Energy and Natural Resources in Kazakhstan

Comprehensive Overview of Energy and Natural Resources in Kazakhstan

Kazakhstan’s energy sector is a pivotal component of its economy, governed by a robust regulatory framework designed to oversee the exploration, production, and distribution of various energy resources. This guide provides an in-depth analysis of the regulatory landscape, key legislative instruments, ownership structures, and market dynamics shaping Kazakhstan’s energy industry.

Regulatory Authorities in Kazakhstan’s Energy Sector

Ministry of Energy

The Ministry of Energy is the primary regulatory body responsible for implementing state policies and regulating activities across the energy sector. Its jurisdiction encompasses:

Oil and Gas Extraction: Oversight of exploration and production activities.
Oil Refining and Hydrocarbon Transportation: Regulation of refining processes and the transportation infrastructure for hydrocarbons.
Gas Processing and Distribution: Management of gas processing facilities and distribution networks.
Power Generation and Coal Production: Supervision of electricity generation and coal mining operations.
Nuclear Energy: Regulation of nuclear energy activities, ensuring safety and compliance with national and international standards.

Legislative Framework Governing Energy Exploration and Production

Subsoil Code of 2017

The cornerstone of Kazakhstan’s upstream energy regulation is the Subsoil Code, enacted in 2017. This legislation establishes the legal framework for subsurface use rights, defining them as limited proprietary rights granted on a reimbursable basis for specific business purposes and durations.

Types of Subsurface Use Rights

Geological Study: Permits for subsurface exploration.
Mineral Exploration and Mining: Rights to explore and extract minerals.
Subsurface Space Utilization: Permissions for using subsurface areas for various operations.
Due Diligence: Rights for conducting necessary assessments and evaluations.

Subsoil Use Regimes

Kazakhstan operates under two main subsurface use regimes:

Licence Regime: Subsurface use licenses are issued by state authorities, granting the holder rights to specific subsurface areas for designated operations.
Contractual Regime: Subsurface use contracts are agreements between the government and users, outlining terms for exploration and production activities.

Acquisition of Subsurface Use Rights

Subsurface use rights can be obtained through:

Granting of Rights: Issued via licenses or contracts.
Transfer of Rights: Through civil law transactions or succession during organizational restructuring.
Electronic Auctions: Typically used for hydrocarbons, ensuring transparent allocation of subsurface use rights.

Legal Framework for Oil, Gas, and Electricity Supply

Oil Supply Regulations

Kazakhstan’s oil market is primarily regulated by the Subsoil Code, complemented by key legislations:

Natural Monopoly Law (2018): Governs monopolistic practices in the energy sector.
Trunk Pipeline Law (2012): Regulates the national trunk pipeline infrastructure.
State Regulation Law (2011): Oversees the production and distribution of petroleum products.

National Trunk Pipeline Operator: Holds exclusive rights to operate trunk pipelines within Kazakhstan, managing the transportation of oil and gas.

Gas Supply Regulations

The gas market framework includes:

Natural Monopoly Law
Trunk Pipeline Law
Gas and Gas Supply Law (2012): Regulates gas production, sale, marketing, and distribution.

Market Structure:

QazaqGas: Acts as the national operator, purchasing gas from subsurface users at regulated prices.
KazTransGas Aimak: Distributes gas to regions at wholesale prices.
Retail Distribution: KazTransGas Aimak sells gas to consumers at regulated retail prices set by the Committee for Regulation of Natural Monopolies (CRENM).

Electricity Supply and Market Design

The Electric Power Industry Law (2004) governs the electricity sector, delineating the market into wholesale and retail segments.

Wholesale Electricity Market

Divided into five categories:

Decentralized Market: Facilitates negotiated agreements with price caps.
Real-Time Balancing Market: Manages imbalances in the electric grid, currently operating in simulation mode.
Centralized Market: Managed by a centralized trading operator, encompassing spot, medium-term, and long-term sales.
System and Ancillary Services Market
Capacity Market: Encourages investment in generating capacity through regulated tariffs.

Participants:

Energy producers, transmission and supply organizations, consumers, system operators, and the Financial Settlement Centre (FSC).

Tariff Regulation

Maximum Tariffs for Electric Energy: Set by the Ministry of Energy, these caps ensure electricity prices remain within regulated limits.
Capacity Tariffs: Cover the availability of generating capacity, with provisions for individual tariffs based on investment agreements, tenders, or auctions.

Ownership and Market Access Restrictions

State Ownership of Subsoil Resources

Under the Kazakh Constitution, all subsoil resources are state-owned. However, once extracted, minerals become mineral raw materials, allowing partial or full ownership by subsurface users as per their contracts or licenses.

State Pre-Emptive Rights

The state retains priority in acquiring subsurface use rights in strategic areas, defined by significant oil, gas, or uranium reserves, or strategic locations like the Caspian Sea sector.

Nuclear Sector Ownership

Ownership of uranium extraction rights is exclusively granted to Kazatomprom, the national atomic operator, ensuring local participation and control within the nuclear sector.

Trunk Pipeline Ownership Restrictions

Trunk pipelines are classified as strategic infrastructure, prohibiting ownership by individuals or foreign entities. Only state or approved private ownership structures are permitted.

Transfers of Control and Assignments

Strategic facilities, including trunk pipelines, national electric networks, oil refineries, and large energy-producing facilities, require governmental approval for any sale, encumbrance, or ownership transfer. The state maintains pre-emptive rights to ensure national security and strategic interests are upheld.

Conclusion

Kazakhstan’s energy regulation framework is designed to balance state control with opportunities for private and foreign investment. Understanding the Subsoil Code, licensing regimes, tariff regulations, and ownership restrictions is crucial for navigating the Kazakh energy market. Legal experts can provide invaluable guidance to ensure compliance and optimize strategic positioning within this dynamic sector.

Practice Areas

Energy and Natural Resources in Kazakhstan

Comprehensive Overview of Energy and Natural Resources in Kazakhstan

Regulatory Authorities in Kazakhstan’s Energy Sector

Ministry of Energy

The Ministry of Energy is the primary regulatory body responsible for implementing state policies and regulating activities across the energy sector. Its jurisdiction encompasses:

Oil and Gas Extraction: Oversight of exploration and production activities.

Oil Refining and Hydrocarbon Transportation: Regulation of refining processes and the transportation infrastructure for hydrocarbons.

Gas Processing and Distribution: Management of gas processing facilities and distribution networks.

Power Generation and Coal Production: Supervision of electricity generation and coal mining operations.

Nuclear Energy: Regulation of nuclear energy activities, ensuring safety and compliance with national and international standards.

Legislative Framework Governing Energy Exploration and Production

Subsoil Code of 2017

The cornerstone of Kazakhstan’s upstream energy regulation is the Subsoil Code, enacted in 2017. This legislation establishes the legal framework for subsurface use rights, defining them as limited proprietary rights granted on a reimbursable basis for specific business purposes and durations.

Types of Subsurface Use Rights

Geological Study: Permits for subsurface exploration.

Mineral Exploration and Mining: Rights to explore and extract minerals.

Subsurface Space Utilization: Permissions for using subsurface areas for various operations.

Due Diligence: Rights for conducting necessary assessments and evaluations.

Subsoil Use Regimes

Kazakhstan operates under two main subsurface use regimes:

Licence Regime: Subsurface use licenses are issued by state authorities, granting the holder rights to specific subsurface areas for designated operations.

Contractual Regime: Subsurface use contracts are agreements between the government and users, outlining terms for exploration and production activities.

Acquisition of Subsurface Use Rights

Subsurface use rights can be obtained through:

Granting of Rights: Issued via licenses or contracts.

Transfer of Rights: Through civil law transactions or succession during organizational restructuring.

Electronic Auctions: Typically used for hydrocarbons, ensuring transparent allocation of subsurface use rights.

Legal Framework for Oil, Gas, and Electricity Supply

Oil Supply Regulations

Kazakhstan’s oil market is primarily regulated by the Subsoil Code, complemented by key legislations:

Natural Monopoly Law (2018): Governs monopolistic practices in the energy sector.

Trunk Pipeline Law (2012): Regulates the national trunk pipeline infrastructure.

State Regulation Law (2011): Oversees the production and distribution of petroleum products.

National Trunk Pipeline Operator: Holds exclusive rights to operate trunk pipelines within Kazakhstan, managing the transportation of oil and gas.

Gas Supply Regulations

The gas market framework includes:

Natural Monopoly Law

Trunk Pipeline Law

Gas and Gas Supply Law (2012): Regulates gas production, sale, marketing, and distribution.

Market Structure:

QazaqGas: Acts as the national operator, purchasing gas from subsurface users at regulated prices.

KazTransGas Aimak: Distributes gas to regions at wholesale prices.

Retail Distribution: KazTransGas Aimak sells gas to consumers at regulated retail prices set by the Committee for Regulation of Natural Monopolies (CRENM).

Electricity Supply and Market Design

The Electric Power Industry Law (2004) governs the electricity sector, delineating the market into wholesale and retail segments.

Wholesale Electricity Market

Divided into five categories:

Decentralized Market: Facilitates negotiated agreements with price caps.

Real-Time Balancing Market: Manages imbalances in the electric grid, currently operating in simulation mode.

Centralized Market: Managed by a centralized trading operator, encompassing spot, medium-term, and long-term sales.

System and Ancillary Services Market

Capacity Market: Encourages investment in generating capacity through regulated tariffs.

Participants:

Energy producers, transmission and supply organizations, consumers, system operators, and the Financial Settlement Centre (FSC).

Tariff Regulation

Maximum Tariffs for Electric Energy: Set by the Ministry of Energy, these caps ensure electricity prices remain within regulated limits.

Capacity Tariffs: Cover the availability of generating capacity, with provisions for individual tariffs based on investment agreements, tenders, or auctions.

Ownership and Market Access Restrictions

State Ownership of Subsoil Resources

Under the Kazakh Constitution, all subsoil resources are state-owned. However, once extracted, minerals become mineral raw materials, allowing partial or full ownership by subsurface users as per their contracts or licenses.

State Pre-Emptive Rights

The state retains priority in acquiring subsurface use rights in strategic areas, defined by significant oil, gas, or uranium reserves, or strategic locations like the Caspian Sea sector.

Nuclear Sector Ownership

Ownership of uranium extraction rights is exclusively granted to Kazatomprom, the national atomic operator, ensuring local participation and control within the nuclear sector.

Trunk Pipeline Ownership Restrictions

Trunk pipelines are classified as strategic infrastructure, prohibiting ownership by individuals or foreign entities. Only state or approved private ownership structures are permitted.

Transfers of Control and Assignments

Conclusion