VZCZCXRO7999
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #2931/01 2971311
ZNR UUUUU ZZH
R 241311Z OCT 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 1014
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE 0284
RUEHAK/AMEMBASSY ANKARA 2106
RUEHBUL/AMEMBASSY KABUL 0360
RUEHNE/AMEMBASSY NEW DELHI 0477
RUEHAST/USOFFICE ALMATY

UNCLAS SECTION 01 OF 02 ASTANA 002931 
 
SIPDIS 
 
DEPT FOR SCA/CEN (O'MARA) 
DEPT PASS TO OPIC - BALLINGER 
DEPT PASS TO TDA FOR STEIN, EXIM FOR GLAZER 
DEPT PASS TO AID - EE-PHILLIPS/RUSHING 
USDOC FOR 4231/ITA/MAC/MLONDON, 4201/BISNIS 
USDOC FOR 6110/ITA/TD/BI/RHALPERN 
ANKARA FOR CFC 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EIND ENRG EPET EFIN KZ
SUBJECT:  KAZAKHSTAN'S PROPOSED SUBSOIL AMENDMENT RATTLES FOREIGN 
INVESTORS 
 
ASTANA 00002931  001.2 OF 002 
 
 
¶1. (SBU) Summary:  On 27 September 2007, the Kazakhstani Parliament 
approved an amendment to the "Law on Subsoil and Subsoil Use" which, 
if signed into law, may have substantial negative consequences for 
the investment climate in Kazakhstan.  The draft amendments give the 
Government of Kazakhstan (GOK) more power to terminate a subsoil use 
contract if it decides that the contractors' actions violate the 
national economic security interests of Kazakhstan.  Interestingly, 
however, the amended law has awaited President Nazarbayev's 
signature for almost one month, perhaps signaling that he is at 
least giving second thought to an amendment sure to displease some 
of Kazakhstan's biggest foreign investors.  End summary. 
 
What the Draft Law Is 
--------------------- 
 
¶2. (U) On September 12, the Mazhilis (lower house of the Kazakhstani 
Parliament) initiated the process of amending the "Law on Subsoil 
and Subsoil Use".  According to the accompanying executive summary 
provided by the Parliament, the purpose of the proposed law is to 
protect Kazakhstan's "national economic security interests."  In 
doing so, the summary states, the draft law introduces "a real 
mechanism for ensuring compliance" with the National Security Law 
requirement that any contract relating to the use and/or sale of 
strategic resources be monitored for compliance with national 
security requirements. 
 
¶3. (U) According to the amendment, in cases in which a subsoil 
user's operations cause substantial change to Kazakhstan's economic 
interest or result in a threat to the national security of 
Kazakhstan, the GOK will have the right to require that the subsoil 
user change and/or amend the terms and conditions of the contract in 
order to restore the economic and security interests of the 
republic.  Additionally, this amendment gives the GOK the right to 
unilaterally refuse, on a month's notice, to perform its contractual 
obligations. 
 
¶4. (U) The proposed amendment also expands the legal grounds for 
termination of a subsoil contract.  Specifically, the GOK can 
terminate a contract under any of the following conditions: 
 
-- If the contractor does not agree in writing to negotiations 
within two months of receipt of notification of the GOK's intent to 
amend the contract. 
-- If the contractor and the GOK cannot reach an agreement within 4 
months of the subsoil user's agreement to enter the negotiations. 
-- If the contractor and the GOK do not sign amendments to the 
contract's terms within 6 months of reaching an agreement on 
restoration of Kazakhstan's economic interests. 
 
¶5. (U) According to Energy Minister Sauat Mynbayev,  only contacts 
concerning a "limited list of strategic objects" could be subject to 
termination.  The amendments authorize the GOK to define the 
strategically important areas of subsoil use (fields).  Mynbayev 
stated "this list will be short... The authorized body will not be 
able to consider all oil projects related to national security.  At 
the same time it is obvious that some big fields should be regulated 
as strategic objects."  According to the executive summary, the 
amended law will retroactively apply to all contracts relating to 
either exploration or production.  [It would be better in this 
paragraph to use fewer direct quotes so as to more clearly and 
succinctly explain what he wanted to convey] 
 
Investors Are Concerned 
----------------------- 
 
¶6. (SBU) During the early October KIOGE (Kazakhstan Oil & Gas 
Exhibition) conference numerous business representatives privately 
expressed serious concerns about the consequences of the Subsoil 
draft law's likely enactment.  On October 1, Kazakhstan's Foreign 
Investors' Council Association (FICA), Kazakhstan Petroleum 
Association (KPA), International Tax & Investment Center (ITIC), 
American Chamber of Commerce (AmCham) and European Business 
Association (EUROBAK) sent a joint letter to President Nazarbayev 
requesting that he veto the draft law.  The letter referred, inter 
alia, to Article 26.3 of Kazakhstan's Constitution, which states, 
"no one can be deprived of his property unless there is a court 
 
ASTANA 00002931  002.2 OF 002 
 
 
decision".  The letter also expressed serious concerns that the new 
law would increase the political risks of investing in Kazakhstan 
and worsen the country's investment climate. 
 
This, Too, Shall Pass? 
---------------------- 
 
¶7. (SBU) Uncharacteristically, President Nazarbayev has been slow to 
sign the draft law since it was approved by Parliament on September 
¶27.  Kazakhstan's Constitution gives the president a month to sign a 
proposed law or send it back to Parliament (suggesting changes or 
essentially vetoing it).  Generally very few draft laws come close 
to testing this deadline.  (Note: some precedents appear to suggest 
that only workdays are counted.  End Note.)  President Nazarbayev's 
slow reaction has led some to speculate that he may still be 
weighing the relative strengths and weaknesses of the law. 
 
¶8. (SBU) The possible enactment of the Subsoil draft law is but one 
challenge currently facing energy investors in Kazakhstan.  Talks 
continue between the GOK and the Agip consortium on resolving a 
conflict over the development of the Kashagan field, with the GOK 
likely to receive compensation for delays in commercial production 
(see septel for additional details).  Separately, TengizChevrOil 
(TCO) has been levied with an environmental fine of over $300 
million for illegal sulfur storage, a decision that TCO has 
appealed. 
 
Comment 
------- 
 
¶9. (SBU) Comment:  The proposed amendment is one of the latest - and 
most significant - salvos in the GOK's apparent tightening of its 
policy toward foreign investors, particularly in the extractive 
sector.  The timing of these amendments was likely not a 
coincidence, but rather a means of pressuring the Kashagan 
consortium's foreign shareholders.  As Kazakhstan's foreign 
investors are voicing their displeasure in the faint hope that the 
draft law will meet a presidential veto, President Nazarbayev 
appears to be keeping his options open.  One option, which 
Nazarbayev has exercised with controversial legislation in the past, 
may be to forward the legislation to the Constitutional Council for 
review, where it can linger and die.  However, the government 
continues to maintain its support for the amendment; Prime Minister 
has stated to the Ambassador that he "hopes" Nazarbayev will sign 
it.  End comment. 
 
ORDWAY