Latest Changes in Regulated Procurement, Local Content and

Subsoil Use Regulations in Kazakhstan

Yerbolat Yerkebulanov

GRATA Law Firm

Aberdeen, 6 March 2014

Volume of Oil & Gas Procurement in Kazakhstan

Total for 2013 - $18,1 billion:

1)TCO, KPO, NCOC (unofficially – “Three Whales”) – $8,6 billion;

2)Samruk companies* (KMG, KazMunaiTeniz, etc.) – $4,2 billion;

3)Other subsoil users - $5,3 billion.

* companies, where ≥ 50 percent of shares (in)directly belong to JSC National Wealth Fund Samruk-

Kazyna (wholly owned by Kazakhstan Government)

Regulation of Procurement

1) TCO, KPO, NCOC

Their own internal rules (with pre-qualification). Criteria of bid awarding are not transparent (not necessarily the lowest price at tenders)

2) Samruk companies

Samruk Procurements Rules No. 80 dd. 26 May 2012 (procurement from single source or under the lowest price)(tender.sk.kz)

3) Other subsoil users

Procurement Rules No. 133 dd. 14 Feb 2013 (single source or the lowest price) (new.reestr.nadloc.kz)

Procurement Procedures for Subsoil

Users*

1) Are goods, works and/or services (“GWS”) procured referred to in the list of single source procurements [1] under the Procurement Rules**?

2) Can a certain product be procured at commodity markets [2]?

3) Does a GWS cost below $140,000 (below $4,000 under Samruk Rules) per year? (if “YES” – procure by request of quotes [3])

If “NO” to all above questions, then the GWS is subject to tender [4] or auction [5]. If no participants, procurement from single source is allowed.

* Except for TCO, KPO, NCOC

**either Samruk Rules or Rules No. 133

Liability for Procurement not under Rules 133

1) Expenses for goods, works and services (“GWS”) procured in breach of Rules 133 are not acknowledged by authorities as execution of annual financial obligations of a subsoil user.

2) Every contract has a work program with certain yearly financial obligations. Underperformance* of such obligations and non-rectification of the breach within a certain period by a subsoil user entails a risk of unilateral termination of the contract by the authorities.

Anticipated Changes in Rules 133

1) From 1 June 2013, all prospective contractors shall have E-signature issued to Kazakh entities or non-residents having rep offices / branches in Kazakhstan (or to a consortium member). Draft amendments dated Jan 2014 to Rules 133 (“Draft”) will allow procurements from single source (e.g. if a tender failed) from entities without E-signature.

2) Currently for GWS costing above $500 thousand per year a subsoil user can require an up-to-5-years experience from prospective contractors. Under the Draft, “$500 thousand” will be replaced by “$140 thousand”.

3) Under the Draft, for GWS costing less than $140,000 per year an announcement for tender is given not 30, but 15 calendar days before.

Issues of Local Content (“LC”)

1) Almost all subsoil contracts have LC percentage obligations for GWS* (e.g. 30% - goods, 80% - works, 80% - services).

2) Failure to achieve contractual LC entails a penalty: up to 30%* of the non-achieved volume of LC in GWS.

* Negotiated and set out specifically in each subsoil

use contract

Four Dimensions of LC

TENDER (20 % discount)*

REPORTS

GOODS “Kazakh manufacturer of goods”

CT-KZ Certificate

SERVICES, WORKS

“Local supplier of services, works”

Rj (percentage of Kazakh employees’ payroll in overall company’s payroll fund)

* For Samruk subsoil users:

1)for goods – 0,15 % for each 1 % of LC (max. 15%);

2)for works, services - 0,1% for each 1% of LC (max. 10%);

TENDER - GOODS

Kazakh entities manufacturing goods with CT-KZ certificate enjoy 20 % discount at a tender

Kazakh entities having ≥ % (19/1) of Kazakh employees enjoy 20 % discount at a tender

TENDER - SERVICES,

WORKS

REPORTS - GOODS

LC in goods supply contracts = % set out in CT-KZ certificate.

If “NO” – LC is 0 (zero)*.

• LC in services contracts = Rj, i.e. percentage of Kazakh employees’ payroll in company’s general payroll fund*.

• If goods are used (works contract), calculation for “Reports – Goods” shall apply.

REPORTS - SERVICES,

WORKS

*Note: For non-resident’s branches in Kazakhstan, Rj is calculated from payroll of all the company’s staff (including foreign divisions), i.e. normally ≤ 1%.

Formulae for Calculation of LC*

, 

For calculation of LC in supply contract

For calculation of LC in services or works

contract

* According to Unified Method of LC Calculation

Calculation of LC in 2 or more GWS

1. To calculate LC in 2 or more GWS*, we need to determine part of specific GWS with 100 % of LC.

2. Analogue. LC is like a salt in water (which is like a GWS).

3. If we vaporize 1 liter (1000 g) of water with 40 % salt, we’ll then have 400 g of salt with 100% of salt (“Concentrate (100%)”).

4. Concentrate (100%) for a construction contract of $ 10 mio with 35 % of LC is equal to $ 3,5 mio.

* LC in goods, works or services is calculated

separately

Algorithm for LC Calculation

Step 1. Determine Concentrate (100%) in each GWS.

Step 2. Summarize Concentrates (100%) of different GWS together (“Result 1 (100%)”).

Step 3. Summarize amounts of different GWS together (“Result 2 (Totals)”)

Step 4. (i)Divide Result 1 (100%) by Result 2 (Totals) and (ii)multiply by 100 %.

Result: LC share in GWS

Resolution1) Concentrate (100%) for Services 1 is

$ 0,8 mio;

2) Concentrate (100%) for Services 2 is $ 2,5 mio;

3) Result 1 (100%) for Services 1 and 2 is $ 3,3 mio;

4) Result 2 (Totals) for Services 1 and 2 is $ 6 mio;

5) 3,2 mio divided by 6 mio is 0,55.

Response: LC in Services 1 and 2 is 55%.

Calculation of LC in 2 or more GWS (2/2)

Example• LC in Services 1 of $ 1 mio is 80%;• LC in Services 2 of $ 5 mio is 50%.What is LC in Services 1 and 2?

Calculation of LC in contracts with subcontractors

Subsoil user

Contractor

Goods Services Subcontractor

Goods Services Subsubcontractor

Goods Services

LC in Staff for Work Permits

From 1 January 2012:

Kazakh employees not less than:1)70% - under 1 (senior managers) and 2 (middle-level managers) categories,2)90% - under 3 (specialists) and 4 (workers) categories.

Exception (until 1 January 2015): subsoil users of NCOC, KPO and TCO projects, their operators, contractors and subcontractors.

Validity term: until Kazakhstan joins WTO.

Anticipated changes in Subsoil Law (1/2)

1) Waiver of state pre-emptive right will be required for fields of strategic significance only (i.e. for non-strategic assets approval lasts 20 business days instead of 70).

2) Simplification of obtaining exploration right procedures. First came – first received (5 business days). Annual increase of rental. Typical contract. No LC in staff and GWS.

Anticipated changes in Subsoil Law (2/2)

3) Auction for subsoil use right – who proposed the biggest subscription bonus will win (currently – (1) subscription bonus and (2) payments to regional social development)

4) Fixation period for physical volume – 6 months, for financial obligations – 3 months (now – 1 month).

5) Exclusion of economic and ecological expertise for draft subsoil use contracts and feasibility study for draft project documents (i.e. shortening approval time).

Thank you for your attention!

If you have any questions, please feel free to contact yyerkebulanov@gratanet.com