Pipelines in Kazakhstan: the Legal Issues
Abai Shaikenov, Senior associate with SALANS international law firm
Anthony Cioni, Senior associate with SALANS international law firm
Since the development of an oil field is an expensive proposition, it is critical for producers to ensure that they can get their product to market. In landlocked countries like Kazakhstan, producers place great reliance on pipeline systems. This reliance in turn places great emphasis on the producer’s rights under Kazakhstan law to construct, own and operate a pipeline. As a result, many producers are now examining the scope of their rights under the law to determine whether and how they might build a pipeline to transport petroleum to market from their fields.
The purpose of this article is to examine the current state of the law to identify some of the potential pitfalls affecting the construction, ownership and operation of pipelines in Kazakhstan. Before embarking on this analysis, it is important to note that at the time of press, the Parliament is currently considering a number of amendments to the laws governing petroleum activities. Some of these amendments might affect the topics discussed in this article.
Petroleum Industry Activities Regulated by Legislation
The main law governing petroleum matters in Kazakhstan is the Decree of the President having the force of law dated 28 June 1995, “On Petroleum” (the “Petroleum Law”). This Law employs a number of basic defined terms to describe which petroleum activities are permitted and regulated in the Republic. In the Petroleum Law, the term “Oil Operations” specifically includes “Construction and Operation of Oil and Gas Pipelines1, as performed on-shore within the limits of rivers, lakes and other internal bodies, as well as Offshore Oil Operations2” (The “Construction and Operation of Oil and Gas Pipelines” is defined by the Petroleum Law as, “any works (operations) conducted for the purpose of the construction, laying and operation of Oil and Gas Pipelines on dry land, in rivers, lakes, the sea and in other internal reservoirs”. 2 “Offshore Petroleum Operations” is defined by the Petroleum Law as “exploration, production, construction and operation of the oil and gas pipelines in the offshore area.”).
Right to Own a Pipeline
The right to own a pipeline is not specifically referenced in the definition of “Oil Operations”, which definition only mentions construction and operation activities. Therefore, it is necessary to look elsewhere in the law for this right.
Article 42 of the Petroleum Law states that Main Pipelines may be owned by the State and other parties. This Article also requires that the owner of a pipeline operate those facilities, unless provided otherwise by contract. Under the Petroleum Law, a Main Pipeline is described as an engineering facility consisting of a linear part and the accompanying ground installation, supply lines, remote controls and communications intended for the transportation of oil from the place of production (refining) to the place of transfer to a different type of transport, processing or use. It is noted that the Petroleum Law does not draw a distinction between onshore and offshore Main Pipelines.
The above provision opens the way for private ownership rights in both onshore and offshore pipelines.
Right to Construct a Pipeline
Apart from the observance of all licensing and permit requirements, there is an issue as to whether or not the right to construct a pipeline should be granted through a tender procedure and subsequent contract with the State. The issue arises from the definition of Oil Operations in the Petroleum Law, which includes the construction, laying and operation of Oil and Gas Pipelines.
Article 8-2 of the Petroleum Law allows subsoil users to conduct Oil Operations relating to the construction and operation of pipelines, but only where the relevant State agencies have granted such subsoil users the relevant permits. However, we note that Article 8-2 expressly applies only to offshore pipelines. Therefore, this drafting problem in the Petroleum Law creates possible pitfalls for investors looking to construct onshore pipelines.
Given this discrepancy, it is arguable that any party wishing to construct an onshore pipeline must undergo the general procedure for obtaining the right to conduct Oil Operations. This general procedure contemplates a tender and the subsequent signing of a subsoil use contract with the Competent Body (currently the Ministry of Energy and Mineral Resources).
This would also complicate matters for pipelines with both onshore and offshore segments. In such cases, it is arguable that the right to construct the offshore segment would merely require the relevant permits from State agencies, while the onshore segment would require the prior tender of the work together with the execution of a contract with the Competent Body.
In our view, aside from the definition of Oil Operations, the balance of the Petroleum Law and the provisions of other relevant Governmental Decrees do not support the proposition that the construction of an onshore pipeline requires a tender and a contract that are prerequisites to gaining the right to conduct Oil Operations.
Although we do not believe that the construction of an onshore pipeline would likely be subject to the application of general tender procedures and the execution of a subsoil use contract, the current wording of the Law does create certain ambiguity on this point. If applicable, this would raise some significant questions regarding both existing and planned onshore pipeline projects in Kazakhstan. We note that most of the existing pipelines in Kazakhstan did not undergo a general tender procedure and did not result in the execution of subsoil use contract. As such, the current practice seems to indicate that these requirements are not applicable. However, we hasten to note that there are comparatively few pipelines as separate projects in Kazakhstan in this time and that the practice may develop over time.
Side Issues Relating to Construction of Pipeline
There are a number of issues related to the right to construct pipelines that are worth initial consideration. To provide a fuller picture on pipeline construction, we have described some of these points below.
As explained above, Article 8-2 of the Petroleum Laws permits the construction of an offshore pipeline with the relevant permits from State agencies. One of these State agencies is the President himself, who is empowered under Article 49 of the Petroleum Law to grant general permits for the conduct of Oil Operations in offshore areas, internal bodies of water, ecological disaster zones and specially protected natural and cultural areas. Such permissions are granted at the request of the Government on the basis of the conclusion of a State environmental expert study.
At first glance, it would appear that the President’s permission is needed each time the State grants someone the right to conduct offshore Oil Operations. Considering the anticipated number of participants in the Caspian Sea, this requirement would appear to place a huge administrative burden on the office of the President. As such, many legal experts believe that such permission is given for conduct of Petroleum Operations generally and is not required for each particular project involving the Oil Operations in the above-mentioned areas.
Second, we note the existence of a special Inter-Agency Commission on Export Pipelines. This Commission is an advisory body of the Government the main objective of which is to make proposals on the development of a co-ordinated policy with respect to export pipelines. The functions of such Commission include the preparation of proposals regarding export pipelines planning documentation, the analysis of alternative pipeline construction projects and the coordination of negotiations on certain priority projects.
The Commission has the right to make proposals for the selection of priority construction projects, to form expert and working groups for pipeline construction projects, and to hear proposals from interested oil companies, associations, oil company groups and investors regarding the development of export pipelines.
Although not clearly indicated in the Commission’s empowering legislation, it appears that export pipeline developers must apply for the approval of the Commission for their pipeline projects.
Finally, we note an additional set of criteria under the Law on Architectural, Town-planning and Construction Activities in the Republic of Kazakhstan dated 16 July 2001 (the “Construction Law”). Article 19 of the Construction Law gives the Government the power to make decisions on the planning and construction of infrastructure of “national and international importance”. Unfortunately, Kazakhstan law does not define what projects are of “national or international importance”. This creates some uncertainty for pipeline developers when assessing whether Government approval is required.
The Construction Law also limits foreign participation in joint ventures of construction industry set up to no more than forty-nine (49%) percent. This limitation is established by Article 65 of the said Law. Although private foreign entities are entitled to own a pipeline as explained above, this provision of the Construction Law limits foreign involvement in construction matters. Therefore, foreign investors should carefully consider the business structure utilized to build their pipelines.
Right to Operate a Pipeline
The legislation regulating the construction and operation of pipelines is limited. Unlike many countries with special pipeline laws, Kazakhstan does not have a separate and specific law on the topic.
Under Article 43 of the Petroleum Law, the operation of Main Pipelines is carried out in accordance with the Rules of Technical Operation, Safety and Protection of Main Pipelines approved by the Government. However, since these Rules have yet to be approved, the regulatory requirements for the operation of pipelines are still set out in a patchwork of Kazakhstan laws and regulations. Accordingly, pipeline operators must carefully consider all of the elements in the patchwork to ensure that their operations are fully compliant with the law.
Article 43 of the Petroleum Law similarly requires operators to develop procedures and plans for the safe operation of pipeline facilities in coordination with various State agencies. Given the myriad of health, safety and environment rules and plans, pipeline operators must also carefully sift through the relevant requirements to ensure that their operations are in full compliance with the law.
As a final point, we note that the transport of oil through the Main Pipelines falls under the activity in the sphere of natural monopoly in accordance with the Law of the Republic of Kazakhstan “On natural monopolies”, dated July 9 1998 (the “Antimonopoly Law”). This Law imposes some restrictions and limitations upon the owners (operators) of Main Pipelines. We would like to note here only a few provisions of the Antimonopoly Law. In accordance with Article 15 of the said Law the Main Pipelines fall under the jurisdiction of the Antimonopoly Agency. The relevant anti-monopoly laws give the Antimonopoly Agency the right to approve transportation tariffs and, arguably, the right to allocate pipeline capacity. In accordance with Article 7, the Main Pipeline operator shall enters into the transportation contract, the form of which should comply with the standard form of the transportation agreement. The Government of the Republic of Kazakhstan, by the Decree dated 23 April 2004, approved the standard form of such agreement. The Antimonopoly Law does not apply to the owners of the Main Pipeline or its operator using their pipeline only for the purposes of transporting of their own oil and which do not render services for transportation. Accordingly, if the Main pipeline is used only for transportation purposes, it does not fall within the jurisdiction of the Antimonopoly Agency. Pipeline operators must consider the impact of anti-monopoly legislation on the business practices affecting the pipeline.
SALANS is an international law firm specializing in Foreign Investment, Energy and Pipeline matters both within and outside the Republic of Kazakhstan. For additional information please contact SALANS office in Almaty or visit Salans website at
www.salans.com
www.salans.com
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