VZCZCXRO3896
OO RUEHAST RUEHBI RUEHCI RUEHLH RUEHLN RUEHPW RUEHVK RUEHYG
DE RUEHTA #1910/01 2731243
ZNR UUUUU ZZH
O 291243Z SEP 08
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3442
INFO RUCNCIS/CIS COLLECTIVE 0652
RUCNCLS/SOUTH AND CENTRAL ASIA COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEKJCS/SECDEF WASHDC 0122
RUEKJCS/JOINT STAFF WASHDC
RHEHNSC/NSC WASHDC 0204
RUEAIIA/CIA WASHDC
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 ASTANA 001910 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TDA FOR DAN STEIN 
COMMERCE FOR DANICA STARKS, ENERGY FOR TYLER TILLER 
 
E.O. 12958: N/A 
TAGS: EPET EINV PGOV KZ
SUBJECT:  KAZAKHSTAN: GOVERNMENT TO PRESENT DRAFT OF NEW SUBSOIL LAW 
TO PARLIAMENT 
 
SUMMARY 
 
¶1. (SBU) The Government of Kazakhstan will present to Parliament in 
October a draft of a new law on subsoil use.  The proposed 
legislation would require separate contracts for exploration and 
production operations, put shorter time limits on exploration 
contracts, enhance the government's authority to terminate contracts 
not in compliance with the law, and require tax stability clauses in 
individual contracts to be approved by parliament.  In addition, 
under the terms of the legislation, no future contracts would be 
structured as production sharing agreements (PSAs).  A Ministry of 
Energy official explained to us that the new legislation is aimed at 
ironing out "contradictions" in several existing laws. International 
oil companies are concerned with several of the provisions in the 
proposed legislation -- but there does not appear to be the same 
level of anxiety that was manifested over the October 2007 subsoil 
amendments.  END SUMMARY. 
 
NO NEW PRODUCTION SHARING AGREEMENTS 
 
¶2. (U) The Ministry of Energy and Mineral Resources announced on 
September 8 that it will present to Parliament in October a draft of 
a new law "On Subsoil and Subsoil Use."  If passed on schedule, the 
Ministry expects that the new law would come into effect in January 
¶2009.  The existing subsoil law has been amended five times, most 
recently in October 2007.  The new law would supersede all current 
legislation on oil production and exploration, mineral resources 
mineral management, and production sharing agreements (PSAs). 
 
¶3. (U) Under the government's proposed draft, no future subsoil use 
contracts would be structured as PSAs.  Tax stability clauses in 
contracts would still be permitted, but parliament would have to 
ratify them to make them legally valid.  There would be separate 
bidding procedures and contracts for exploration and production 
operations.  A company awarded exploration rights would nevertheless 
be given priority rights to negotiate a production contract with the 
government following an oil or gas discovery.  However, if the terms 
of the production contract were not agreed to within a set time 
period, production rights would be opened to other bidders through a 
public tender. 
 
MORE AUTHORITY TO TERMINATE CONTRACTS 
 
¶4. (U) Under other terms of the draft law, exploration contracts 
would be limited to six years, with the possibility for an extension 
for an evaluation period.  (NOTE: Current law provides for 
exploration contracts of up to six years, with the possibility of 
two extensions of two years each -- for a total of 10 years -- in 
addition to an additional extension for an evaluation period. END 
NOTE.) Companies would be required to establish equal terms, 
conditions, and pay for Kazakhstani and foreign workers. The 
government would also put greater emphasis on promised social 
contributions in evaluating bids on subsoil contracts. 
 
¶5. (U) The proposed draft fully incorporates the October 2007 
amendment to the current subsoil law which allows the government to 
force amendments to existing subsoil contracts of "strategic 
significance" -- or even terminate such contracts -- where the 
economic interests of Kazakhstan are so threatened as to create a 
"national security risk."  In addition, the proposed draft provides 
the government with enhanced authority to terminate any subsoil 
contracts for non-compliance with any law.  The Ministry of Finance 
in particular pushed for such authority.  According to the Ministry, 
more than half of the 400 oil and gas companies operating in 
Kazakhstan do not consistently fulfill the terms of their contracts, 
especially those concerning taxation. 
 
REASSURANCES FROM ENERGY MINISTRY 
 
¶6. (SBU) Timur Toktabayev, Director of the Department of Subsoil 
Investment in the Ministry of Energy and Mineral Resources, told 
Energy Officer on September 24, that the main purpose of the new law 
was to codify and reconcile existing legislation.  Toktabayev served 
on the working group that prepared the new draft subsoil law and he 
claimed there were more than 60 contradictions in the various 
existing laws pertaining to subsoil.  The inter-governmental working 
group was also tasked with strengthening the monitoring and 
enforcement provisions of production contracts, particularly 
financial and technical clauses.  For example, production contracts 
 
ASTANA 00001910  002 OF 002 
 
 
will be monitored more closely to ensure that companies meet 
specific production milestones for the entire block under contract 
and do not simply hold subsoil use licenses without working to 
develop the field.  Toktabayev was eager to reassure Energy Officer 
that the Government of Kazakhstan will continue to respect the 
sanctity of contracts and the principle of tax stability.  He said 
the government does not want to trigger new legal battles with 
companies and will continue to prefer the negotiated settlement of 
disputes to litigation and arbitration. 
 
INTERNATIONAL COMPANIES EXPRESS SEVERAL CONCERNS 
 
¶7. (SBU) International oil companies operating in Kazakhstan, 
including ExxonMobil, ConocoPhillips, and Chevron, are currently 
reviewing the draft law and will provide comments and suggestions to 
the Government through the KazEnergy business association headed by 
President Nazarabayev's son-in-law, Timur Kulibayev.  They have 
indicated to us that their primary areas of concern are the 
separation of exploration and production contracts; the requirement 
for parliamentary approval of tax stability clauses; uncertainty 
over whether the provisions of the new law would require the 
renegotiation of existing contracts; and the government's enhanced 
authority to terminate contracts.  They also maintain that the 
legislation might allow the government to revoke the production 
rights of one company in a consortium while allowing other partners 
to continue to operate, thus giving the government direct influence 
over consortium operations and composition. 
 
COMMENT 
 
¶8. (SBU) The proposed new subsoil law appears to be yet another step 
-- even if a small one -- in the direction of increased Kazakhstani 
government assertiveness in the energy sector.  That said, while 
senior officials, including Prime Minister Masimov, admit that the 
government wants to strike more favorable terms for new deals, they 
regularly reassure us that the sanctity of existing contracts will 
be respected.  In any event, the proposed new law has not aroused 
anywhere near the same level of concern as the October 2007 subsoil 
amendments that gave the government the power to renegotiate and 
terminate contracts on "national security" grounds. END COMMENT. 
 
HOAGLAND