Commentary to article 115. Allocation of a subsoil plot to the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use”  

1. The allocation of a subsurface area under a contract for the exploration and production of hydrocarbons is carried out at the request of the subsurface user in the following cases::

1) allocation of a part of an exploration site – if the proposed contours of the discovered deposit (set of deposits) are located within each of the parts, established in the addendum to the exploration project approved by the subsurface user and having received positive conclusions provided for by this Code and other laws of the Republic of Kazakhstan, providing for work on the assessment of such a deposit (set of deposits);

2) allocation of an exploration site – if two or more exploration sites are fixed in the exploration and production contract, within each of which the proposed contours of the discovered deposit (set of deposits) are located, established in accordance with the approved by the subsurface user and received positive conclusions provided for by this Code and other laws of the Republic.

Kazakhstan expert opinions supplement to the exploration project, which provides for the assessment of such deposits (totality of deposits);

3) allocation of a production site – if at least one exploration site and at least one production site are fixed in the exploration and production contract.;

4) allocation of a mining site – if two or more mining sites are fixed in the exploration and production contract.

2. The allocation is made subject to the following conditions::

1) the contract for exploration and production, under which a subsurface area is allocated, was concluded after the entry into force of this Code and corresponds to a standard contract for the exploration and production of hydrocarbons, approved by the competent authority;

2) there is a prior consent of the pledgee to the allocation if the right of subsurface use is encumbered by a pledge;

3) there are no violations of obligations under the subsoil use contract that have not been eliminated by the subsurface user, as indicated in the notification of the competent authority.

For the purposes of subparagraph 4) of paragraph 1 of this article, an additional condition for allocating a mining site is the obligation to alienate the right of subsurface use for the allocated site to a person who is not affiliated with the subsurface user.

3. The allocation of a subsurface area is formalized by making changes to the subsurface use contract under which the site is allocated and concluding a separate subsurface use contract for the allocated subsurface area.

4. The exploration period, the preparatory period or the production period and other terms of the subsurface use contract for the allocated subsurface area must comply with the terms of the subsurface use contract under which the site was allocated.

5. The application for allocation of a subsurface area must contain:

1) last name, first name, patronymic (if it is indicated in the identity document), the name of the subsurface user;

2) the number and date of registration of the subsoil use contract;

3) an indication of the subsurface area (part of it), which is supposed to be allocated to a separate subsurface use contract.

6. The application must additionally be accompanied by:

1) an addendum to the contract signed by the subsurface user, containing an appendix to the contract, establishing, in accordance with Article 110 of this Code, a reduced main subsurface area;

2) a contract for exploration and production or production of hydrocarbons signed by the applicant, developed in accordance with a standard contract for exploration and production or production of hydrocarbons approved by the competent authority and complying with the requirements of paragraph 4 of this article.

7. The application is subject to consideration within twenty working days from the date of its receipt by the competent authority. Based on the results of consideration of the application, the competent authority decides on the allocation of a subsurface area or refuses to allocate a site.

8. The competent authority refuses to allocate a subsurface area in the following cases::

1) if the application does not comply with the requirements established by this Code;

2) non-compliance with the conditions set forth in this article.

The refusal of the competent authority to reduce the subsurface area does not deprive the subsurface user of the right to submit a second application.

9. The competent authority, within ten working days from the date of making a decision on the allocation of a subsurface area, concludes with the applicant an addendum to the subsurface use contract, a separate subsurface use contract for the allocated subsurface area and sends the applicant its signed copies.

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(Mukhamedov R.N.)

1. As already noted in the commentary to Article 112 of the Subsoil Code, the Subsoil Code for the first time provides for the possibility of separating a subsoil plot (part of it) from a subsoil use contract into a separate contract. The legislator took this step in order to stimulate investment in new oil and gas projects, including the involvement of junior companies in the field of subsoil use, whose business is to search for promising areas and then sell the right to use them to large oil and gas companies with less mobility in making investment decisions.

On the other hand, such an innovation should not have affected budget revenues from existing projects, since, as already mentioned,

It was noted that a reduction in production volumes under the contract (in connection with the allocation) may lead to a corresponding reduction in the mineral extraction tax rate.

2. In this regard, according to paragraph 2 of the commented article, the right to allocate a subsurface area is held only by subsurface users who concluded a contract after the entry into force of the Subsurface Code, excluding subsurface users who carried out activities before its entry into force, but switched to the terms of the Subsurface Code by concluding a contract based on a standard.

In addition, the allocation of a subsurface area is possible only under exploration and production contracts (not provided for under production contracts), in the following cases:

– When conducting exploration during the originally established exploration period (before its extension), when the subsurface user has not yet returned parts of the site of the original subsurface area in connection with the extension. At the same time, at least one hydrocarbon deposit should be discovered in both the allocated and remaining subsurface areas. A striking example of a situation in which a subsurface user may need such an option is the discovery of two deposits in different areas. At the same time, the financial and (or) other resources of the subsurface user are insufficient for their simultaneous development, and the realization of the rights to one of them will allow accumulating enough funds for the development of the remaining one.

– The second option provides for a later allocation of a subsurface area, when, during the extension of the exploration period for evaluation and (or) trial operation, the subsurface user retained two or more subsurface areas with discoveries, and returned the remaining areas to the state.

– As noted earlier, the system for regulating subsurface use contracts provided for by the Subsoil Code provides for a clear link between the periods of subsurface use and the corresponding subsurface areas. As a result, within the framework of one exploration and production contract, hydrocarbon production can already be carried out in one subsurface area, while in others it is possible to search for or evaluate deposits. In this regard, if one or more exploration sites and at least one production site are fixed in the contract at the same time, then the production site may also be allocated from such a contract.

– In the same way, it is allowed to allocate a mining site if two or more are fixed in the contract. However, in this case, in order to prevent abuse by subsurface users of the possibility of allocating a mining site to a separate contract for tax optimization purposes, paragraph 2 of the commented article establishes the obligation

to sell the right of subsurface use on the allocated site to a person who is not affiliated with the subsurface user.

At the same time, the Subsoil Code does not set deadlines for the fulfillment of such obligations by the subsurface user, however, it can be assumed that the MET tax period may be a reasonable period for its fulfillment.

A separate issue here also raises the term "affiliated person" in relation to the provisions of the Subsoil Code. The Subsoil Code does not contain a definition of it, and most of the relevant regulations use the construction of "direct or indirect control." There are various definitions for the term "affiliated person" in the legislation of the Republic of Kazakhstan.

In some cases, we are talking about persons who have the opportunity to directly or indirectly determine the decisions of the entity (paragraph 1 of Article 1 of the Law of the Republic of Kazakhstan "On Natural Monopolies" No. 204-VI dated December 27, 2018), in others – about persons whose decisions may be directly or indirectly influenced by the entity itself (Article 166 PC RK), and thirdly, both of the above options are taken into account (paragraph 1 of Article 12-1 of the Law of the Republic of Kazakhstan "On Limited and Additional Liability Partnerships" No. 220-I dated April 22, 1998).

Given the semantic load of the specified provision of the Subsoil Code, which boils down to preventing the allocation of subsurface areas for tax purposes, it can be assumed that in this case, the legislator understands affiliation as persons controlling the subsurface user (directly or indirectly) and persons controlled by him.

3. Another important condition for allocating a subsurface area, as set out in paragraph 4 of the commented article, is that such allocation does not in any way affect the validity of subsurface use rights and any other conditions for the allocated and remaining subsurface area. In the new contract, concluded based on the results of the allocation of a subsurface area, all the terms of the original contract are retained in full.

The scope of the work program (additional work) during the exploration period remains an open question here, which, based on the literal interpretation of the norm, should be both retained for the original contract and fully included in the new contract. In this regard, in the process of further legislative work, this point should be clarified, providing for the distribution of the scope of the work program (additional work). accordingly, the allocated and remaining subsurface areas.

4. A special feature of the procedure for preparing an application for the allocation of a subsurface area is the need to attach to it two documents signed by the subsurface user at once:

– an addendum to the main contract, which provides for the consolidation of a reduced subsurface area in the annex;

– a new subsurface use contract for the allocated subsurface area, containing conditions identical to the main contract.

In turn, a special feature of the procedure for signing an addendum to the contract and a new contract by the competent authority is the reduction (in comparison with similar cases provided for by the Subsoil Code) of up to ten working days from the date of the decision on the allocation of a subsoil plot.

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  Kazakh Association of Organizations of the Oil and Gas and Energy Complex KAZENERGY

Nur Sultan 2022

The Kazenergy Association expresses its sincere gratitude for the support in preparing the commentary to the following companies: North Caspian Operating Company NV, NC KazMunayGas JSC, Mangistaumunaygas JSC, Karachaganak Petroleum Operating BV, White & Case Kazakhstan LLP, Haller Lomax LLP)", "Erlicon CG" LLP, "Signum Law Firm" LLP. © Kazenergy Association, 2022 © team of authors, 2022 © authors, 2022

Dear readers!

We offer you a scientific and practical commentary prepared by a group of Russian specialists with extensive practical experience in legislation on subsoil and subsoil use and who participated in the preparation of the Code on Subsoil and Subsoil Use.

Subsurface use is a very complex and specific area of public relations, the regulation of which has its own historical background and takes into account the technological specifics of the process of subsurface development, as well as environmental, commercial, legal and other features of exploration and development of deposits.

Kazakhstan's legislation on subsoil and subsurface use has passed through several stages in its development, and has always been based on a balance of interests between the state and subsurface users, transparency, striving for the maximum possible degree of protection of the rights and legitimate interests of investors, ensuring sustainable social, economic and environmental development of the country.

The Code "On Subsoil and Subsoil Use", adopted at the end of 2017, was developed taking into account many years of accumulated experience and law enforcement practice, as well as the results of extensive discussions with experts working in the industry.

It reflects specific, important measures on the part of the state to increase the investment attractiveness of exploration and further reduce administrative barriers.

Nevertheless, practice and legislation do not stand still, constantly evolving, taking into account new challenges facing both the subsurface use industry and the economy as a whole.

In this regard, this commentary is intended to serve as an aid for a wide range of interested persons – specialists working in the industry, in

understanding the meaning of the norms, their historical context, the interrelationship and mutual influence of the various provisions of the Code.

We also hope that studying the commentary will serve as an incentive for new generations of young domestic specialists to work scientifically and practically in this important industry, for the benefit of the development of our country, current and future generations of Kazakhstanis.

Sincerely, U. Karabalin, Deputy Chairman of the Kazenergy Association, Hero of Labor of Kazakhstan