Transcript Slide 1

Important aspects related to the new Law
on Subsoil and Subsoil use
Almaty, 29 April 2011
Odd Instefjord
General Director
Statoil North Caspian AS
Classification: Internal
2011-04-28
Content
Overview of important aspects dealt with in the Law
Host governments expectations
Policy or strict regulation ?
Impact on mandated Local Content
Local Content targets
Successful tools
Classification: Internal
2011-04-28
The New Subsoil Law (SL)
 Entered into force on July 6, 2010 and replaces / combines two previous
laws, the Petroleum Law (PL) and the previous Subsoil Law
 Ministry structure has been updated in the SL (in particular the MOG and
MINT responsibility)
 State agencies for the sector are reorganized (per March 2010)
and reflected in the New SL)
 Separate Competent Authorities (“CA”) for oil & gas (MOG) and for
hard minerals (MINT)
 State regulatory functions of KazMunaiGas are removed
Classification: Internal
2011-04-28
The new Subsoil Law (SL) (cont’d)

Split of E and P

Combined E&P only for strategic fields or fields with “complex
geological structure” and per Governmental approval

“Exclusive right” to convert E to P contract through a complex
application procedure

Foreign “strategic partner” company can still enter contract with KMG by
direct negotiation (without tender) – and several such blocks are now in
negotiation

KMG has the right to ≥50% of any new E&P project

SL restates survival of existing licenses and contracts – including PSAs)
Classification: Internal
2011-04-28
The new Subsoil Law (SL) (cont’d)
Formation of separate operator company remains optional
 if formed, KMG has right to ≥50% ownership
New terms for exploration stage:
 for appraisal 6 years (+ one 2-year extension for offshore
project) + extension
 for production stage - no clear reference to 25 and 45 years,
No annual work programs - only minimum work programs
Classification: Internal
2011-04-28
The new Subsoil Law (SL) (cont’d)
 Stiffened gas flaring / utilization rules
 Trunk pipelines confirmed to be strategic objects (per Civil Code and National Security
Law)
 Dispute resolution
 right of int’l arbitration is retained (where allowed by Kazakhstan law or treaty), and
 Kazakhstan-governing-law-only rule remains
Contract must be in both Russian and Kazakh language. English translation can be
made, but not be given legal force / priority
 The mineral tax regime remains under the Tax Code (Chapt. 10 and 11)
 Stiffer grounds for termination of contract (and apparent intent to give Gov’t / CA
wide grounds to terminate unilaterally without need for court decision first
 definitive view on this must await practice)
Classification: Internal
2011-04-28
Policy or strict regulation ?
Host governments expectations
 Resource rich countries want to turn natural
resources into long term economical
development.
 Job creation and business
opportunities
 Diversification of the economic base
 Funding national development plans
and social programs
 IOCs and oil service companies are
expected to behave as local players
 Employment, training;
 Local supply chain;
 Technology transfer
Source:
Classification: Internal
2011-04-28
Policy or strict regulation ?
All stakeholders must play its part
Government
Financial
sector
Oil
companies
Local
Content
Oil Service
companies
Educatio
n sector
Local
Private
sector
Source:
Classification: Internal
2011-04-28
Policy or strict regulation ?
The policy maker’s challenge and question
 Will interventions to leverage economic growth from expenditure in the oil, gas
and mining sectors lead to more skilled and competitive domestic suppliers?
 Or will it serve to perpetuate inefficient and uncompetitive national industries?
 Will the local content regulation break the core principle that contracts are awarded
on the basis of international competitiveness also on quality and delivery?
 Three arguments are put forward below to justify why this principle might be
temporarily suspended in emerging markets:



Infant industry argument,
Market power argument,
Social impact compensation.
Classification: Internal
2011-04-28
Local Content in Kazakhstan
General
• Promotion of ‘local content’ in the oil and gas sector is a major government
policy priority.
• The new SL has made changes in the regulatory context and a variety of
provisions are governing relations between investors and the state.
• In early April 2010, with new requirements in place, 34 contract termination
notices were sent out to the subsurface users based on the incompliance with
local content requirements.
• The Ministry of Oil and Gas (MOG) indicated that further 122 incompliance
notices will be or has been sent out.
• The trend indicates that the legislative developments of the last few years had
set the stage for changes in the investment climate and emergence of the new
state direction for the governance of the natural resources
Classification: Internal
2011-04-28
Local Content
Subsoil Contract and Local Content regulations
• Mandatory contract terms are to include provisions on % of Kazakhstan personnel and
allocations of Kazakhstan goods, works and services.
• provision of equal conditions and remuneration for Kazakhstan personnel is given
including those engaged in subcontract work.
• Provision in contracts is also to be made for fines for failure to meet local content
requirements.
• Detailed rules on tendering procedures are contained in Rules for procurement of goods,
works and services when carrying out subsurface operations. These Rules address all
subsurface operations, and apply to subsurface users and their subcontractors purchasing
goods, works or services for carrying out subsurface operations.
• Detailed procedures for the tender process contain a ‘positive discrimination’ in
favour of Kazakhstan and says that comparing bids must be decreased by 20%.
Classification: Internal
2011-04-28
Local content
local deliveries – Who’s local?


Draft Public procurement legislation require a public tender for supply to state agencies
(or state-controlled companies) of certain goods, works and services.
The Legislation aims to strengthen the position of local providers of goods and services
and preference is to be given to local manufacturers where “the quotations presented
are equal”. Furthermore, the draft Law addresses the wider definition of what constitutes
‘local’ content with
 a “domestic provider of work and services” is a Kazakhstan resident individual or
a legal entity whose workforce is no less than 95% local.
 For a “domestic entrepreneur” to be recognized as such he/she needs to be a
resident of Kazakhstan doing business in the country.
Classification: Internal
2011-04-28
Local content
local deliveries – calculation

the Uniform Method of Local Content Calculation for products and services has been
decreed by the Government. In this formula, which still is part of the draft Law, some of
the indicators has caused much debate among the stakeholders.
 inclusion of the salary ratio of the domestic employees across an overall salary
base of suppliers and contractors/sub-contractors has been considered very
problematic by some companies for the reasons of confidentiality, competitive
advantage and other commercial factors.
 requirement concerns obtaining local content certificates, CT-KZ, for every
product and service subject to calculation, from the Committee on technical
regulation under MINT
Classification: Internal
2011-04-28
Classification: Internal
2011-04-28
Classification: Internal
2011-04-28
Policy or strict regulation ?
Local Content requirements or targets – only the beginning?
++
%
50 - 90%
?%
60%
50%
65100%
3050%
45-85%
25+%
Source:
Tore Halvorsen, FMC
Classification: Internal
2011-04-28
What has been successful tools?




Project Procurement and Contract strategies
Local capacity building, training and R&D, when necessary


through tax incentives
Technology transfer requirements
Support for SMEs and entrepreneurs




Registry of competent and qualified local vendors
Advise on potential for Joint Venture and other mechanisms of cooperation with foreign
companies
Cluster Programs
Mentor Programs
Infrastructure initiatives


Supply Base initiatives
Enterprise centres
Incentives rather than stick
Source:
Classification: Internal
2011-04-28
“Maximizing the
benefits of local content
is not the same as to
maximize local content”
Impacts must be measureable in terms of
employment, training, infrastructure, well
being of host communities
And not seen as a percentage only
… … …more through a target policy than strict legislation
Classification: Internal
2011-04-28
….views provided by experienced global
companies







In short term there are lack of domestic suppliers, who produce specialized products
There is currently insufficient growth of technological capacity on behalf of domestic
suppliers
There is a deficit of qualified human resources domestically
Limited exchange between domestic producers, subsurface users and state bureaucracy
Long-term nature of investment in human resources training and education, as well as
technology transfer and capacity building and short-to-mid-term local content
There is compliance targets stipulated by the Concept and the Law with administrative
sanctions and termination of subsoil users’ contracts due to noncompliance
The LC requirements does not induce collaboration between the state and private industry
and these measures, even though intended to boost domestic supplier base, can have an
opposite effect, if not coupled with a significant investment into SME development
Source IIED
Classification: Internal
2011-04-28
Thank you
Important aspects related to the new Law
on Subsoil and Subsoil use
Odd Instefjord
General Director, Statoil North Caspian AS
www.statoil.com
Classification: Internal
2011-04-28