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Avoiding Subsoil Disputes in Kazakhstan

Yerzhan YessimkhanovGRATA Law Firm

London, 2011

Subsoil Disputes

• Subsoil vs. state;

• Parties in a subsoil M&A transaction.

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Subsoil User vs. State

• Non-compliance / alleged non-compliance of subsoil user with conditions of subsoil contracts / legislative provisions;

• Majority of disputes – environmental. Also non compliance with subsoil work program, labour, procurement.

• Legislative (and contractual) requirements are often vague, changes are regularly introduced;

• Potential consequences – termination of a subsoil contract.

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Measures to Avoid

• Monitoring of subsoil user’s activity;

• Strict compliance with requirements of contracts / legislation;

• Timely reporting;

• Implementation of internal programs: environmental protection, social responsibility, procurement.

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Parties in Subsoil M&A

• Bad structuring of M&A deal;

• Non-compliance with mandatory approval procedures;

• Quality of assets;

• Potential consequences – invalidity / termination of transaction, termination of subsoil contract.

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Measures to Avoid

• Thorough due diligence with a focus on potential non-compliance with contractual / legislative provisions;

• Observance of mandatory approval procedures during the structuring stage.

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Due Diligence

• Main asset – right to extract minerals (subsoil use right), based on contract with the state;

• Contract might be terminated by the state in case of any material violation by subsoil user;

• Due diligence shall confirm absence of any material violations / compliance with obligations.

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Due Diligence (cont.)

Obligations of Subsoil User:

• Execution of work program (program of exploration / production activities and investments);

• Environmental;• Social;• Historical costs;• Procurement procedures;• Reporting;• Other.

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Regulatory Approvals

- waiver of state pre-emptive right;

- anti-monopoly approval.

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Regulatory Approvals (cont.)

STATE PRE-EMPTIVE RIGHT

• applicable to subsoil use right transfer, ALL share transfers and “connected objects” transfers. Exceptions are very limited;

• Ministry of Oil and Gas (MOG) or Ministry of Industry and New Technologies (MINT);

• consequences: invalidity of transaction / termination of subsoil contract;

• time: 70 business days;• effectiveness: 6 months.

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Regulatory Approvals (cont.)

ANTI-MONOPOLY APPROVAL

• applicable to transactions with aggregate assets of vendor and purchaser exceed approx. US$ 20 million;

• Agency on Protection of Competition (Anti-Monopoly Agency);• Time – 1-2 months.

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ANY QUESTIONS?

Yerzhan YessimkhanovCounsel

GRATA Law Firmyyessimkhanov@gratanet.com

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