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Will subsoil code changes deliver the expected prize?

Kazakhstan: Will subsoil code changes deliver the expected prize?

After two years and three draft codes, doubts remain as to the likely timeframe for revisions to Kazakhstan’s subsoil framework as well as the government’s commitment to improve operating conditions.

Boosting investment

A major impetus of the reform drive is the aim to attract further investment into the country’s mineral extraction industries. In particular, the government in Astana is keen to see further investment in smaller and mid-sized hydrocarbon plays in order to secure a diversified production profile. Specifically, the government hopes to increase inward investment to the oil industry by USD1 billion per annum.

As demonstrated in the graph below, Kazakhstan’s oil production will in future be dominated by its major fields – Tengiz, Karachaganak and Kashagan. While the smaller and mid-sized fields contributed notably to expanded production during the early 2000s, their share in total production has stagnated and is set to decline. This trend risks moving Kazakhstan from an already immense reliance to even greater dependency on its three major plays.

Liquids production

Source: Wood Mackenzie, 2017

Astana is similarly keen to boost foreign investment into its mining industry. Developing the sector to its full potential requires the participation of foreign companies that can bring not only capital but new technology and technical expertise. While many international companies show interest in investing in Kazakhstan, the regulatory environment is the most-cited factor holding them back.

Optimism checked

There is optimism among stakeholders around the changes proposed to the subsoil framework, but the draft code fails to satisfy key industry players. Companies already operating in Kazakhstan have to some extent been involved in the process; however, their concerns about the existing framework are not necessarily reflected in the proposed changes. 

For example, mid-sized operators in the oil industry – a key target of the changes – do not necessarily feel that the inputs they have offered are reflected in the draft legislation. In particular, they question the government’s commitment to reducing the burden on getting projects off the ground. The draft code includes measures to:

  • simplify the granting of subsoil rights by analogy with the Australian model; licenses are to be issued for geological studies, exploration of solid minerals, production of solid minerals, subsoil space usage and prospecting and contracts to be entered for hydrocarbon exploration and production or hydrocarbon production;
  • transition to international reserve estimation procedure;
  • provide open and digitised access to geological information.

Regulation vs reality

Even if appropriate regulations are implemented over time, however, wider political risks remain for foreign investors. Indeed, while the subsoil code changes are a necessary step to attract new investment, it is unclear whether it will be sufficient. In particular, while political transition weighs heavily on the mind of current and potential investors in Kazakhstan, so do the day-to-day challenges of operating in the country.

Local content regulation, also addressed in the subsoil draft code, serves as an example of how formal regulations do not necessarily reflect the operating environment. Foreign companies in Kazakhstan report to us that the pressure to increase local content is intensifying.

The push is plausibly motivated by the impending phase-out of formal requirements, as Kazakhstan gradually takes on obligations arising from WTO membership. However, it is unlikely that the phase-out of local content regulation will have a positive impact. Our sources widely expect pressure for local content to remain in place regardless of formal regulations; indeed, contracts since 2015 already reflect the more amenable WTO terms.

Dashed expectations?

Minister for Energy Kanat Bozumbayev in June suggested that the draft code will be before parliament in September this month, which would likely allow the rubberstamp body to approve the draft code before the end of the year. However, according to Verisk Maplecroft sources, the current draft requires revision – and will very likely be revised – before being submitted to parliament. In fact, one stakeholder argues that the process “has a long way to go”, expecting several rounds of revisions.

With the exact content of the subsoil code changes and the timeline uncertain, doubts linger over the likelihood that the new regulatory framework will deliver on its main objective: attracting investment to Kazakhstan’s oil and mining industries.

By Camilla Hagelund, Principal Analyst - Europe and Central Asia

Image source: Camilla Hagelund, Principal Analyst, Verisk Maplecroft
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