offshore exploration projects and projects involving the expansion of subsoil areas, the draft law proposes undergoing examination by the Central Commission on Exploration and Development of Mineral Resources (hereinafter referred to as the “Commission’).
Thus, exploration projects not requiring examination by the Commission will be submitted to the competent authority through a notification.
The expected partial elimination of mandatory permits during the exploration phase is set to significantly reduce costs for subsoil users. This modification is projected to result in time savings ranging from 4 months to 1 year.
Expansion of the Competent Authority’s Powers in the Hydrocarbon Sector
It has also been proposed to expand the powers of the competent authority by granting the ability to determine the procedure for implementing pilot projects. This includes automating the monitoring of subsoil users’ compliance with contractual or licensing obligations, procedures for granting subsoil rights through information systems and the registration of the transfer or pledge of subsoil rights or facilities related to subsoil rights.
Additionally, it is envisaged that the authority to develop subordinate legislative acts related to reserves estimation will transition from the Committee of Geology of the Ministry of Ecology, Geology, and Natural Resources to the Ministry of Energy of the Republic of Kazakhstan.
Introduction of a Separate Procedure for Encumbering Subsoil Rights
Additionally, the draft law outlines a separate procedure for granting permission to encumber subsoil rights and reduces the processing time to 15 (fifteen) business days. Encumbrance of subsoil rights (shares in subsoil rights) for hydrocarbons, as well as the encumbrance of shares (stakes in the share capital) of entities directly or indirectly controlling an entity holding subsoil rights for hydrocarbons, not prohibited by this Code, requires the permission of the competent authority. In the case of encumbrance (pledge) of subsoil rights, the transfer of subsoil rights is not envisaged. This procedure necessitates submitting a significant amount of documents (information on registration, information on controlling persons, etc.) and involves timelines (the review period ranges from one month to three months for major deposits). Given that banks are typically involved in encumbrances, the extensive documentation and requested data are considered unnecessary, complicating the subsoil rights pledge process for the purpose of financing subsoil operations.
3. Reduction of Financial and Administrative Costs for Subsoil Users in Deposit Development
Cancellation of Annual Author Supervision
According to the proposed changes, author supervision will be conducted as needed and at the discretion of the subsoil user in cases outlined in the unified rules for the rational and comprehensive use of subsoil. In cases of significant deviations (more than 10% for major deposits, more than 50% for other deposits not classified as major), and with a justified conclusion based on the analysis of hydrocarbon deposit development, changes to the development project are subject to state expertise of project documents.
Increase in Threshold Values for Major Deposits
The draft law suggests raising the threshold from 10% to 30% to classify a deposit as major in cases where an analysis reveals discrepancies between actual and projected indicators of deposit development. These proposed changes stem from legal practices indicating that discrepancies exceeding 10% are common in the development of deposits. Consequently, subsoil users frequently must amend project documents, adding to their substantial workload.
