Herbertsmith energymarketrk2012-120401164817-phpapp02


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Herbertsmith energymarketrk2012-120401164817-phpapp02

  1. 1. Herbert Smith
  2. 2. Energy law in the Republic of Kazakhstan ::0 (1) "C c: C"Recent developments in theenergy market in the Republic of KazakhstanBy Yuliya Daurova, LLM, partner of Linkage &Mind, KazakhstanOil and gas, mining, electricity, transport and service fo r over thirty years. A number of projects havecommunications and chemicals and pharmaceuticals recently been started under the afore-mentioned stateare key industrial sectors in Kazakhstan. These sectors programme. Th ese include:were included in the State Programme for Accelerated • Modernisation of the countrys electricity networkIndustrial-Innovative Development (2010-2014) (the and construction of the second 500kV electricity line"Programme") as high priority sectors for development. from the North to the South of Kazakhstan which areThe Programme aims to diversify the economy and being undertaken by KEGOC;modernise existing industries. In 2011 , Samruk-Kazyna • Construction of a regional power station in the Third a national welfare fund) is undertaking 20 projects at a Energy block at Ekibastuz;combined cost of US$22 billion which represents around • Construction of Moinak Hydro-Electric Power w ith a51% of the total funds available under the programme. projected total cost of the US$340 million;US$6.8 billion is to be invested into the energy sector. • Construction of the second 500kV power line from Northn the electricity sector, power generation is designated to South with total projected costs of US$295 million;as a vital industry. Thus, the Programme includes • Construction of an interregional power line in Aktobe~ e modernisation of existing power plants and the region in Northern Kazakhstan with a projected totalltroduction of new ones. cost of US$165 million; Samruk-Kazyna has many subsidiary • Construction of a thermal power plant at Balkhash at companies, including: a total cost of US$4.7 billion; • Samruk-Energo which holds stakes in • An international project involving the construction thermal and hydroelectric plants and of new power lines from Kemin to Almaty with total distribution companies; investments amounting to US$140 million; • Kazakhstan Electricity Grid Operating Company • Kazatomprom started building a solar panel plant (KEGOC), the national electricity grid operator; at Astana in March 2011. The cost of the project is KazMunaiGas, a national company; and around US$230 million; • Kazatomprom, a nuclear company. • Asia Green Power, a joint venture between Italy and Turkey consisting of an agreement to build two wind~.,e global economic crisis has dealt a heavy blow to farms in order to reduce power shortages in the south=:::anomie growth in Kazakhstan. However, measures of the country. The project is valued at US$1 billion;·-at were adopted to counter the crisis have been largely::~ccessful. These measures included an injection of • Construction of an integrated chemicals complex_S$19 billion by way of economic stimulus from NFW in the Atyrau region. The operator of the project is:::amruk-Kazyna and other measures taken by the Kazakhstan Petrochemical Industries Inc (KPI); and .a ional Bank. Kazakhstan was one of the first countries • The opening of the Central Asia to China gas·:: emerge from the global economic crisis and recorded pipeline, which runs through Kazakhstan, has been~~d economic growth of 7% in 2010. a major development in recent years. It is hoped the development of the new Caspian gas pipeline will have a::: .Jrrently 41% of the countrys thermal power plants similar effect although its progress has been delayed due~-d 68% of its hydroelectric power plants have been in to ongoing negotiations with Russia and Turkmenistan. - the European Energy Handbook 2012 217
  3. 3. :a In addition a number of deals have recently been Under the New Subsoil Law, rights to use the subsoil CD concluded with the aim of enhancing national energy arise from:"C security by increasing production capacities andc improving the quality of services: • a right from the State obtained upon conclusion ofC" an agreement on exploration and/ or extraction of--·() • In 2011 , JSC Kazmunaigas (National Company) , a state-owned company purchased hydrocarbons (like oil and gas); • transfer of rights to use the subsoil by the previous0 Aktaunefteservis LLP; user. This can either be done explicitly or through the...... • In 2011 , Kazatomprom (a national holdings company) disposal of shares in a legal entity which holds rights"D.)ND.)~ • and Chemieanlagenbau Chemnitz GmbH (a German company) entered into a Memorandum of Co-operation; In 2011 , Tethys Petroleum Limited announced the • to use the subsoil; and transfer of rights by all-party agreement in the event of a legal entity which holds rights to use the subsoil signing of a joint venture agreement between two of being reorganised.::TUl its subsidiaries, Tetismuanygas and Eurasia Gas LLP;r+ Exploration contracts can be granted for a period of upD.) • In 2009, Kazakhmys Pic purchased 10% of the share to six years. Thereafter they may be extended twice for:::l capital of Balkhashskaya Thermal Power Plant; a period of up to two years each. After a commercial • In 2009, NWF Samruk-Kazyna purchased 50% of the discovery is made, the subsoil user has the exclusive rig ht share capital of the electric power plant GRES- 1 to negotiate an extraction contract. Extraction contracts Ekibastuz; and can be granted for up to 25 years or up to 45 years in • In 2009, Mangistau Investments B.V. a case where the recoverable reserves consist of more purchased 100% of the share capital of JSC than 100 billion cubic meters of natural gas. Mangistaumunaigas. Almost all types of subsoil use activity are carried out Given the old age of many of the power plants in for a limited period of time and the above contracts are Kazakhstan , deterioration of plant equipment is a real subject to a fee. issue that creates electricity shortages. This can even In accordance with the New Subsoil Law, subsoil model threaten the stable economic development of the contracts contain local content, including a requirement country. Therefore, the power industry has to solve to hire Kazakhstani personnel and to use goods, services this problem . The market must operate in such a way and works of Kazakhstani origin . Those subscribing as to ensure that the power supply companies (who, to model contracts for subsoil use also take on duties effectively, are investors) are guaranteed a return on which, amongst others, include social responsibility, the cost of commissioning new equipment and /or the commencement and rate of subsoil operations, amount cost of maintaining existing power stations. Electricity of subscription bonus, size of investment, compliance companies w ill sell power on the power market with health, safety and environment requirements under to KEGOC, wh ile electricity will be freely traded at domestic legislation etc. competitive prices. The State has pre emptive and priority rights in relation The main law regulating the electric energy industry is to all natural gas deposits. Where a new party is seeking the law On Electricity dated 9 July 2004. Under the terms to enter the market, either by way of purchasing shares of Article 9 of the Law, engineering and construction in a company that already has subsoil rights or by way of standby (shunting) power lines and substations may of a transfer of rights, the State has a priority right to only be performed with preliminary notification and acquire the relevant rights (or any part thereof) through coordination with: a number of different entities unless the acquiring entity • The Committee for State supervision and control has the relevant state approval. Approval to acquire over energy; rights must be sought from the Ministry of Oil and Gas. This procedure takes around 70 days. • The Agency of the Republic of Kazakhstan for Regulation of Natural Monopolies (AR EM); and AREM will subject new market entrants to further • KEGOC (the system operator). requirements and approval processes if the transition would be such as to create either a monopoly or give a Projecting and construction of power stations, power strategic advantage to the new entity. AREMs consent lines and substations as well as their operation may is requ ired to conclude transactions that would have be performed on the basis of concession agreements. such an effect. AREMs approval is also required for all According to the Law on Licensing dated 11 January transactions where the total book value of assets of the 2007, production, transmission and distribution of target or the purchaser exceeds 2,000,000 MCI for the electricity and operation of power stations, power grids last financial year. Approval from AREM is also required and sub-stations are subject to licensing. if one of the persons participating in the transaction is a The main law regulating relations among oil and gas company holding a dominant or monopolistic position market participants is the Law of the Republic of in the relevant product market. The conclusion of such Kazakhstan No 291-IV On Subsoil and Subsoil Use transactions without prior state approval can lead to dated 24 June 2010 ("the New Subsoil Law"). nullity of the contract ab initio. 218 EER- the European Energy Handbook 2012
  4. 4. Currently, the Ministry of Oil and Gas is working on thedevelopment of a Law On Gas and Gas supply. The draftlaw envisages the establishment of a national operatorfor the gas industry which will have the exclusive rightto purchase gas from the gas mining companies ofKazakhstan. There is a pressing need for the new lawin order to ensure efficient modernisation of the currentgas infrastructure in the country. At present the countrysgas pipelines, which used to be an integral part of theUSSR single-union system, mainly serve the transit flowof natural gas from Central Asia to the European part ofRussia, Ukraine and the Transcaucasian states. There isno connection between the major gas pipelines meaningthat some regions of the country are gas islands. Thisespecially affects the western, southern and northernregions of the country. footnote 1. MCI is the minimum calculation index which is set by the Law on State budget annually. In 2011 it is 1,512 KZT.EER- the European Energy Handbook 2012 219
  5. 5. Overview of the legal and regulatoryframework in the Republic of KazakhstanThe Republic of Kazakhstans key industrial sectors Monopolies ("AREM"). Projection and construction ofare oil and gas, transport and communications, power stations, power lines and substations, as well aselectricity, mining and chemicals and pharmaceuticals. operation of the same, may be performed on the basis ofKazakhstans State Programme for Accelerated agreed concessions.Industrial-Innovative Development 2010 - 2014 (the Interregional and interstate electric power lines,"Programme") , the aim of which is to diversify the substations and distributing installations with a voltagestates economy and modernise its existing industries, of 220kV or more which are built on the basis of agreedemphasises these sectors as high priorities for concessions are, for the period of their operation, for thedevelopment. Samruk-Kazyna, a major state-controlled temporary possession of and use by the concessionaire.joint stock company with diversified interests in The centra!ised operative-dispatcher control of suchKazakhstan and abroad, carried out 20 projects in 2011 concessions, as well as their operation , are performedalone under the Programme, at a combined cost of by the system operator on the basis of agreementsUS$22 billion. US$6.8 billion out of US$22 billion have made. Upon the end of the concession term, thebeen earmarked for investment into the energy sector. concessions are transferred to the national power grid. Law No 214- 111 On Licensing, dated 11 January 2007 2A. Electricity (the "Licensing Law"), stipulates that the production, transmission and distribution of electric and thermalA.1 Industry structure power and the operation of power stations, electricity grids and sub-stations shall be subject to licensing byWithin the electrical sector emphasis has been placed the relevant licensor, in this instance the Committee.on power generation, and the Programme providesfor the modernisation of existing power plants as well Specific activities subject to Licensing under theas the introduction of new ones. Samruk-Kazyna Licensing Law include (but are not limited to):holds extensive domestic assets in the energy sector, • the production of electricity from sources with aincluding Samruk-Energo (which holds stakes in thermal voltage of 35kV or more;and hydropower plants and distribution companies), • the transmission and distribution of electricityKazakhstan Electricity Grid Operating Company to consumers;("KEGOC") (which operates the national power grid),KazMunaiGas (a national gas company) ("KMG") and • the operati on of power stations, electricalKazatomprom (a national nuclear company). The substations and grids of all types used at hazardouselectricity industry was privatised after Kazakhstan production facilities, except those used for municipalgained its independence in 1991, and in addition to these and domestic purposes and for objects of powermajor state-backed players there are numerous private used in a single process;power production and distribution companies . • the production of thermal energy for heating settlements, industrial buildings and facilities, except forAccording to KEGOC s annual report, electricity in the production of heat by the same for their own use;Kazakhstan is produced by 66 power plants. Thermalplants account for 85.5% of the countrys power • the projection, manufacture, assembly or repair ofgeneration, with the remaining power produced by chemical, drilling, petroleum and gas producing,hydroelectric (8.8%) and gas turbine stations (5.7%). geological prospecting, mining, metallurgical, power, or explosion-protected electric technicalThe main law regulating the sector is law No 588-11 equipment or lifting facilities, as well as boilers with aOn Electricity, dated 9 July 2004 1 (the "Electricity working pressure of over 0.7kg/ cm2 and heat carrierLaw"), which regulates relations between electricity temperature over 115°C and vessels and pipelinesproduction companies and the market. Since June operating under a pressure of over 0.7kg/cm2, except2010 the electrical sectors main regulator has been the for the projection, manufacture, assembly or repair ofCommittee of State Supervision and Control over Energy, equipment used in common technological processes;within the Ministry of Industry and New Technologies • the purchase of electricity for resale purposes; and("the Committee"). • project survey activities and electricity supplyUnder Article 9 of the Electricity Law, projection and schemes of inhabited localities including theconstruction of standby transmission lines (shunting) placement of items for production and theand substations may be performed only with preliminary transportation of electricity in the building system , asnotification to and coordination with the Committee, well as electricity supply to industrial complexes tothe system operator (KEGOC) and the Agency of the be situated in territories between inhabited localities.Republic of Kazakhstan for the Regulation of Natural220 EER- the European Energy Handbook 2012
  6. 6. The relevant licence and, if necessary, a supplement to wholesal e and retail level, whereas the thermal energythat licence will be issued by the licensor (in this case market is a single-level retail market.the Committee) no later than 30 business days (1 0 in On a wholesale level, the electricity market consists of:the case of small business entities) of an applicationbeing made. • a decentralised market functioning on the basis of sale-purchase agreements executed byA.2 Electricity trading market participants at prices and terms of supply determined by agreement amongst the participants;KEGOC guarantees market participants accessconditions to a power supply, and consumers have a • a real -time balancing market aimed at regulating any hourly imbalances arising throughout the dayright to choose their electricity supplier. KEGOC, as the between the actual and contractual amounts ofsystem operator, ensures reliable operation of the united production and the consumption of electricity in thepower system of the state and provides system services national power grid; andto enable power transmission and dispatch servicesin balancing production and consumption. Tariffs for • a centralised market comprising the organisedKEGOC as the monopoly holder are regulated by AREM, trading floors for the sale of electricity on short-termwhich sets the uniform tariff (described below) for (spot-trade), medium-term (weeks or months) andelectricity transmission services through KEGOC for all long-term (quarters or years) bases.types of consumers. JSC Korem is the operator of the centralisedTariffing electricity market, and is responsible for the organisation of spot-trading and the regulation ofPower generation companies may apply an electricity centralised trading for the medium- and long-term.tariff not exceeding the maximum stipulated specifically It is also charged with providing equal terms offor them . This maximum can be (1 ) a unified, (2) a access for wholesale market participants to thecalculated or (3) an individual tariff. Exemptions from this centralised trading market and providing them withru le include the realisation of a spot bid (for no more than information on indicative electricity prices obtained10% of the generated electricity) in the balancing market from such trading .and the sale of electricity for export. Conditions for access to the centralisedCompanies are divided into 13 groups for the purposes market include:of the unified tariff. A maximum tariff shall be approved • the filing of a statement of intent to participatefor a group of companies for a period of not less than in trade;7 years but may be adjusted annually, if the need forinvestment incentivisation arises or if the industry • the provision of a copy of a contract between the company and a designated bank engaged inrequires it. Under the Governments Order No 392, service trades ;dated 25 March 2009, the tariff limits vary from 3.3 to7.7KZT/KWh for 2011. KEGOCs tariff for 2010-2011 is • the registration of the participant on the market0.94KZT/KWh. operators system, including the completion of an application for registration and the provisionThe calculated tariff is that determined in a feasibility of registration bidder cards in duplicate (the formstudy for a given investment project, and the individual of these documents is determined by the markettariff is the calculated tariff as adjusted during operator); andimplementation of an investment project, which is to be • compliance with trading rules.agreed with AREM . Power generation companies haveto conclude model investment contracts 3 under rticle Under Rule No 240 On Centralised Trading of12.3 of the Electricity Law with authorised state bodies in Electricity, dated 8 October 2001, on the wholesalecase they are involved in the creation of new assets, or balancing "day ahead" market a participant whothe expansion, renovation, maintenance, reconstruction has the right to purchase and / or sell electricity mustor modernisation of existing assets. notify the system operator before 11am Almaty time on the day before the relevant day. This rule does notThe final consumers tariff charged by suppliers depends apply on weekends and holidays, and requests foron the relevant consumers type of use (ie whether trading on weekends or holidays must be filed beforeindividual or commercial), the volume of use, and the 11am on the working day before the first weekend ortime and usage of electrical appliances. holiday date. Such requests can be submitted up toPower markets 7 days in advance.Power supply in Kazakhstan is carried out by way Power generating companies are prohibited fromof the electricity and thermal energy markets, in selling electricity to natural or legal persons who arew hich electricity and thermal energy are considered not participants in either the wholesale or retail market,commodities. The markets operate as a series of with the exception of sales for export purposes. Utilityinterconnected and co-existing markets : the balancing companies are prohibited from selling electricity to othermarket, the auxiliary services market and the electricity utility companies otherwise than on the balancing market.market. The electricity market operates on both aC:ER- the European Energy Handbook 2012 221
  7. 7. A.3 Third party access regime covers, inter alia , principles of pricing and tariffing policy within the Single Economic Space of the Customs Union.There are no special restrictions in respect of third partyaccess to the national power grid, but all third partiesmust ensure compliance with the rufes on licensingand permissions. This will include the conclusion of a B. Gascontract with KEGOC as well as the agreement of atariff with AREM. B.1 Industry structure The oil and gas (O&G) sector remains the engine ofA.4 Market entry (Supply and generation) the Kazakh economy. The country is one of the top 20 oil producers in the world and production continuesFull foreign participation (ie investments amounting to increase. One of the major developments in theto 100% of the project value) is permitted in the international O&G industry in recent years has been thedevelopment of power projects in Kazakhstan. project of a gas pipeline between Central Asia and China.As noted in paragraph A.1, projection and construction According to Kazakhstans Ministry of Oil and Gasof standby power transmission lines and substations (the "Ministry"), natural gas production in the Republicmay only be performed with preliminary notification amounted to 37.4 billion cubic meters in 2010. Theto and co-ordination with the Committee. Projection Government plans by 2015 to export circa 30 billionand construction of power stations, power lines and cubic meters of natural gas annually to Russia and Chinasubstations and their operation may be performed on through gas pipelines. Under the terms of an agreementthe basis of concession agreements. All such activities on the counter-delivery of gas between Gazprom (amay be carried out only by licensed contractors or Russian state-controlled gas company), Uzbekneftegazsubcontractors. (an Uzbek state-controlled gas company) and KMGConcession agreements are subject to a calculated signed on 27 December 2006, all imported gas istariff which is to be agreed in the feasibility study for exchanged at Karachaganak, one of three major Kazakha given investment project. This calculated tariff may gas condensate fields, which in turn exports gas at thelater be adjusted to become an individual tariff during same price and in equal amounts.the implementation phase of a given project, as agreed The export of gas is subject to a rent tax, the rate ofwithAREM. which ranges from 0% to 32% depending on market price, not including transportation costs or otherA.S Public service obligations deductions. In addition, export transactions must and smart metering be registered with or notified to the National BankPower generating companies and network operators are of Kazakhstan.subject to stringent controls by AREM, and must ensure The national supervisory and regulatory authority of thethat contracts concluded with KEGOC define the daily gas sector is the Ministry, which was established in 2010minimum amount of electricity to be generated, as well as and is involved in the formation of public policy and inthe tariff applicable. coordinating management processes in the O&G sector.Smart metering does not exist in Kazakhstan. Power It also has supervisory remit over the petrochemicalproviders use home meters from which data is read and industries and the transportation of raw hydrocarbons.recorded by an employee of the supplier. The Committee of State Inspection within the Ministry monitors the compliance of mining companies and the execution by the same of subsoil contracts, including withA.6 Cross-border interconnectors regard to relevant local content requirements.The national power grid is part of the unified power Key market players include KMG, KazMunaiGassystem of Commonwealth of Independent States ("CIS") Exploration Production JSC (KMG EP), KazTransGascountries, which involves the parallel operation of 11 CIS JSC (KTG) and private companies such aspower systems as well as the power systems of the Karachaganak Venture.Baltic countries. KEGOC and the other national operatorsare continually working towards the development of a KMG is the owner of 44 O&G onshore fields in thecommon electricity market in the Eurasian region. Mangistau and Atyrau regions in Western Kazakhstan, and provides 65% of oil transportation, all gasKEGOC has stated that special emphasis is given to transportation and 50% of tanker transportation carriedactivities and proposals mooted within the framework out domestically within Kazakhstan. Transportation ofof international organisations, including the Eurasian gas via pipeline is undertaken by KazTransGas JSC, withEconomic Community (EurAsEC), Shanghai Cooperation tanker transportation carried out by KazMorTransFiot JSC.Organization (SCO), Single Economic Area (SEA) andother communities and unions established for the purpose KMG EP was created in March 2004 following the mergerof mutually beneficial cooperation in the power sector. of JSC Uzenmunaigas (UMG) and JSC Embamunaigas (EMG), and is a subsidiary of KMG. The companysOn 19 November 2010 Kazakhstan, Russia and Belarus shares are listed on the Kazakhstan Stock Exchangeentered into a framework agreement on access to and its Global Depositary Receipts (GDRs) are listedmonopoly services in the energy sector. The framework222 EER- the European Energy Handbook 2012
  8. 8. on the London Stock Exchange. In September 2006, • a transfer of subsoil use rights by universalthe company raised approximately US$2 billion in its succession or in the event of the reorganisation of ainitial public offering, and is the second largest Kazakh legal entity who is a subsoil user.oil-producer. An exploration contract may be granted for up to sixKTG, also a KMG subsidiary, provides gas production, years and subsequently may be extended twice for atransportation, marketing and trading services, including period of up to two years each time. After a commercialthe sale of gas and gas products. It operates the discovery is made, the subsoil user has the exclusivecountrys assets for the generation and distribution right to negotiate an extraction contract, which may inof heat and power energy. Currently, KTG owns the turn be granted for up to 25 years. For deposits withmain gas pipeline system, the regional gas distribution recoverable reserves of more than 100 billion cubicassets in six of the countrys regions and shares in meters of natural gas, an extraction contract may becertain domestic power companies. At the same time, granted for a period of up to 45 years .the company is developing its gas transmission base ·Almost all types of subsoil activities are carried out onand expanding its gas sales market share abroad the basis of temporary use in return for a fee.by undertaking various projects !nternationally. KTGsubsidiary KazTransGas LNG LLP oversees the It is a requirement of the Subsoil Law that subsoil modeltreatment and processing of natural gas. contracts contain certain obligations. This includes obligations and restrictions as to, inter alia: the hiring ofThe Kazakh gas market is liberal and privatised. The Kazakh personnel; the use of Kazakh goods, serviceslargest private enterprise is the Karachaganak Venture and works; implementation of social responsibility(KPO BV consortium), which comprises BG Group programmes; the commencement and rate of subsoil(32.5%), ENI (32.5%), Chevron (20%) and Lukoil (15%) . operations; the amount of any subscription bonus; theCurrently, ENI transmits up to 10% of its shares to KMG · size of investment; and compliance with health, safetythrough various mechanisms. In 1997, partners in the and environmental requirements of domestic legislation.venture signed a Final Production Sharing Agreement(FPSA) which stipulated that the partnership would Notably, the Subsoil Law introduced more stringentoperate Karachaganak until 2038. legal requirements than had previously been in place in respect of prohibitions on gas flaring, which provedThe Ministry is currently working on a draft law On Gas controversial with existing subsoil users.and Gas Supply (the "draft Gas Law") , which containsprovisions for the establishment of a state-owned Activities subject to licensing by the Ministry include thenational operator in the gas sector which w ill have design, engineering, exploration, extraction, transmissionthe exclusive right to purchase gas from national gas and storage of gas. In order to automate the licensingextraction companies. process and establish an effective mechanism for information exchange between state authorities and theThe main law currently in place regulating relations business community, the Committee of State Inspectionamongst gas market participants is the law No 291-IV implemented the national "e-licensing" database4 . TheOn Subsoil and Subsoil Use, dated 24 June 2010 (the Licensing Law requires that licences shall be issued within"Subsoil Law"). It defines "oil" so as to include crude 30 working days of an application being made. The mainoil, condensate, natural gas and associated gas and requirements are legal incorporation and compliance withhydrocarbons that have been obtained after purification certain qualifications (for example, availability of technicalof either crude oil, natural gas or the processing of oil managers and specialists, certificates for constructionshale or tar sands. or extraction works, proof of ownership or lease of theUnder the Subsoil Law, subsoil use rights arise from : industrial building, etc). The operation of a distribution network and the storage of gas also require a licence from• the direct provision by the State of a sub~oil use right the Ministry, and many activities subsequently require upon conclusion of an exploration; appropriate environmental, sanitary, and other permits.• extraction; Given that the gas industry is dominated by state-backed• joint exploration and extraction; companies, the transportation of natural gas must• agreements or a production sharing agreement comply with state-approved model agreements. (note: since 2009 PSAs are no longer recognised as a form of subsurface contract under the Gas export and import and other transactions involving Subsurface Law); international business deals are subject to transfer pricing legislation . The law On Transfer Pricing, dated• construction and/or maintenance of underground 5 July 2008, stipulated that transfer prices are those facilities not related to exploration and/ or production which are agreed between related parties and differ as the result of State tenders (note: there are some from fair market prices. Transfer prices take into account exceptions to this rule in which contracts can be the price range in arms-length transactions, ie, prices concluded in course of direct negotiations); determined between independent and equal parties. Tax• a transfer of rights of use by the previous and customs authorities exercise control by monitoring rights-holder disposing of shares in a legal entity who transactions, carrying out inspections and various other is a subsoil user to another entity; and/or procedures stipulated by national laws.EER -the European Energy Handbook 2012 223
  9. 9. If it is established in the course of an inspection that the Under the Subsoil Law, the State has pre-emptive andtransaction price deviates from the market price (taking priority rights over gas deposits. In case of entry to theinto account any relevant price range), the competent market though the purchase of shares in a subsoil useauthorities will accordingly make adjustments to the company or a gas deposit itself (ie a transfer of subsoiltaxable and tax-related items. rights), the State shall have a priority right to acquire subsoil use rights that are being alienated (or any part8.2 Gas trading thereof). This right may be exercised through a national management holding company, a State-owned companyThe gas industry in Kazakhstan is, at the present time, or any other authorised state body. Thus, a personstill in the development stage. There is therefore no intending to acquire rights or objects associated with gasnational operator or special trade platform, balancing fields must ensure that he has received appropriate statemarket or specific legislation on gas trading, and parties approval from the Ministry.may conclude financial and/ or physical contracts on thesale and purchase of gas on the commodity market. The Until1999 the principal prerequisite to obtaining theUniversal Commodity Exchange Astana, for example, is right to enter into a subsoil agreement was a preliminarypopular for trading liquefied gas (LNG). licence. However this procedure has since been abolished and, as noted, currently the legal basis forOnly brokers and dealers accredited on a given conducting subsoil activities is a contract between thecommodity exchange may trade on it. The law On Ministry and the subsoil user. Despite this change inCommodity Exchanges, dated 4 May 2009, requires that requirements, licences issued before the amendment area stock broker must be a legal person carrying out its valid until their expiry date (as Kazakhstani law does notactivities on the commodity exchange under a licence have retrospective effect).issued by the competent authority. The broker mustexist in the legal form of a joint stock company or limited If the market entrance is conducted by way of a mergerpartnership, and conclude deals on behalf and at the or acquisition that would lead to the creation of a naturalexpense of the customer. monopoly or another type of economic concentration under Article 50.2 of the Competition LaW, the transaction will be subject to additional approvals by8.3 Third party access regime to AREM. The consent of AREM to conclude the aforesaid gas transportation networks transactions is required if:There is an open regime with respect to third party • the total book value of the assets of the reorganizedaccess to regulated services, goods and work in the companies (group of persons), the acquirer (group ofgas sector and in respect of condensate gas storage persons), or the target companies shares of which areand transportation through mains and/or distribution being acquired, or if the total volume of sales for the lastpipelines. Tariffs for gas pipelines are established by financial year exceeds 2,000,000 Monthly Calculatedthe pipeline operator but must be approved by AREM. Indices or MCI 6 at the date of application; orPipelines built and used by a private company exclusivelyfor its own use are exempt from regulation by AREM , as is • one of the persons participating in the transaction is athe CPC Pipeline (a cross-border pipeline) under special company holding a dominant or monopolistic positionagreements between Russia and Kazakhstan. in the relevant goods market. The conclusion of transactions without prior State consentsKTG regulates the sale and purchase of natural gas can lead to annulment of the relevant contract ab initio.and approves annual tariffs. Other pipeline operatorsare obliged to follow a model agreement and thecorresponding rules on access. 8.6 Public service obligations and smart metering8.4 LNG and gas storage Gas utilities are natural monopolies and are therefore supervised by AREM , which also sets the tariffs for gasUntil the draft Gas Law is fully drafted and in force, LNG supply, transmission and storage.facilities and gas storage fall under the common legal andlicensing regime of the Subsoil Law. Smart metering is not developed in Kazakhstan ; gas suppliers use home gas meters.Gas storage contracts are based on model agreementsissued by the Government. 8.7 Cross-borper interconnectors8.5 Market entry Gas pipelines in Kazakhstan , which functioned as an integral part of the USSR single-union system, mainlyAs- mentioned in paragraph B.1 , the requirement for serve the transit flows of natural gas from Central Asiaentry into the gas market is the conclusion of a subsoil to Ukraine, European Russia and the trans-Caucasianuse contract with the Ministry of Oil and Gas, resulting states. A dearth of connections between the variouseither from a successful tender or from the transfer of main gas pipelines does not allow for the effectivesubsoil use rights or objects from an existing subsoil redistribution of gas between the various regions of theuser. New entrants to the local energy market are not country. This is particularly the case for the Western ,required to have a presence or a local subsidiary in order Southern and Northern regions of the country, and is ato participate.224 EER - the European Energy Handbook 2012
  10. 10. major impetus for the draft Gas Law, which provides for As the main source of consumer energy in Kazakhstana national operator that w ill also supervise the further is thermal coal-based power plants, the Government isdevelopment of the internal gas pipeline network. currently working to develop and implement cleaner coal technologies. In 2006 the EU and Kazakhstan signed aOn 15 July 2010, the P.rotocol on Amendments to the Memorandum of Understanding on Collaboration in theAgreement between the Governments of Kazakhstan Sphere of Energy relating to clean coal technologies andand China on Co-operation in the Construction and ecologically safe coal storage.Operation of Gas Pipeline Kazakhstan- China (dated18 August 2007) was signed relating to the second In June 2011 the first of a series of seminars relating tophase of the construction of a gas pipeline flowing from carbon capture and storage, clean coal technologies,Kazakhstan to China (the Beineu- Shymkent pipeline). and the ecology, health, safety and economy of clean technologies were held in Belgium and Germany. A pilotOn 9 December 2010, Kazakhstan, Russia and Belarus project called ACCESS (Assistance in ecologically Cleansigned an agreement on the rules of access to the Coal and Environmentally Sound Storage), financedservices of natural monopolies in the field of gas by the EU, has begun in Kazakhstan. The Ministrytransportation, including principles of pricing and tariff of Industry and New Technologies works togetherpolicy within Single Economic Space. with local organisations to try to raise the profile of Kazakhstan in the clean coal technology, carbon capture and storage spheres.c. Climate change and sustainability C.4 Renewable energy The law On Support of the Use of Renewable EnergyC.2 Emission trading Sources, dated 4 July 2009 (the "Renewables Law"),The basic rules relating to emission trading are set out in aims to define the main targets for and guidelines for thethe Ecological Code of Kazakhstan (the "Code") , dated use of renewable energy sources ("RES") in Kazakhstan,9 January 2007, which aims to reduce emissions into and thereby to encourage investment into the renewablethe environment. Article 105 of the Code states that energy sector. The Renewables Law provides benefits forthe Government has the authority to introduce market companies dealing with RES, including companies which:mechanisms establishing limits and quotas for emissions, • utilise RES for construction or exploitation in theand to approve rules and obligations aimed at reducing course of business;emissions. In the case of establishing quotas, companiesshall be entitled to an annual quota of emissions. • produce electric or thermal energy using RES; or • provide preferential investments to individuals andThe Code provides for the possibility of emissions legal entities that utilise RES.trading on an international level if relevant internationaltreaties are ratified by Kazakhstan in the future. In such Regional network companies are required to purchasea scenario, companies would be able to enter into electricity produced using RES in order to compensateappropriate agreements with foreign individuals and legal for the standard transmission losses in their networks,entities in order to sell or to buy emissions. up to a maximum of 50% of the size of such losses. KEGOC has committed to purchase energy from RESKazakhstan ratified the Kyoto Protocol to the United companies that are fully connected to its grid.Nations Framework Convention on Climate Changeon 26 March 2009. As such, the Government has Qualified RES generation companies can independentlycommitted to attempting to implement emissions trading set the selling price for their electricity, provided such amechanisms in relation to greenhouse gases, and to price does not exceed a rate specified in the feasibilityprovide incentives to reduce emissions within Kazakhstan. study of the relevant RES construction project. Such companies are also exempt from payment to powerKazakhstans domestic legislation obliges commercial transmission organisations for the transfer of electricitypremises to control the amount of carbon dioxide or thermal energy.("C0 2 ") emitted, and caps C02 emissions for certainactivities in the energy, metallurgy, mining, agriculture At present, less than I% of energy consumption inand manufacturing sectors. Regulated companies must Kazakhstan stems from renewable sources, but it isobtain allowances for greenhouse gas emissions, which expected that RES consumption w ill surpass 1% by 2015are allocated by the Ministry of Environmental Protection and will reach 5% by 2024. The development of RES ism major emitters, defined as those whose overall annual also included as a goal in the Programme.emissions exceed 20,000 tons of C0 2 . The following RES sources are currently used in Kazakhstan: solar installations; wind energy installations;C.3 Carbon capture and storage hydroelectric plants; geothermal energy installations; and installations utilising biomass, biogas and otherThere is currently no specific legislation on carboncapture and storage in Kazakhstan. However, fuel of organic wastes for the generation of electric and thermal energy.commitment to the principle of the reduction ofemissions is set out in Article 310 of the Ecological Code.=-=R- the European Energy Handbook 2012 225
  11. 11. Kazakhstan has five operational hydroelectric plants, on the amount of biofuel that may be made by two or which sit mostly on the lrtysh River. Other renewables more producers at any given biofuel plant. are largely undeveloped . The Government and KazAgro (a national holdings There is currently no "green" or "white" certificate trading company) regulate and supervise the industry. According system in place in Kazakhstan . However, initial steps to the Government Decree No 204, dated 1 March 2011, were taken when the regulatory framework for such a the planned annual limit for the production of biofuel for system was developed in 2007 by the United Nations 2011 is 2.8 billion litres, with a potential expansion to Development Programme (UNDP) and the Government, 3.2 billion litres by 2014. in co-operation with the Renewable Energy and Energy In 2010 there was only one biofuel plant, Biohim, in Efficiency Partnership and the Global Opportunities Kazakhstan, but the potential market is large due to Fund. Under this framework, electricity producers would the countrys developed grain production capabilities. be obliged to possess renewable energy certificates Biohim produces bioethanol and biogasoline from feeder to cover a certain share of their annual output. These grain and its residues. Furthermore, there are some certificates would be issued and initially sold by micro and small private biofuel producers, many of which producers of green energy. However, since the market are members of the Kazakhstan Biofuel Association. for the trade of these certificates does not yet exist in Kazakhstan, the certificates would have to be purchased C.6 Energy efficiency by green energy providers from the Agency for Renewable Energy (which is yet to be created) for resale The Government has adopted several measuresto ele ctricity distributors. aimed at improving energy efficiency, including certain provisions of the Programme and the law On EnergyC.5 Biofuel Saving, dated 25 December 1997. These and other rules and proposals focus not only on efficiency per se, butOn 15 November 2010, the President of Kazakhstan also on the economic and organisational requirementssigned the law On State Regulation of Production andTurnover of Biofuel (the "Biofuel Law"). The law is aimed that underpin efficient power generation and fuel usage. The overriding aim of these various measures is toat protecting the food security of the state, reducing achieve greater environmental protection.emissions of pollutants into the atmosphere, andsupporting research into and the application of scientific The Programme in particular includes several projectstechnologies in the production and turnover of biofuel. aimed at the modernisation of the existing powerThe law also introduced rules allowing the government infrastructure parallel to the development of newof Kazakhstan to impose limits on volumes of biofuel technologies, in particular renewables and biofuel.production facilities.According to the Biofuel Law, biofuel production may becarried out if: D. Nuclear energy The law On Use of Atomic Energy, dated 14 April• the biofuel producers are in possession of a 1997, stipulates that activities associated with the production passport and metering devices that use of atomic energy must be carried out under strict provide automatic transfer of information on the supervision by the state. The basic principles of state volume of biofuel to the authorised body; and policy in the nuclear sector are designed to ensure• production takes place in a factory for the production safety, and include: the prohibition of radioactive waste of biofuel that belongs to the manufacturer on the disposal by other states on Kazakhstani territory; the basis of a property right. provision of social protection for nuclear facilities;Accompanying invoices must be attached for the and protections for those living and working in areasrealisation, export and transportation of biofuel. exposed to radioactivity. The law also aims to achieveRealisation may be carried out by persons engaged in transparency in relation to the discussion of public policybiofuel production and/ or those who are licensed in the in the nuclear energy field.compounding of petroleum products. Kazakhstan has been a member of the InternationalThe storage of biofuel must be in premises belonging Atomic Energy Agency (IAEA) since 1993.to biofuel producers and producers of oil containing The major state regulator of the sector is the Atomicbiofuel on the basis of a right of ownership or other Energy Committee ("AEC") of the Ministry of Industryproprietary right. and New Technologies. The AEC is the successor toIt is prohibited to use raw food materials in amounts the Agency on Atomic Energy, and is responsible for,exceeding quotas set by the Government. This inter alia, nuclear safety issues and the supervision ofprohibition includes the use of grade 1 and 2 grain or the nuclear sector. The AEC has control over all goodsgenetically modified materials during the production of exported and imported , as w ell as the provision of allbiofuel, and manufacturers must not produce alcohol or services, in the atomic energy field. This includes thedispose of non-denaturised ethanol , except for in the use transfer, sale or procurement of nuclear energy forof biofuel production. Additionally, there are restrictions commercial purposes or the transfer of the same for226 EER - the European Energy Handbook 2012
  12. 12. non-commercial purpose. The AEC issues licences andtransport permits for nuclear export- and import-relatedproducts under the terms of the law On Export Control,dated 21 July 2007. Nuclear materials, technologies,equipment and stations are classed as nuclear exportproducts, as are specified non-nuclear materials,equipment, dual use materials and technologies,radiation sources and isotope products.Licences for nuclear import and export are granted onlyto those legal entities possessing the correct licences asissued by the AEC. The granting of export licences andtransit permits occurs only on the basis of a successfulapplication completed in the prescribed form and after acomprehensive assessment of proposed export routesand end-user reliability. Certain categories of nuclearexport require the assurance of an importing country(usually one not possessing nuclear weapons) that theobtained products are intended for peaceful use.The AEC issues other types of licence based on TheLicensing Law and Governmental Decrees No 1894and 270, dated 29 December 1995 and 19 March 2008,respectively. A licence in this context is a documentconfirming that a legal entity is able to provide thesafe use of the radiation sources, nuclear and otherradioactive materials.The relevant national operator is National HoldingKazatomprom ("NHK"), a subsidiary of NWFSamruk-Kazyna. NHK regulates the import and exportof uranium, rare metals, nuclear fuel for power plants,special equipment and dual-purpose materials.Kazakhstan currently has no nuclear power-generationcapacity as the Aktau nuclear reactor, the countrysonly nuclear power plant, was shut down in June 1999.However, there are currently plans to build a new1,500MW nuclear plant in near Lake Balkash in theSouth East of Kazakhstan. footnotes 1. The Law of the Republic of Kazakhstan On The Electric Power dated 9 July 2004, No 588-11. 2. The Law of the Republic of Kazakhstan On Licensing dated 11 January 2007, No 214-111. 3. The Decree of the Government of the Republic of Kazakhstan On Approval of Model Agreements dated 10 March 2009, No 276. 4. http://elicense.kz 5. The Law of the Republic of Kazakhstan On Competition dated 25 December 2008, No 112-IV. 6. MCI is the minimum calculation index which is set by the Law on State budget annually. In 2011 it is 1,512 KZT.:::ER - the European Energy Handbook 2012 227
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