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Subsoil Use Regulations in Kazakhstan

SUBSOIL USE REGULATIONS IN KAZAKHSTAN
The principal legislation governing subsoil exploration, mining and production activity in Kazakhstan is the Code “On Subsoil and Subsoil Use” dated December 27, 2017 (Mining Code). Some provisions of the Mining Code will become effective on January 1, 2020 and on January 1, 2021.

In addition to the Mining Code, certain provisions of the Law “On Subsoil and Subsoil Use” dated June 24, 2010 (Subsoil Use Law) shall apply to subsoil use operations, though in general the Subsoil Use Law is ineffective.

License or Contract
Under the Mining Code subsoil use rights are to be granted either based on a license or on a subsoil use contract depending on type of mineral. In respect of all types of solid minerals, except for uranium such rights are granted by license; and in respect of exploration and/or production of hydrocarbons and production of uranium a subsoil use contract is entered.

Types of subsoil use operations
The Mining Code regulates exploration, production/mining, geological study (research) operations and use of subsoil spaces and prospecting (digging). The latter two types of operations were not provided under the Subsoil Use Law. Use of subsoil spaces in general includes deployment and operation of underground structures and storage facilities for various purposes. Prospecting involves mining of precious stones and metals either manually or by using low power equipment/vehicles.

Periods of exploration and production and their extensions
The Mining Code sets various exploration and production/mining periods considering the types of minerals and other factors.

In respect of hydrocarbons, exploration periods may vary depending on location of operations (onshore or offshore) and set out from six to nine years with the right to two extensions. Production period for hydrocarbons depends on size and uniqueness of a field and may vary from 25 to 45 years with the right to extension up to 25 years.

Exploration period for solid minerals is six years with the right to extend for five years. Mining period shall not exceed 25 years with the right to extend for 25 years. The Mining Code does not contain any provisions regulating exploration periods for uranium. Accordingly, provisions regulating exploration periods for solid minerals should apply though it is not expressly stated in the Mining Code. As a rule, the periods are generally set to be “consecutive” years.

Exclusive Right to Production/Mining
Under the Mining Code, subsoil users holding exploration licenses for solid minerals have an exclusive right to obtain a mining license for both solid minerals and common materials (if any) and a license for the use of the subsoil, subject to certain conditions. This exclusive right applies also to subsoil users, which have received exploration rights for solid minerals and common materials under the Subsoil Use Law. There are no express provisions under the Mining Code dealing with production rights for (i) hydrocarbons (since there are no separate exploration contracts); (ii) common materials, and, (iii) uranium. In the latter case, it may be explained that the production rights may be granted only to the national uranium company.

Transfer of Subsoil Use Rights and/or Objects Related to Subsoil Use Rights and Consent thereto
Transfer of subsoil use rights and/or objects related to such rights under licenses or contracts are generally subject to the consent of the competent authority. The term “objects related to subsoil use rights” under the Mining Code includes shares, interests and other instruments confirming title to such shares, interests or instruments in the share capital of a subsoil user holding subsoil use rights for exploration and/or production of hydrocarbons or production of uranium, or a license for exploration or production of solid minerals. In addition, such objects include shares, units and other interests in the share capital in any entities having direct or indirect control over the above listed objects related to subsoil use rights.

Shares and other securities/instruments, which are publicly traded (in Kazakhstan or abroad) are not considered to be objects related to subsoil use rights as well as shares and other instruments in any legal entities directly or indirectly holding the above listed shares and securities/instruments.

The competent authority’s consent to a proposed transfer is valid for one year and no extension is permitted (the current validity period is six months, plus one six months extension).

The exceptions include, among others, transfers of up to 1% of the objects related to subsoil use rights, transfers of rights or objects among members of a group of companies owned by one entity owning at least 99% of the relevant group members, provided that a buyer has not been registered in a tax haven; and in other cases, listed under the Mining Code.

The State Priority Right and State Pre-emptive Right
Subject to certain exceptions, the State has a priority right to acquire subsoil use rights or a part thereof on a proposed transfer and shares and other securities being objects related to subsoil use rights issued for public trading, if such rights, shares and securities are in respect of a strategic deposit (as defined in the Mining Code).

In addition, the State has a pre-emptive right to purchase hydrocarbons. The State has no such right in respect of purchase of other minerals.

Change of control
Any changes of control are subject to notification of the competent authority within 30 days after such changes.

Direct control means any title to more than 25% of the voting rights and/or shares or other ownership interests in a subsoil user or entities holding such shares and/or a right to obtain more than 25% of the profit of the relevant entity and/or to determine decisions made by entities directly or indirectly owning subsoil use rights or objects related to such rights. Indirect control means holding rights to control those entities, which have direct control as described above.

Financing of Reclamation
Subsoil users’ reclamation obligations may be secured by providing a bank guarantee, a bank account’s pledge and/or through insurance (except for subsoil users performing offshore exploration for hydrocarbons). The type of security may vary based on the type of a mineral. For example, the reclamation obligations of uranium subsoil users shall be secured by a bank account’s pledge while the same obligations of subsoil users dealing with solid minerals may be secured through all three above-listed types.

Investment Preferences
The Mining Code permits a subsoil user and the competent authority to agree certain investment preferences for processing of solid minerals in Kazakhstan, such as exemption from payment of corporate income tax, land and property taxes as well as from payment of customs duties while importing technological equipment, batching and spare parts thereto, raw materials and/or materials. Obtaining such preferences requires at least entry of an investment contract with the state authority in charge for investments.

Payments
In addition to payments for subsoil use rights set out in the tax laws, the Mining Code provides for land lease payments and annual minimal financial costs, which are to be paid under licenses for solid mineral and common materials.