'On Both Sides Of The Caspian Sea', A Comparative Analysis Of The Investment Law In Kazakhstan And Azerbaijan Exclusively For PETROLEUM Analytical Journal

The experts of GRATA Law Firm exclusively for PETROLEUM conducted a comparative analysis of the investment law in Kazakhstan and Azerbaijan.

– Let us start with a particular example. In the spring of this year, a Norwegian company - Statoil, announced the departure of Kazakhstan. Having withdrawn Abai project, it chose Azerbaijan and signed a Memorandum of Understanding with the State Oil Company of Azerbaijan Republic in respect to Zafar and Mashal structures in the Azerbaijani sector of the Caspian Sea. Does this mean that the investment climate in that country is more attractive than here? Could you conduct a comparative analysis of the situation in terms of granting subsoil use rights in the Caspian states (Kazakhstan, Azerbaijan)?

Yerbolat Yerkebulanov, Counsel, Natural Resources Department, GRATA Law Firm

KAZAKHSTAN:

– The Law 'On Subsoil and Subsoil Use', dated 24 June 2010, (hereinafter - the 'RK Subsoil Law') establishes different investment modes for investors looking to get a contract for exploration and (or) extraction of mineral resources on land or in the Caspian Sea.

General Procedure for Obtaining Subsoil Use Rights

The subsoil use right in Kazakhstan is granted under contracts concluded as a result of a tender or on the basis of direct negotiations. Previously, there was an option of entering into production sharing agreements (hereinafter - the 'PSA'), but the respective Law on PSA was abolished since 1 January 2009.

Since 2007, a moratorium on the granting of subsoil use rights on the basis of a tender was introduced in Kazakhstan, and the subsoil use right was only granted pursuant to direct negotiations. Earlier this year, there has been an announcement on lifting the moratorium and, as far as known, a package of deposits that will be put out to tender is currently prepared.

Based on the above, in practice, investors looking to get the right of subsoil use in Kazakhstan repurchase the right (a part thereof) from an existing subsoil user, or purchase directly or indirectly interests (shares) in such a subsoil user, or enter into an agreement with a national company (KazMunaiGas National Company JSC, Tauken Samruk National Mining Company JSC, regional socio-entrepreneurial corporations), which has the right to obtain subsoil use rights on the basis of direct negotiations.

It should be noted that since 2012, investors have the option to obtain subsoil use rights independently on the basis of direct negotiations, when they acquire the status of a subject of industrial innovation, in accordance with the Law 'On State Support of Industrial Innovations', dated 9 January 2012.

Requirements to the Sea Operations

The requirements to persons applying for the subsoil use right at sea are significantly higher than those applying for the same but on land.

For instance, a prerequisite for granting subsoil use rights at sea is the equity participation in the relevant contract of the national company of at least fifty percent. Further, unless otherwise provided for by the agreement for joint activities between a foreign investor and the national company, the RK Subsoil Law establishes that the payment of the subscription bonus in favour of the Republic of Kazakhstan shall be made by its strategic partner.

Moreover, negotiation process may establish other requirements.

For example, according to information from public sources, with respect to Statoil the parties agreed that all costs of the exploration stage shall be borne by the Norwegian company. In addition, the parties agreed on the participation of Statoil in the construction of a jack-drilling up rig, which will be further used for the development of the Caspian shelf blocks.

We believe that one of the factors of the Statoil exit from Abai project located in the Kazakhstan sector of the Caspian Sea, was the duration of the negotiations (2006-2013), and, perhaps, some other requirements put by the national company.

Samir Hadjiyev, Counsel, Head of Baku Office, Azerbaijan, GRATA Law Firm

AZERBAIJAN:

– According to Article 8 of the Law of Azerbaijan 'On Subsoil' No. 439-IQ, dated 13 February 1998 (hereinafter - the 'RA Subsoil Law'), subsoil users in Azerbaijan may be individuals and legal entities of both Azerbaijan and other states. In this case, Article 4 of the RA Subsoil Law establishes that the subsoil within the territory of the Republic of Azerbaijan, without compromising the rights of any individuals or legal entities, are the property of Azerbaijan. Thus, having reserved the right of ownership, the state may grant the right to use the subsoil to separate legal entities and individuals both of Azerbaijan and foreign countries. Under this provision, the subsoil plots cannot be a subject of sale-and-purchase, gift or other forms of alienation. Despite the fact that according to the RA Subsoil Law the subsoil use right can be granted both for a fixed term and for an indefinite term, foreign investors tend to get this right for up to 30 years with a possible extension. Please note that subsoil in the territory of Azerbaijan may be granted in use though both tender or auction and direct negotiations. According to the Regulation on the rules and conditions of tenders and auctions for granting subsoil use rights of Azerbaijan, a public auction (tender) is conducted without any restrictions on a number and type of subsoil users, while private auctions (tenders) are carried out for state-owned enterprises.

In case of putting up subsoil for an auction (tender), where the right to use it is exercising on the basis of the PSA signed, the terms of the auction (tender) should include regulations on fundamental criteria or conditions of the PSA conclusion. In order to determine the winner of an auction, they form (tender) committee from among the representatives of the authorised ministries and committees of Azerbaijan. Following the auction (tender) a joint decision (by a majority votes of the Committee) is made. This decision is the basis for the subsequent...