New gas legislation lays foundations for developing market - International Law Office

Introduction
State's priority and pre-emptive rights of purchase
Associated gas
Operations with liquefied petroleum gas, liquefied natural gas and commercial gas
State regulation of wholesale prices for commercial and liquefied petroleum gas
Comment

Introduction

On January 9 2012 Kazakhstan adopted the Law on Gas and Gas Supply, a new piece of legislation that is intended to provide a framework for the state's regulation of the domestic gas industry and market. The law applies to the following players in the Kazakh gas market:

• the national operator, KazTransGas JSC;
• producers of commercial gas(1) and liquefied petroleum gas;
• subsoil users that own commercial gas processed from extracted raw gas or liquefied petroleum gas extracted from raw hydrocarbons;
• owners of commercial gas that is produced outside Kazakhstan and imported for domestic consumption;
• owners of commercial gas that is produced outside Kazakhstan from raw gas extracted in Kazakhstan pursuant to international agreements with the state;
• gas transportation and distribution organisations;
• owners of automatic gas refuelling compressor stations; and
• industrial consumers of commercial gas.

The key provisions of the law, from the perspective of players in the domestic gas industry, include those dealing with:

• state regulation of wholesale prices with respect to commercial and liquefied petroleum gas on the domestic market;
• the state's pre-emption right to purchase raw and commercial gas; and
• the state's priority right to purchase the assets of a gas supply system or shares in companies that own such assets.

State's priority and pre-emptive rights of purchase

Subject to certain exceptions, the law grants the state a right of priority purchase - termed the 'state priority right' - in connection with transfers of:

• gas pipelines, gas distribution and consumption systems and other technological objects (including installations and infrastructure) connected with the production, transportation, storage, sale or consumption of commercial gas; and
• shares in the common property rights in the objects of the unified system of commercial gas supply, and interests in the entities that own such objects.

The state exercises its right through KazTransGas. An exception applies when the transferred assets are of strategic importance to the sustainable development of society, such as major gas pipelines (or interests in the entities that own them, or the parent companies of such entities), in which case the right is exercised directly by the state, subject to a different set of procedural requirements. However, certain transactions are exempt from the state priority right, including:

• transfers of the automatic gas refuelling compressor stations and gas consumption systems of industrial consumers; and
• share transfer transactions between close affiliates.

Subject to certain exceptions, the law also grants the state a pre-emptive right in respect of subsoil users, allowing it to purchase:

• raw gas owned by such users under their subsoil use contracts; and
• commercial gas processed by such users from the raw gas that they have extracted.

Like the state priority right, the state pre-emptive right is exercised through KazTransGas. The law requires subsoil users to submit to the national operator a commercial proposal for sales of raw or commercial gas for the year to come, on the proviso that the subsoil users' profit from such sales may not exceed 10%. If the national operator waives its state pre-emptive right with respect to a particular sale based on this commercial proposal, the subsoil user that receives the waiver can store or transport its commercial gas; however, the subsoil user will need to furnish evidence of the waiver to the entity that transports the gas. The right does not apply to sales of:

• raw gas produced from gas fields or gas condensate fields; or
• certain categories of commercial gas.

Associated gas

The law calls for an agreement with a third-party investor to process associated gas into commercial gas, liquefied petroleum gas or liquefied natural gas for subsequent supply to satisfy the domestic gas needs of Kazakhstan as a matter of priority. This provision is an attempt to set out a basic framework for the use of associated gas. It reflects a recent trend by the state, which increasingly treats such gas as a commercial product in new subsoil use contracts, whereas previously the treatment of associated gas was regarded as merely an environmental issue, rather than an economic factor. It appears that this provision will now apply to the new subsoil use contracts that expressly define associated gas as a commercial product, thereby addressing the issues of ownership of the associated gas and other related matters. It remains to be seen how the concept will apply to contracts that do not contain similar provisions with regard to associated gas.

Commercial operations with liquefied petroleum gas, liquefied natural gas and commercial gas

The law specifies the entities that are authorised to engage in specified commercial operations (ie, sale, transportation, storage and distribution) involving certain types of gas. For instance, commercial gas wholesale operations can be performed only by:

• KazTransGas (which is responsible for the effective operational regulation of the domestic gas market);
• the primary owners of the commercial gas; and
• gas distribution entities accredited by the Ministry of Oil and Gas.

In addition, the law provides that gas-transporting companies are permitted to transport commercial gas outside Kazakhstan only for:

• KazTransGas;
• producers of commercial gas;
• subsoil users that own the commercial gas processed from the raw gas that they have extracted; and
• owners of commercial gas produced outside Kazakhstan that is in transit through the country.

Similarly, gas-transporting entities are permitted to transport liquefied petroleum gas and liquefied natural gas outside Kazakhstan only for:

• producers of such gas;
• owners of such gas, which has been processed from raw hydrocarbons that they own; and
• owners of gas that was produced outside Kazakhstan and is being shipped through the country.

The law provides that a legal entity or individual purchaser that purchases commercial or liquefied petroleum gas from an authorised vendor is prohibited from re-selling it. In addition, it is implied that gas traders may not engage in wholesale gas-related operations on the internal gas market in Kazakhstan (although it is unclear whether gas traders that transport foreign gas through the Kazakh territory are exempt from these restrictions).

Regulation of wholesale prices for commercial and liquefied petroleum gas

The law provides that for each six-month period, the state will set a maximum wholesale price for commercial gas for each region of Kazakhstan, taking into account the local economic and social conditions. In addition, the state will set a state-wide maximum wholesale price for liquefied petroleum gas on a quarterly basis. Entities engaged in wholesale supply of commercial or liquefied petroleum gas are prohibited from charging prices above the price ceilings established by the state.

Comment

In issuing the law, the state is attempting to lay the foundations of the developing gas market in Kazakhstan, particularly for liquefied natural gas, liquefied petroleum gas and associated gas. In so doing, it is seeking to secure the country's energy and environmental safety and to prioritise domestic gas supply. However, the law does not specify how certain of its provisions will work in conjunction with similar rights afforded by existing legislation. For instance, it is unclear how the state will apply the state priority right and its priority right of purchase under the legislation on the use of natural resources in situations involving a transfer of shares in a subsoil user that also owns, for example, certain assets of the gas supply system. This and several other issues will probably require further fine-tuning once the law comes into effect and regulatory gaps become clearer as a result of its application in practice.

For further information on this topic please contact Azamat Kuatbekov or Svetlana Barbassova at Baker & McKenzie – CIS by telephone (+7 727 3300 500), fax (+7 727 258 40 00) or email (azamat.kuatbekov@bakermckezie.com or svetlana.barbassova@bakermckenzie.com).

Endnotes

(1) The term 'commercial gas' being defined as a product of processed raw conventional or non-conventional gas that meets national technical standards for commercial gas)