Draft Law “On subsoil and subsoil use” Review and comparative analysis with current law “On subsoil and subsoil use”

Definitions Separate definitions were carried out: Separately named authorized state bodies; The pre-emptive right of the state; Servitude; Experimental exploitation, industrial development of a deposit; Kazakhstani content of the staff and Kazakhstani content of the goods, works and services; Sites of the subsoil (deposits) having strategic value and strategic mineral raw material; Other definitions which for today are applied, but are not present their precise definition.

Common positions Legislation’s goals The current Law “On subsoil and subsoil use” regulation of carrying out of subsoil use operations with a view of maintenance: protection of interests of Republic Kazakhstan and its natural resources, rational use and protection of subsoil of Republic Kazakhstan, protection of interests of subsoil users, creations conditions for equal development of all forms of managing, strengthening of legality in the field of attitudes on subsoil use. Draft Law “On subsoil and subsoil use” maintenance: economic growth of Republic Kazakhstan and well-being of people of Kazakhstan, strengthening of legality in the field of attitudes on subsoil use, maintenance of a combination of republican and regional interests, maintenance of reproduction of a mineral raw material base, creation of favorable conditions for attraction of investments into carrying out of operations on subsoil use.

The Legislation’s principles The current Law “On subsoil and subsoil use” 1)maintenance of rational, complex and safe use of subsoil; 2)maintenance of protection of subsoil and an environment; 3)maintenance of a combination of republican and regional interests; 4)maintenance of reproduction of a mineral raw material base; 5)publicity of carrying out of subsoil use operations; 6)payment of interest of subsoil use; 7)creations of favorable conditions for attraction of investments into carrying out of subsoil use operations; 8)maintenance in sphere of subsoil use safety of production, processes of its life cycle for a life and health of the man and an environment according to the legislation of Republic Kazakhstan on technical regulation. Draft Law “On subsoil and subsoil use” 1)maintenance of rational, complex and safe use of subsoil; 2)maintenance of protection of subsoil and an environment; 2)publicity of carrying out of subsoil use operations; 3)payment of interest of subsoil use.

The pre-emptive right of Republic of Kazakhstan The pre-emptive right on acquisition of minerals The pre-emptive right of the state

The pre-emptive right on acquisition of minerals The current Law “On subsoil and subsoil use” Republic of Kazakhstan has the pre-emptive right on acquisition of minerals from subsoil users under the prices which are not exceeding the prices of the world market. Draft Law “On subsoil and subsoil use” Republic of Kazakhstan has the pre- emptive right before other persons on acquisition of minerals from subsoil user under the prices which are not exceeding the prices, applied by subsoil user at fulfillment of transactions with the corresponding minerals, developed on date of fulfillment of the transaction, excluding transport charges and expenses for realization. In case of absence of the information on the prices of the minerals applied by subsoil user at fulfillment of transactions, the prices which are not exceeding a prices that have developed in the world markets for date of fulfillment of the transaction are applied.

Mechanism of realization of the pre-emptive right of the state 1.Submission of the application for alienation in competent body. 2.Transfer of the application and materials by competent body within 5 working days in Interdepartmental Commission. 3.Consideration Interdepartmental Commission of the application, development of the offer within 30 working days. A direction of the report with the maintenance of the offer and the instruction of the national company or the state body in competent body. 4.Acceptance by competent body of the decision within 5 working days. A direction of the decision in the national company or the state body authorized on acquisition. 5.Initiation of negotiations by the national company or the authorized state body.

Subsoil use right Operations for which conducting the subsoil use right is given: state geological studying of subsoil; investigation; extraction; construction and (or) operation of the underground constructions which have been not connected with investigation or extraction. The operator and its status among subjects of the subsoil use right Operator - created or defined according to the legislation of Republic of Kazakhstan by contractors under the writing notice of competent body the legal entity who is carrying out operative management by activity and registration-accounting operations, connected with execution of the contract for which actions the contractor bears the property responsibility.

Functions of national companies participation in realization of a uniform state policy in subsoil use sphere; representation of the state interests in the contracts providing in them individual share of the national company; individual share in contracts; carrying out of operations on subsoil use on sites of the subsoil given on the basis of direct negotiations; participation in the international and internal projects on realization of operations on subsoil use ; participation in the international and internal projects on transportation of hydrocarbonic raw material; participation in preparation of annual reports on a course of performance of contracts; corporate management and monitoring concerning investigation, development, extractions, processing, realizations, transportations of hydrocarbons, designing, construction, operation of oil and gas pipelines and oil and gas field infrastructures; carrying out of negotiations and the conclusion of agreements on purchase of the alienated subsoil use right (its parts) and (or) a share of participation (share holdings) with alienator (alienators).

Accrual of subsoil use right The subsoil use right arises by: 1.grantings; 2.transfers; 3.transition by way of assignment. Granting of the subsoil use right is carried out: on the basis of carrying out of competition, or in the cases stipulated by the Draft Law, on the basis of direct negotiations. The body authorized on carrying out of competition on granting of the subsoil use right - Competent body. The Draft Law establishes requirements to the maintenance of the notice on carrying out of competition, the maintenance of the application form for participation in competition, and also terms for application, for carrying out of competition, summarizing of competition and the maximal term of prolongation of term of summarizing of competition are certain.

Cancellation in the right to participation in competition As the new basis for cancellation in granting the right to participation in competition it is provided: if granting to the applicant of the subsoil use right will cause non- observance of requirements on maintenance of national safety of the country, including in case of concentration of the rights within the limits of the contract and (or) concentration of the rights to carrying out of operations in the field of subsoil use. Criteria of definition of the winner of competition: size of a subscription bonus; size of deductions in the local budget on social and economic development of region and development of its infrastructure.

Features of granting of the subsoil use right at transition from a stage of investigation on a stage of extraction The person who has made detection and an estimation of a deposit on the basis of the contract on investigation, has the right in term, not later than three months from the date of the termination of the contract on investigation to address in competent body the application about carrying out of direct negotiations on the conclusion of the contract on extraction. The competent body, not later than 2 months, unilaterally defines following conditions of the contract on extraction: 1)size of a subscription bonus; 2)size of the Kazakhstani content concerning: the goods, works and services, and also the Kazakhstani staff; 3)size of deductions in the local budget on social and economic development of region and development of its infrastructure.

Transfer of the subsoil use right and the object connected with it Besides stipulated by the Law “On subsoil and subsoil use” the Draft Law provides new ways of transfer of the subsoil use right and (or) the objects connected with it: 1.references of collecting on the subsoil use right, a share participations (share holding) in the legal entity possessing the subsoil use right, including at the mortgage; 2.occurrence of the right to a share in the legal entity possessing the subsoil use right as a result of increase in the authorized capital by acceptance of the new participant in structure of participants of the legal person.

Exceptions of the above mentioned cases: 1)fulfillment of transactions on alienation of shares or securities of the legal entity possessing the subsoil use right, publicly traded on securities market; 2)transfers of all or parts of the subsoil use right, shares of participation (share holding) in the legal entity who is subsoil user, in favour of the absolute affiliated organization; 3)transfers of all or parts of the subsoil use right, shares of participation (share holding) in the legal entity who is subsoil use between the legal entities, being absolute affiliated persons.

Other operations for which fulfillment the sanction of competent body is required : primary release in the reference on the organized securities market of shares of the legal entity who is subsoil user, and the legal entity possessing shares of participation (share holdings) in legal entities – subsoil users, including primary accommodation on the organized securities market of shares of such legal entities who have been let out within the limits of additional issue; transfer to the mortgage of the subsoil use right (its parts), shares of participation (share holding) in the legal entity possessing the subsoil use right.

Governing Law Under transactions and other actions directed on alienation of the subsoil use right, shares of participation (share holding) in the legal entity possessing the subsoil use right in Republic Kazakhstan, the right of Republic Kazakhstan is applied.

The order of delivery of sanctions to alienation of the subsoil use right 1.Submission in competent body of the application for delivery of the permission. 2.Transfer by competent body of the application of the Commission of experts concerning subsoil use during 15 working days. 3.Consideration within 20 working days of the Commission of experts of materials, development of the offer and a direction of the report in competent body. 4.Making decision by competent body within 30 working days.

The moratorium on alienation of the subsoil use right Subsoil use right cannot be transferred within two years from the moment when the contract comes into force, except for the cases of the reference of collecting to the subsoil use right or reorganization of the legal entity who is subsoil user. The moratorium does not extend on cases of transfer or acquisition subsoil use right by national company or its subsidiary organization.

Contract on subsoil use The Draft Law stipulates following kinds of contracts on subsoil use: 1)for carrying out of investigation - contract on investigation; 2)for carrying out of extraction - contract on extraction and primary processing; 3)for carrying out of construction and/or operation of the underground constructions which have been not connected with investigation or extraction - contract on construction and/or operation of the underground constructions which have been not connected with investigation or extraction; 4)for carrying out of the state geological studying of subsoil - contract on the state geological studying of subsoil. Terms of the conclusion of the contract: for carrying out of investigation - no more than 18 months from the date of making decision on the conclusion of the contract and signing of the report of direct negotiations, or from the date of the announcement of results of competition; for carrying out of extraction - no more than 24 months from the date of making decision on the conclusion of the contract and signing of the report of direct negotiations, or from the date of the announcement of results of competition.

Terms of the contract The contract on investigation - 6 years. An opportunity of prolongation: at carrying out of oil operations on the sea - for 2 years; in case of commercial detection - for the period necessary for an estimation. The contract on extraction - the term certain by the project on work on extraction. An opportunity of prolongation: in case of the reference of subsoil user with the corresponding application 6 months prior to the termination of works and at a substantiation of the reasons of prolongation.

Renewal of the contract on investigation or extraction Cases of renewal of contracts, cancelled under the initiative of competent body: 1)an establishment of the fact of making decision on cancellation of the contract on the basis of doubtful data who have considerably affected making decision on cancellation of the contract, including if for date of making decision on cancellation of the contract subsoil user for the valid reasons has not the documents confirming performance of contract obligations; 2)an establishment and acknowledgement not dependent on will of subsoil user the reasons owing to which there was a default or inadequate execution of contractual obligations, including action of force majeure, that is extreme and unpreventable circumstances under the given conditions (the natural disasters, military actions, etc.), rendered direct influence on default or inadequate execution of contractual obligations.

Guarantees The current Law “On subsoil and subsoil use” Subsoil user is guaranteed protection of its rights according to the legislation. Changes and the additions of the legislation worsening position of subsoil user, are not applied to the contracts concluded before entering of given changes and additions. The guarantees established by present article, do not extend on changes of the legislation of Republic of Kazakhstan in the field of maintenance of defensibility, national safety, in sphere of ecological safety and public health services. Draft Law “On subsoil and subsoil use” Subsoil user is guaranteed protection of its rights according to the legislation. Changes and the additions of the legislation directly worsening results of commercial activity of subsoil user under contracts, are not applied to the contracts concluded before entering of given changes and additions. The guarantees established by present article, do not extend on changes of the legislation of Republic of Kazakhstan in the field of maintenance of national safety, defensibility, in sphere of ecological safety, public health services, the taxation and customs regulation.

Thank you! Victoriya Katanayeva Partner GRATA Law Firm Mob.: