Classification: Internal 2011-04-28

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

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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)

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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

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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)

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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:

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Policy or strict regulation ? All stakeholders must play its part

Government

Financial sector

Oil companies

Oil Service companies

Local Private sector

Education sector

Local Content

Local Content

Source:

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Policy or strict regulation ? The policy maker’s challenge and question

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.

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?

Classification: Internal 2011-04-28

Local Content in KazakhstanGeneral

• 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 ContentSubsoil 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%.

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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.

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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

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Classification: Internal 2011-04-28

Classification: Internal 2011-04-28

Policy or strict regulation ? Local Content requirements or targets – only the beginning?

?%

30-50%

60%

50%

25+%

65-100%

45-85%

++%

Source:Tore Halvorsen, FMC

50 - 90%

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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

Source:

Incentives rather than stick

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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

“Maximizing the

benefits of local content

is not the same as to

maximize local content”

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….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

Important aspects related to the new Law on Subsoil and Subsoil use

Odd Instefjord

General Director, Statoil North Caspian AS

www.statoil.com

Thank you