On 9 January 2012, the President of Kazakhstan signed the Law “On Gas and Gas Supply”, which has no analogue in the legislation of the Republic of Kazakhstan, since earlier this sector was governed by the subsoil laws and a range of governmental resolutions.In this Article, we would like to inform on the important legal changes, which may affect activities of companies working in the gas industry.

The Law “On Gas and Gas Supply” (hereinafter – the “Law”) aims at the regulation of relations in the area of gas supply and as a general principle seeks to the priority of provision of the internal market with tank (under the Law – a mixture of hydrocarbons with a predominance of methane) and liquefied petroleum gas (under the Law – a mixture of propane and butane), produced in the Republic of Kazakhstan. The Law provides for a number of provisions that directly relates to the activities of investors in the area of gas and gas supply.

The Law provides for the pre-emptive right of the State to acquire:

·       raw gas disposed by a subsoil user;

·       tank gas produced by subsoil users when processing raw gas extracted and owned by them under the subsoil use contracts.

Pre-emptive right is exercised by the national operator (hereinafter the “Operator”) – a legal entity created (defined) by the Government and engaged in the activities in the area of gas supply for the domestic needs of the country in the tank gas.

The price of supplies to the Operator is determined by a subsoil user under a method approved by the Government, and includes the cost of the subsoil user, as well as profitability. The Law, however, does not provide for consideration of market price in determining the price for transactions with the Operator.

To comply with the pre-emptive right, a subsoil user must send a commercial proposal to the Operator no later than 5 months prior to the planned period (as a general rule, within a calendar year).

The Law also provides for the priority right of the State to acquire disposed facilities of the unified tank gas supply system (hereinafter – the “Facilities”), which includes the following facilities intended for production, transportation, storage, sale and consumption of the tank gas:

·    connecting and main gas pipelines;

·    commercial gas store;

·    gas-distributing and gas-consuming systems;

·    gas-filling stations;

·    other technical facilities.

The unified system, however, does not include:

·   field gas pipelines;

·   gas-consuming systems of domestic users;

·  technological facilities designed for the production, re-gasification, transportation, storage, sale and consumption of liquefied petroleum gas.

Priority right also applies to the purchase of disposed interests (shares) of the Facilities owners (hereinafter – the “Interests”). The Law, however, does not provide for the priority right of the State to purchase shares of the Interests holders, i.e. it only applies to the first level of interests. In addition, the Law also does not specify the responsibility for the failure to exercise the pre-emptive right of the State to purchase the Facilities or Interests.

Further note that the provisions on both the priority right and pre-emptive right of the State entered into force on 1 April 2012.

The Law provides for a number of conditions to sell the tank gas, liquefied petroleum gas and liquefied natural gas.

Thus, the wholesale and retail sale of the tank gas (sales in the domestic market or abroad) may be only performed by a certain number of persons as defined by the Law.

As to the liquefied petroleum gas there is a similar way of regulation. Moreover, as in the case with the tank gas, wholesale and retail sale of the liquefied natural gas shall be only performed by a certain number of persons as defined by the Law. In addition, the Law provides for the approval by the Government (as the authorised body) for the limit selling prices for gas.

The Law requires that the seller or performer must on or before 31 December 2012 renew the sale-and-purchase agreements for the raw, tank, and (or) liquefied petroleum gas, as well as contracts for the maintenance of gas-consuming systems and gas equipment of municipal and domestic customers, signed before the introduction of the Law for more than a year.

In respect of associated gas, the Law states that State owns associated gas produced and owned by a subsoil user in the Republic of Kazakhstan, in accordance with the legislation on subsoil and subsoil use, or transferred by subsoil users to the State.

By the decision of an authorised body the associated gas is transferred in certain amounts, as defined by this body, in the ownership of an investor under the agreement on public-private partnership in the area of gas and gas supply. In this case, the price of the transfer is determined by agreement between the parties. The Law also provides for the approval by the Government for the procedure of such a transfer.

The Law establishes a number of restrictions in terms of gas transportation. In particular, the Law approves an exhaustive list of persons, whom is entitled to receive the services of gas transportation companies on transportation of the tank gas through main pipelines. In this case, gas transportation that does not meet state standards and technical regulations of the Republic of Kazakhstan or the pre-emptive right of the state is not permitted.

As to the transportation of liquefied petroleum and natural gas, there is also an exhaustive list of persons, who can carry it by rail, road, sea, inland waterway transport from Kazakhstan.

Please note that the Law establishes quite a tough regime of regulation of gas sector in Kazakhstan, in particular by the introduction of monitoring the gas sales and the expansion of the power of public authorities.

Among the negative consequences of the Law there is a possible reduction of investment attractiveness of gas supply area for foreign participants. In addition to the above reasons, the Law creates opportunities for nationalisation of the gas supply system, which usually has a negative impact on the investment climate.

In turn, a number of positive aspects of the Law include the creation of preconditions for the formation the unified gas supply system in Kazakhstan.