Amendments to the Code on Subsoil and Subsoil Use

Authors: Ayana Unerbayeva, Nikita Lysenko

On 28 February 2024, with some exceptions regarding some paragraphs and articles, the Law of the Republic of Kazakhstan dated 28 December 2023 No. 52-VIII "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Subsoil Use and Ecology" (hereinafter, the "Law") entered into force. The purpose of the Law is to improve legislation in the field of subsoil use.

One of the amendments, which, in our opinion, will have a significant impact on the existing practice of the implementation of the priority right of the state, is to amend Article 43 of the Code of the Republic of Kazakhstan dated 27 December 2017 No. 125-VI "On Subsoil and Subsoil Use" (hereinafter, the “Code”).

In particular, paragraph 1 of Article 43 was amended as follows (in bold):

"In newly concluded and previously concluded contracts for subsoil use, the state has a priority right over any persons and organisations, including persons and organisations that have pre-emptive rights on the basis of the laws of the Republic of Kazakhstan or an agreement, to acquire the alienated subsoil use right (share in the subsoil use right) and (or) objects related to the subsoil use right for a strategic subsoil area, as well as shares and other securities put into circulation on the organised securities market, which are the subject of the contract."

Therefore, nowadays, the state has a priority right not only to acquire the disposed subsoil use right (share in the subsoil use right) but also to acquire objects related to the subsoil use right for a strategic subsoil plot under new and previously concluded subsoil contracts.

In accordance with part 1 paragraph 1 of Article 41 of the Code, objects related to the subsoil use right are participatory interests, units, shares and other forms of equity participation, as well as securities confirming the ownership right or convertible into shares, participatory interests, units and other forms of equity participation in a legal entity holding the subsoil use right under a contract for the exploration and production or extraction of hydrocarbons, under a contract for the production of uranium, under a licence for the exploration or extraction of solid minerals.

Also, according to part 2, paragraph 1, article 41 of the Code, the objects related to the subsoil use right are also recognised as participatory interests, shares, units and other forms of equity participation, as well as securities confirming the ownership right or convertible into shares, units, shares and other forms of equity participation in a legal entity or other organisation, which have the ability to directly and (or) indirectly determine the decisions taken by the person holding the subsoil use right specified in part one of this paragraph.

Meanwhile, a strategic subsoil area is the following:

• containing geological reserves of oil of more than fifty million tonnes or natural gas of more than fifteen billion cubic metres;
• located in the Kazakhstan sector of the Caspian Sea; or
• containing a uranium deposit.

Resolution of the Government of the Republic of Kazakhstan No. 389, dated 28 June 2018, approved the List of strategic subsoil areas where minerals are uranium, oil, gas and other hydrocarbons.

In view of the above, it is now necessary to observe the state's priority right in respect of such objects when transferring participatory interests, shares, and other forms of equity participation in a company that realises the subsoil use right under the relevant contract. Consequently, in the event of a change of indirect control over objects related to the subsoil use right, for example, in transactions involving the transfer of such participatory interests or shares at the upper levels of a holding company, even in a different jurisdiction and foreign applicable law thereto, authorisation for the transfer of such objects will be required.

If such authorisation is not duly obtained, such transaction shall be null and void in accordance with paragraph 1 of Article 159 of the Civil Code of the Republic of Kazakhstan.

Based on the above, in connection with the extension of this norm to previously concluded contracts, we draw the attention of current players in the subsoil use market, as well as potential investors, to the need to comply with the priority right of the state and obtain authorisation for the transfer of objects associated with the subsoil use right, which are, among others, participation interests and shares of the relevant company.