The Priority Right Of The State

1. Introduction

   As is known, contracts for subsoil use have a special status.This is because they concern the natural resources of the Republic of Kazakhstan and thus the country's vital interests. The subsoil of Kazakhstan is the exclusive property of the State. Despite the fact that the State grants the right of subsoil use to the possession of individuals, it nevertheless endeavours to retain substantial control over the rational use of mineral resources.

   The priority right of the State was first introduced in December 2004, as part of the amendment to the Law of the Republic of Kazakhstan on 'Subsoil and Subsoil Use' of January 27, 1996. Before the adoption of this legal amendment, in general the notion of the State's priority right had not been clearly established.

   One of the reasons for introducing the concept of the priority right may have been the situation in 2003, when one of the participants in the development of the Kashagan field had announced the sale of shares belonging to it (16.67%) in the North Caspian Production-Sharing Agreement ('NPS') to two Chinese companies. The other NPS subsoil users who held the priority right to acquire the share of the outgoing subsoil user, expressed a desire to exercise their priority right of first refusal to acquire the said shares, though at that time in the Republic of Kazakhstan such a right had not been expressly agreed. In connection with this, Kazakhstan declared its right to purchase shares of alienated right of subsoil use, which took precedence over the priority rights of other parties.

   Over time, the State widened the scope of application of its priority right. In particular, the priority right was extended to cover participatory shares in a subsoil user or its direct and indirect owners.

2. The concept of the priority right and how it is exercised

   Currently, the State's priority right is understood to be the priority right of the State to acquire the alienated right of subsoil use (parts thereof) and/or objects associated with the right of subsoil use. The objects related to the right of subsoil use are defined as: 1) a share/shares in a legal entity which has the right of subsoil use or 2) shares in a legal entity which has the ability to directly or indirectly determine the decisions and/or influence the decision making process of such a user, if the legal entity's main activity is connected with subsoil use in the Republic of Kazakhstan (the 'Objects')1. In other words, the State, typically represented by a national company, has the right to redeem alienated the subsoil use right and objects, not allowing them to be...