07ASTANA443, KAZAKHSTAN: OIL AND GAS AMENDMENTS SLIGHTLY TIGHTEN

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Reference ID Created Released Classification Origin
07ASTANA443 2007-02-20 12:18 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana

VZCZCXRO1965
RR RUEHDBU RUEHLN RUEHVK RUEHYG
DE RUEHTA #0443 0511218
ZNR UUUUU ZZH
R 201218Z FEB 07
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC 8495
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCIS/CIS COLLECTIVE 0032
RUEHAST/USOFFICE ALMATY

UNCLAS ASTANA 000443 
 
SIPDIS 
 
DEPT FOR SCA/CEN (O'MARA) 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET KZ
SUBJECT:  KAZAKHSTAN: OIL AND GAS AMENDMENTS SLIGHTLY TIGHTEN 
GOVERNMENT CONTROL 
 
REF: A. 05 Almaty 3857, B. 06 Astana 927, C. 06 Astana 501 
 
1. (SBU) Summary:  On January 12, Kazakhstan adopted new amendments 
to its "Petroleum" and "Subsoil" laws, the most notable of which 
prohibits the transfer of subsoil rights for two years following 
signature of a subsoil contract.  While this amendment has received 
considerable attention in the press, a prominent oil-and-gas 
attorney told Energy Officer that, in her opinion, the amendment was 
a justifiable response to considerable "speculation" in Kazakhstan's 
onshore market; further, as the amendment was not retroactive, it 
would have no effect on existing contracts.  The new amendments also 
strengthen Kazakhstan's "local content" requirements in the 
procurement process, and -- in what is likely a response to fears of 
growing Chinese ownership of Kazakhstani oil assets -- define the 
Energy Ministry's right to refuse a company's participation in a 
tender in the interests of "national security."  End summary. 
 
Two-Year Moratorium on Rights Transfer 
-------------------------------------- 
 
2. (SBU) On January 12, President Nazarbayev signed into law a 
series of amendments to both the 1995 "Petroleum Law" and the 1996 
"Subsoil Law."  Most notably, the amendments prohibit the 
re-assignment of subsoil use rights within two years of a contract's 
effective date.  KazMunaiGaz and its subsidiaries are exempted from 
this proscription. 
A Kazakhstani senator explained in the press that the amendment had 
been adopted in order to reduce "speculation," or an increasing 
tendency of contract signators to transfer their rights without 
making any investments or attempting to fulfill their contractual 
requirements.  Marla Valdez, a leading oil and gas attorney, 
applauded the change in a February 16 conversation with Energy 
Officer, explaining that, with high oil prices, the sector had 
become fraught with speculation.  The government was justified in 
seeking some continuity of ownership, she argued, adding that "in 
the oil business, two years is a very short time."  Valdez also 
commended the fact that the law was not retroactive. 
 
"National Security" Interests in Tenders 
---------------------------------------- 
 
3. (U) A new Subsoil Law amendment grants the Energy Ministry the 
right to refuse an applicant's participation in a tender if awarding 
the subsoil rights to that applicant would compromise Kazakhstan's 
national security.  The amendment repeats language originally 
legislated in the fall 2005, in response to the Chinese National 
Petroleum Company's (CNPC) bid to purchase PetroKazakhstan (Ref A), 
defining the "concentration of rights" as a possible threat to 
national security.  The media has linked this provision to the 
recent sale of Nations Energy's Karazhanbasmunai field to the China 
International Trust & Investment Corporation (CITIC Group), and to 
the public debate which ensued about China's increasing share of 
Kazakhstan's oil producing assets (Ref B). 
 
Local Content 
------------- 
 
4. (SBU) The new amendments also tighten the GOK's local content 
regulations, requiring companies to meet local content benchmarks 
annually, rather than on average over the lifetime of a project. 
Subsoil users are also required to submit an annual procurement 
program.  Valdez suggested that the local content amendments "had 
not turned out nearly as bad as investors had feared" in the wake of 
the October 2006 "Tengiz brawl" (Ref C), which focused national 
attention on the issues of local content and pay equity for 
Kazakhstani workers, especially in large oil and gas projects. 
Valdez explained that the law stipulated that local companies be 
granted contracts if they met "state regulations," rather than 
"international standards," as desired by Western oil majors. 
However, she noted, as part of the WTO accession process, 
Kazakhstan's "state regulations" were themselves being amended to 
prescribe "international standards," thus yielding the same result. 
 
 
MILAS

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