03.09.2014 Legal developments in 2014: Changes and future developments, Erdenedalai O. & Blormaa G.

02 September 2014
Legal Developments in 2014:
Changes and Future Developments
Frontier Securities Conference
Erdenedalai Odkhuu, Associate
Bolormaa Gulguu, Associate
Hogan Lovells (Mongolia) LLP

www.hoganlovells.com
Content
1. Legal developments in 2014
2. Legal framework for the petroleum sector
3. Amendment to the Minerals Law and lifting of
the moratorium on granting exploration
licences
4. Laws pending Parliamentary approval
2

1. Legal developments in 2014
• Previous fundamental changes - Repeal of Strategic
Foreign Investment Law and Enactment of
Investment Law
• Enactment of Securities Market Law
• Lifting of Exploration Licences Moratorium
• New Regulatory Regime for Oil & Gas
• "Glass" account law
3

Legal Reform Update
• Legislation
• Court system
– Restructuring first instant courts and increasing the
number of judges
– Specialization of courts and judges (administrative,
criminal and civil matters)
– Expectation: Increase the efficiency of court procedures
and dispute settlement period. Business and commercial
disputes will be settled quickly and judges will be more
specialized.
4

2. Introduction to the legal framework for the petroleum sector
Upstream Downstream
Petroleum Law
(enacted on 1 July 2014)
Petroleum Production Law
(enacted on 1 July 2005, as revised)
New Petroleum Law sets out a
comprehensive legal framework for the
petroleum sector - the former
petroleum law enacted in 1991 had
been criticized as being out of date.
The latest development:
Specific Regulation of Petroleum
Products Licences by Ministerial Order
#171 on 29 August 2013 - separate
licences in order to engage in (i) the
import of petroleum products, (ii) retail
trade, and (iii) wholesale trade.
5

Overview of Petroleum Law
Provides two types of petroleum:
• Oil (crude oil and gas);
• Unconventional oil (oil sands, oil shale etc.)
Provides three main petroleum activities;
• Research ("эрэл")
• Exploration ("хайгуул")
• Extraction ("ашиглалт)
Latter two activities are licensed activities:
• Exploration licence for Oil and Gas;
• Exploration licence for Unconventional Oil;
• Extraction/development licence for Oil and Gas; and
• Extraction/development licence for Unconventional Oil;
6

Overview of Petroleum Law (2)
7
• The Ministry of Mining and the Petroleum Authority of Mongolia ("PAM")
are the two primary regulators for the petroleum sector.
– The Ministry of Mining is responsible for policy issues, the issuance of
licences and organising tenders for exploration sites.
– PAM is the main implementing authority responsible for matters such as
concluding production sharing agreements (as authorised by the Cabinet),
approval of annual plans, and the supervision of fee payments
• Contractor, Operating Company and Subcontractor
– The latter two must be Mongolian-incorporated companies

8
• Research
– Not a licensed activity, subject to a contract with PAM
– a term of no more than three years.
– Production sharing agreement - may take several months to conclude as the process involves the
completion of negotiations with PAM, the procurement of an approval from the Ministry of Mining,
and the issuance of an authorisation from the Cabinet.
• Exploration
– the term of an oil exploration licence may be no more than 8 years and can be extended twice by up
to two years for each extension.
– unconventional oil exploration licences are issued for a term of no more than 10 years which can be
extended once for a maximum of a further five years.
– Registration processes (well and discovery-well)
– Exploration test
• Extraction
– The term of an oil extraction licence may not exceed 25 years and can be extended twice by up to
five years for each extension.
– The term of an unconventional oil exploration licence can be no more than 10 years and can be
extended once for a maximum extension of five years.

9
Fees and Expenses
Licence
fee
Exploration licence:
US$ 3 per square kilometre for initial term; and
US$ 8 per square kilometre for any extension period
Extraction licence:
US$ 100 per square kilometre for initial term; and
US$ 200 per square kilometre for any extension period
Royalty
fee
Oil and gas:
5 - 15 percent of extracted crude oil and gas
Unconventional oil:
5 – 10 percent [of extracted unconventional oil]
Other • Recovery cost and cost oil
• Product Sharing (Profit oil)
• Other contributions, including a contract signing contribution, an extraction
commencement contribution, an extraction ramp-up contribution, a training
contribution, and a local development contribution.

3. Introduction on the Amendment to the
Minerals Law
• Amendments to the Minerals Law
• Lifting of Exploration Licences Moratorium
• Government Resolution re 106 revoked licences
• Commercial laws pending approval by the
Parliament of Mongolia
10

Amendments to the Minerals Law
• Several minor amendments were made in 2014
(preferential royalty rate for gold, obligations pertaining to
cultural heritage)
• The Law on Amending the Minerals Law adopted on
1 July 2014
• Introduced 13 new provisions and altered a number
of existing provisions
• Became effective on 1 July 2014
11

• Principal amendments are:
– Common minerals are no longer regulated by the
Minerals Law;
– Policy Council (ad hoc) is to provide
recommendations and support the implementation of
the state mineral policy;
– National Geological Office is to (i) conduct various
geological cartographic surveys; (ii) research patterns
of distribution and occurrence of mineral resources;
and (iii) maintain a national database on geological
studies, mining and mineral resources;
– Technical experts and specialists are to be
involved in the preparation of exploration reports and
feasibility studies;
12

– The Mineral Council under Mineral Resources
Authority of Mongolia ("MRAM") is to review and
issue recommendations in respect of feasibility
studies;
– Exploration licence area is reduced from 400,000 to
150,000 hectares;
– An exploration licence term is extended to 12 years;
and
– Up to 10% of employees of subcontractors of licence
holders may now be foreign citizens.
13

• New obligations of licence holders:
– appointing a full time employee for liaising with
government on environmental and mine closure
matters;
– giving priority to business entities registered in
Mongolia when procuring goods, work or services;
– giving priority to Mongolian concentrator plants when
selling its products;
– informing MRAM re suspension or closure of mine;
and
– notifying the Petroleum Authority of Mongolia if
methane is discovered during coal mining.
14

• Reporting obligations:
– prepare feasibility study within one year of obtaining
the mining licence;
– submit an exploration work plan by 15th April each
year and annual exploration work report by 15th
February of the following year; and
– submit a mining plan with production estimates by 1st
December of each year.
15

• Sanctions for Non-Compliance
- A daily late fee equal to 0.3 per cent of the original licence
fee for failure to pay licence fees on time
- A licence will be revoked if licence holders are more than
30 days late with payment
- Fines are expressed in terms of the minimum monthly
wage allowing for indexation. The fines are now between
MNT 960,000 to 9,600,000 (approximately US$ 500 -
5,000)
16

Pending regulations:
- procedure for acceptance of mines for operation;
- operational procedures of concentrating plants;
- restoration and closing procedures;
- accreditation of geology and mining sector technical
experts and specialists; and
- public disclosure of mineral resources, deposit
reserves and the results of prospecting work.
17

Repeal of Prohibition Law
• The Law on Prohibition of Granting Exploration
Licences ("Prohibition Law") imposed a moratorium
on the issuance of exploration licences
• The Prohibition Law had been in effect since June
2010
• The Law on the Repeal of the Prohibition Law was
adopted on 1 July 2014
18

In summary:
– no major changes significantly altering the existing
regulatory regime
– new stakeholders but MRAM remains the main
regulator of the sector
– the repeal of the moratorium on granting exploration
licences
– extension of the exploration licence term
19

- clarifies the role and responsibility of government
agencies and licence holders
- some uncertainties include:
- the impact of the preferential treatment to Mongolian entities;
- the determination of market price of goods to be sold to
Mongolian concentrator plants; and
- whether the reduction of exploration licence area affects
existing licence holders
- many regulations to be adopted at a later stage
20

Government Resolution #216
• The Regulation on Tendering of 106 Exploration
and Mining Areas for which Licences were Annulled
by Court Decision was adopted on 4 July 2014
• 106 licences will be re-issued by a competitive
tender process organised by MRAM
• The threshold value is to be determined based on
the cost of geological and exploration work
conducted and other expenses incurred
21

Government Resolution #216
- Bidders must place a deposit equal to 30% of the
threshold value
- No preferential treatment in the tender process for
previous licence holders
- No specific mechanism for redress or compensation
to previous licence holders
- Tenders for 14 licences have been announced
- Government officials state that previous licence
holders are not required to deposit 30% and they
will be fully compensated based on the amount paid
by the winning bidder
22

Topics for Autumn Session of Parliament
– Law on Security Interests over Movable Properties and
Intangible Assets
– Revised Law on State Registration of Legal Entities
– Amendment to the Law on Prohibition of Exploration and
Mining in Headwater Areas, Protected Zones for Water
Reserves and Forest Lands (i.e. "Long-name Law")
23

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03.09.2014 Legal developments in 2014: Changes and future developments, Erdenedalai O. & Blormaa G.

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03.09.2014 Legal developments in 2014: Changes and future developments, Erdenedalai O. & Blormaa G.