The International Comparative Legal Guide To: Oil And Gas Regulation 2014

1 OVERVIEW OF NATURAL GAS SECTOR

1.1 A brief outline of Kazakhstan's natural gas sector, including a general description of: natural gas reserves; natural gas production including the extent to which production is associated or non-associated natural gas; import and export of natural gas, including liquefied natural gas (LNG) liquefaction and export facilities, and/or receiving and re-gasification facilities ("LNG facilities"); natural gas pipeline transportation and distribution/transmission network; natural gas storage; and commodity sales and trading.

According to British Petroleum's Statistical Review of World Energy 2013, according to western standards Kazakhstan's natural gas reserves make up approximately 1.3 tcm of proven reserves (0.7 per cent of world reserves), placing Kazakhstan 21st in the world (together with China and India). In 2012 BP estimated Kazakhstan reserves under the "Soviet" standards being equal to 1.9 tcm.

The so-called "Three Wales" of Kazakhstan oil producing companies, specifically, Tengiz, Karachaganak and Kashagan perform 85 per cent of gas production in Kazakhstan.

Estimated balance gas reserves of Karachaganak comprise 1.35 tcm. Currently Karachaganak produces approximately 50 per cent of all gas produced in Kazakhstan. Kazakhstan's anticipated reserves are estimated at 5.9 tcm.

In 2012 Kazakhstan produced 40.1 bcm (an increase of 1.5 per cent over for 2011). The plan for 2013 is 40.5 bcm. The volume of gas commodities was 21.2 bcm in 2012. The volume of internal consumption in Kazakhstan was 10.5 bcm (an increase of 3.2 per cent over 2011).

The volume of exports from Kazakhstan is 8.8 bcm (3.7 per cent by 2011). Transit of gas through Kazakhstan is 96.5 bcm, as in 2011.

The production of LNG in 2012 was equal to 2.2 million tonnes (3.1 per cent by 2011). The majority of LNG is produced at the Tengiz Gas Processing Plant.

In addition to domestic consumption of the gas and re-injection of gas by subsoil users, Kazakhstan also exports gas mainly to Russia. In recent years Kazakhstan also started to export to China.

As gas pipelines cover only 11 regions of Kazakhstan out of 16, Kazakhstan imports gas from Uzbekistan and Turkmenistan (for southern regions) as well as from Russia (for northern regions).

Among the latest developments in the gas sphere are commissioning of the first part of Beineu-Bozoi-Shymkent pipeline (Kazakhstan-China gas line) (1,477 km, able to transport up to 2.5 bcm per year) in September 2013. The second part will be completed by 2015.

All gas commodities from Kashagan will be transported through this pipeline.

Also Kazakhstan plans to construct the Tobol-Kokshetau-Astana pipeline, to supply gas to the capital of Kazakhstan from western regions.

1.2 To what extent are Kazakhstan's energy requirements met using natural gas (including LNG)?

Natural gas is often used in Kazakhstan as a secondary source (approximately 10.6 per cent), as most of the country's electricity requirements are met through coal (72 per cent). Another two principal sources for generation of electricity are hydro resources (12.3 per cent) and oil (4.9 per cent).

1.3 To what extent are Kazakhstan's natural gas requirements met through domestic natural gas production?

In 2012, Kazakhstan imported 3.830 bcm (3.5 per cent by 2011) for the amount of USD 374.9 million (24.4 per cent by 2011).

Kazakhstan mainly purchases gas from Uzbekistan and Russian and small volumes from Turkmenistan.

In late 2012 Kazakhstan and Uzbekistan agreed to increase gas supply by 40 per cent to up to 3.5 bcm annually.

Kazakhstan plans that, after full commissioning of the Beineu-Bozoi-Shymkent pipeline and start of gas supplies from Kashagan, it will significantly reduce dependency on Uzbekistan gas for southern regions.

1.4 To what extent is Kazakhstan's natural gas production exported (pipeline or LNG)?

Currently, most of Kazakhstan's natural gas production is exported by pipeline to Russia. As the Beineu-Bozoi-Shymkent gas pipeline will be fully commissioned, a major amount of gas will be exported to China.

The volume of gas exports in 2012 was 8.8 bcm (3.7 per cent by 2011).

2 OVERVIEW OF OIL SECTOR

2.1 Please provide a brief outline of Kazakhstan's oil sector.

According to British Petroleum's Statistical Review of World Energy 2013, according to western standards Kazakhstan's estimated proven reserves of crude oil are 3.9 billion tonnes, which represent 1.8 per cent of total world reserves.

Kazakhstan is in the 12th place in the word and the second largest oil producer among CIS countries.

Anticipated reserves of Kazakhstan are estimated at approximately 17 billion tonnes.

In 2012 Kazakhstan produced 79.2 million tonnes of oil. Kazakhstan plans to increase oil production from approximately 80 to 140 million tonnes per year by 2020.

Kashagan is one of the world's largest oil fields. It is estimated, that the Kashagan field (approximately 75 X 45 sq. km) has from 9 to 13 billion tonnes of estimated proven oil reserves. The commercial production at Kashagan is expected to start in the first half of 2014.

The Tengiz field was established in 1993 and is operated by Chevron with KazMunayGas owning a 20 per cent stake. Crude oil reserves of Tengiz are estimated to be 245.8 million tonnes.

Tengiz currently produces about one-third of Kazakhstan's total production. Together with Karachaganak, they produce about half of the current production.

More than 90 per cent of Kazakhstan's 203 oil and gas fields are located in the northwestern region (Atyrau, Mangistau, West-Kazakhstan and Aktobe regions).

2.2 To what extent are Kazakhstan's energy requirements met using oil?

The primary source for electricity production in Kazakhstan is coal (72 per cent). Oil serves only account for 4.9% for electricity production.

2.3 To what extent are Kazakhstan's oil requirements met through domestic oil production?

Kazakhstan legislation aims to supply all domestic oil requirements. For example, the majority of subsoil users have contractual obligations to provide a certain percentage of oil produced to Kazakhstan refineries. Further, the State has the pre-emptive right to purchase oil from subsoil users. Finally, if the oil is to be transported via pipelines, one shall preliminarily approve a monthly supply schedule, the approval thereof by MOG is also subject to cover the needs of refineries.

There are three major refineries in Kazakhstan located in the north (Pavlodar), the south (Shymkent) and the west (Atyrau).

As the refineries could not make deep processing, the State initiated a programme for their modernisation to be supposedly completed by 2015.

2.4 To what extent is Kazakhstan's oil production exported?

In 2012 Kazakhstan exported 68 million tonnes for $56.4 billion (without counting for countries of Customs Union, i.e., Russia and Belarus), including to Italy - 17.7 million tonnes for $ 14.9 billion, China - 10.6 million tonnes for $ 8.7 billion, the Netherlands - 7.9 million tonnes for $ 6.7 billion, Austria - 6.4 million tonnes for $4.9 billion, and France - 6.1 million tonnes for $5.3 billion.

Kazakhstan plans to export more than 90 million tonnes by 2015.

3 DEVELOPMENT OF OIL AND NATURAL GAS

3.1 Outline broadly the legal/statutory and organisational framework for the exploration and production ("development") of oil and natural gas reserves including: principal legislation; in whom the State's mineral rights to oil and natural gas are vested; Government authority or authorities responsible for the regulation of oil and natural gas development; and current major initiatives or policies of the Government (if any) in relation to oil and natural gas development.

Under the Constitution of Kazakhstan, the subsoil and minerals are owned by the State, represented in relations with subsoil users by the Ministry of Oil and Gas (the "MOG").

The principal law for the development of oil and natural gas reserves is the Subsoil and Subsoil Use Law dated 24 June 2010 (the "Subsoil Law").

MOG is entitled to organise tenders for the granting of subsoil use rights, to conclude and register subsoil use contracts, as well as to supervise compliance during the implementation of subsoil use contracts.

The State also adopted the Gas and Gas Supply Law dated 9 January 2012 (the "GasLaw"). See more detail on this Law in question 6.1.

3.2 How are the State's mineral rights to develop oil and natural gas reserves transferred to investors or companies ("participants") (e.g. licence, concession, service contract, contractual rights under Production Sharing Agreement?) and what is the legal status of those rights or interests under domestic law?

The State awards subsoil use rights either through direct negotiations (in certain limited cases) or on the basis of a tender (open or restricted).

Upon the results of a tender or direct negotiations, a contract (having the form of concession contract) is executed with the MOG.

PSAs were eliminated as of 1 January 2011 though a number of PSAs entered into prior to 2009, remain valid.

Earlier, Kazakhstan instead of having a contractual regime, had a two-tier regime, comprising a licence and further execution of a subsoil use contract. The licensing regime was abolished from September 1999, however, licences issued before September 1999 remain valid. Currently, licence provisions are considered in practice only with regard to the procedure of suspension and termination of subsoil use rights.

3.3 If different authorisations are issued in respect of different stages of development (e.g., exploration appraisal or production arrangements), please specify those authorisations and briefly summarise the most important (standard) terms (such as term/duration, scope of rights, expenditure obligations).

The Subsoil Law provides for the following types of contracts:

exploration contracts; production contracts; combined exploration and production contracts; contracts for construction and/or exploitation of...