VZCZCXRO7892
OO RUEHIK
DE RUEHTA #0089/01 0260830
ZNR UUUUU ZZH
O 260830Z JAN 10
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7288
INFO RUCNCIS/CIS COLLECTIVE 2407
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1768
RUEHKO/AMEMBASSY TOKYO 2474
RUEHUL/AMEMBASSY SEOUL 1384
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1964
RUEKJCS/SECDEF WASHDC 1814
RUEKJCS/JOINT STAFF WASHDC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/AMCONSUL ALMATY 2217

UNCLAS SECTION 01 OF 02 ASTANA 000089 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC, S/EEE, S/CIEA 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EINV EPET SOCI KZ
SUBJECT:  KAZAKHSTAN:  LOCAL CONTENT LEGISLATION AMENDMENTS NEEDED 
TO KEEP OIL AND GAS PROJECTS ON TRACK 
 
ASTANA 00000089  001.3 OF 002 
 
 
REFTEL:  08 ASTANA 1910 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On January 20, Energy Officer received a 
thorough overview of the laws and regulations governing subsoil use 
and local content from a well-respected local law firm. 
Negotiations between the government and foreign investors over local 
content likely will continue due to ambiguous language in the law, 
which fails to define a consistent methodology to calculate local 
content.  If unresolved, these negotiations could affect the quality 
and pace of major oil-production projects, such as Kashagan.  END 
SUMMARY. 
 
LEGISLATION REGULATING SUBSOIL USER OPERATIONS 
 
¶3.  (SBU) On January 20, Energy Officer met with Samat Daumov, 
Director of the Astana Branch of Grata Law Firm and a member of the 
Parliamentary advisory group on the Subsoil Use Law, to discuss 
subsoil use legislation. The discussion included Decree 367 (March 
20, 2009) to establish a unified methodology for local content 
calculation, the Local Content Law 223 (December 29, 2009), and the 
draft Subsoil Use Law, which will replace existing laws.  The Local 
Content Law officially comes into effect on January 22. 
 
AMBIGUOUS METHODOLOGY LEADS TO INDIVIDUAL INTERPRETATIONS 
 
¶4.  (SBU) Daumov complained that ambiguity with the formula to 
calculate local content has compelled subsoil users to developed 
their own, individual interpretations and estimations.  He asserted 
that the flawed formula resulted from government pressure for rapid 
legislative approval, which precluded parliament's proper 
consideration of the consequences of implementation.  According to 
Daumov, the Ministry of Energy and Mineral Resources (MEMR) is 
awaiting the reaction of subsoil users to the new law, and "will not 
make further amendments unless they raise a fuss." 
 
LOCAL CONTENT LAW STRENGTHENS STATE ROLE 
 
¶5.  (SBU) Daumov highlighted the Local Content Law's mandated 
creation of a database of local suppliers.  He also explained that 
the law places responsibility for meeting local content requirements 
squarely on the shoulders of the companies and strengthens the 
state's oversight role by giving additional authority to the 
Ministry of Energy and Mineral Resources (MEMR) to monitor local 
content requirements.  According to Daumov, the law requires 
companies to establish a percentage of local content in contracts, 
but does not explain how to address existing contracts without a 
specified percentage.  Daumov confided that in March 2009, following 
approval of Decree 367, MEMR sent letters to subsoil users, which 
recommended they amend contracts to establish a minimum 
local-content provision.  He asserted that small subsoil users 
undertook the relevant changes while larger investors did not. 
 
¶6.  NOTE:  On January 26, Minister of Energy and Mineral Resources 
Sauat Mynbayev informed parliament that MEMR has introduced changes 
to more than 500 contracts during the past two years, including 
changes designed to increase local content and attract more 
Kazakhstani specialists to oil and gas projects.  Mynbayev 
acknowledged that it has been difficult for MEMR to modify contracts 
for large projects such as Kashagan, but he nevertheless reported 
that the number of Kazakhstani senior managers working on Kashagan 
increased from nine to 241 during the last two years.  "We will 
continue to press this point with the international companies," 
Mynbayev vowed, adding that all new exploration and production 
contracts will contain strict requirements to employ local 
subcontractors and Kazakhstani specialists.  END NOTE. 
 
¶7.  (SBU) Daumov explained that the Local Content Law allows the 
state to revoke the subsoil-production rights of users who do not 
meet local-content requirements during a project's exploration 
 
ASTANA 00000089  002.3 OF 002 
 
 
phase.  He said that the government, which is aware of Kazakhstan's 
current scarcity of qualified local-specialists and subcontractors, 
has asked international investors to establish consortia to develop 
local content.  Although he acknowledged that the law favors 
domestic suppliers by creating an enabling environment for their 
development, Daumov contended that it does not constitute a direct 
subsidy. 
 
SUBSOIL USE LAW NEAR FINAL APPROVAL 
 
¶8.  (SBU) Daumov told Energy Officer that discussion of the draft 
was temporarily halted pending approval of the Local Content Law. 
On January 21, the Parliament concluded debate on the draft Subsoil 
Use Law, which is expected to enter into force in the near future 
(reftel). 
 
U.S. COMPANY CALLS FOR KAZAKHSTAN TO INVEST IN LOCAL CONTENT 
 
¶9.  (SBU) During a courtesy call with the Ambassador on January 26, 
Dan Houser, Vice President for Europe and Central Asia of J. Ray 
McDermott, told the Ambassador that McDermott was committed to 
investing in local content in Kazakhstan, but he said the government 
cannot continue to rely on international companies to develop local 
skills and capacity.  "Kazakhstan needs to invest in itself more. 
They need to put their money on the table," he said. 
 
¶10.  (SBU) COMMENT:  Although legislation governing local content 
and subsoil use gradually is taking shape, ambiguities regarding the 
calculation and implementation of local-content requirements present 
an administrative barrier for subsoil-use operations.  Ongoing 
negotiations over what does and does not constitute local content 
could slow the pace of major oil projects, such as Kashagan, unless 
these issues are resolved in a timely manner.  The government has 
previously demonstrated a willingness to consider the suggestions of 
subsoil users when implementing laws of this nature.  We expect that 
further amendments will be necessary, particularly if large 
investors such as Chevron, ExxonMobil, and Conoco press the claim 
that these restrictions will impact the pace and quality of 
operations.  END COMMENT. 
 
 
HOAGLAND