Does the oil and gas industry afraid of the WTO?

What will happen to more than 100 measures of support for domestic producers and local content spelled out in a number of regulatory documents of Kazakhstan after the transition period ends on January 1, 2021 and we become full participants of the global market, within the framework of WTO agreements? The Council for the Development Strategic Partnerships in the Oil and Gas Industry, established with the participation of the KazEnergy Association and Atameken NCE, asked the partner of the DASCO Counsulting Group, Mira Dossova, to answer this question.

Mira is the specialist in provision of legal services in international investment, corporate law, commercial law, subsoil use, construction, including the implementation of innovative and industrial projects for more than 15 years. The main task of Mira Dossova was to clarify the legal restrictions and opportunities of domestic businessmen in the new terms.

Local content: WTO v. Subsoil Code

As closer the year 2021 is approaching, as more intense solicitude of the Kazakhstani producers of goods, works and services (GWS) about the restriction of future access to customers – subsoil users, in business circles is discussed. Kazakhstan’s business will find itself in a tougher competitive environment, with already rivals from all over the world already breathing in the back.

Let us try to figure out and find out what the WTO norms in the legal field are in terms of how they are reflected in the local content issues in the procurement of the GWS of subsoil users[1]. So, in this vein, everyone is well aware of the following basic provisions of the recently entered into force Code “On Subsoil and Subsoil Use” of the Republic of Kazakhstan dated 27.12.17. No. 125-VI (Subsoil Code)[2]:

The share of local content in works and services acquired for carrying out operations on subsoil use, established in terms of contracts for subsoil use, licenses for the extraction of solid minerals, must be at least 50% of the total volume of acquired works and services during a calendar year;
Subsoil use contracts and licenses for the extraction of solid minerals must contain obligations for local content in works and services (in the amount established in accordance with the requirements of the legislation)[3];
The notice of the auction for the subsoil use right for hydrocarbons should contain minimum obligations for local content in works, services and personnel;
For violation of the obligation to ensure the minimum share of local content in the works and services used in carrying out operations for the extraction of solid minerals, a penalty in the amount of 30% of the cost of works and services relating to the unfulfilled amount of obligations is imposed. Payment of penalties for violation of an obligation shall terminate the primary obligation, the performance of which is provided for in the corresponding calendar year.
For subsoil use contracts concluded prior to January 1, 2015, when procuring goods during subsoil use operations, the tender organizer conditionally reduces the price of the competitive bid of the bidders – Kazakhstani producers of goods by 20%. This provision applies until the expiration of the specified contracts or until January 1, 2021, whichever comes first.
procedure for the acquisition of goods, works and services by subsoil users and their contractors operating in the framework of agreements (contracts) on production sharing (PSA), approved by the Government of the Republic of Kazakhstan, or under a subsoil use contract approved by the President of the Republic of Kazakhstan[4], determined by the procedures established in accordance with such agreements (contracts). Moreover, this procedure should ensure: 1) the implementation of approved programs for the development of local suppliers of goods, works and services; 2) provision of all potential suppliers of goods, works and services with full and fair opportunities to participate in the competition for the purchase of goods, works and services; 3) application of objective criteria for the preliminary selection of potential suppliers of goods, works and services.
It is assumed that the contracts concluded before January 1, 2015 (except for the PSA and the TCO contract, as provided for in Article 278 (30) of the Subsoil Code), require changes to exclude local content obligations in goods and replace them with measures compatible with WTO rules or such requirements will become null and void from January 1, 2021.

It is worth paying attention to the fact that the WTO rules themselves do not contain direct provisions on the prohibition of local content requirements. However, their legality is determined in terms of the presence / absence of contradictions to the rules of the WTO, and, in particular, to the provisions:

General Agreement on Tariffs and Trade (GATT);
General Agreement on Trade in Services (GATS);
Trade Related Investment Measures Agreements (TRIMs):
Subsidies and Countervailing Measures Agreements (SCM Agreement);
Government Procurement Agreements (GPA).
We will consider GATT as the main one, which regulates trade in goods, and GATS – trade in services.

Article III of the GATT (trade in goods)

The most important provisions that, so to speak, have a negative impact on local content requirements are laid down in Article III of the GATT. This article contains the key principle of the GATT – the principle of national treatment – according to which discrimination against imported goods should not be allowed vis-à-vis similar goods of local origin.

WTO member countries should establish equal conditions of competition for imported and domestic goods. This means that they are required to provide goods of foreign origin with exactly the same treatment as their national goods in the area of ​​domestic taxes and duties, as well as with regard to national laws, regulations and rules governing domestic trade.

Article III of GATT is unconditional. This means that countries that have joined the GATT, including Kazakhstan, must comply with it in full. And for these reasons, bringing, among others, the legislation on subsoil use in accordance with the provisions of the WTO, Kazakhstan excludes from it the rules on support for Kazakhstani producers of goods. The Kazakhstan negotiating working group succeeded, nevertheless, to retain such provisions only in the legislation on subsoil use, and only for a transitional period – until 2021 – which in the practice of the WTO was a rare exception.

Article XVII of GATS (trade in services)

Like the GATT, some of the provisions of the GATS contain the principle of national treatment, which apply to local content requirements and, in particular, Article XVII.

But unlike GATT, GATS provides two groups of obligations that the participating countries undertake: general (horizontal), covering all types of services, and specific (specific) in relation to individual industries producing and supplying services, fixed in the lists,[5] to which the principle of national treatment applies (the “opt-in” approach). Thanks to the “opt-in” approach according to GATS, the principle of national treatment is a contractual criterion.

Thus, following the results of the negotiations, Kazakhstan secured a share of local content in works and services acquired for carrying out operations on subsoil use at least 50% of the total volume of acquired works and services during a calendar year.

How will the situation be assessed in terms of applying the principle of national treatment when one and the same person is a supplier of goods and services at the same time? In this case, if disagreements arise in relation to the goods, the provisions of GATT will rather be applied, as the WTO’s judicial practice shows.

International experience and alternative support measures for domestic producers

In global practice, measures for local content are not something new. And negotiations on them, and the disputes emanating from them have been going on for years. According to experts, such measures are taken especially in times of crisis. For example, in the wave of the 2008/2009 crisis, more than 100 new local content requirements were accepted, among others, by Australia, the USA, Argentina, Brazil, China, India, Indonesia and Kazakhstan.

Moreover, many WTO member countries in awarding licenses (for example, broadcasting) or subsurface use contracts, and more recently in the provision of preferential fixed tariffs (feed-in tariff) for renewable energy sources (RES) projects, one way or another, often included and continue to be different local content requirements.

Canada – Renewable Energy case is one of the most recent and vivid examples from international practice.[6] Thus, Canada, in exchange for the provision of preferential fixed tariffs, obligated producers of renewable energy to carry out certain measures for local maintenance and, in particular, to buy equipment from Canadian manufacturers. These measures were challenged by Japan. And, precisely, this case became a trigger for subsequent attacks against countries that took similar measures in order to cancel them (China against measures taken by Italy and Greece; USA against India; Argentina against the European Union, etc.).

Thus, Canada, in exchange for the provision of preferential fixed tariffs, obligated producers of renewable energy to carry out certain measures for local maintenance and, in particular, to buy equipment from Canadian manufacturers. These measures were challenged by Japan. And, precisely, this case became a trigger for subsequent attacks against countries that took similar measures in order to cancel them (China against measures taken by Italy and Greece; USA against India; Argentina against the European Union, etc.).

Thus, as the judicial practice of the WTO shows, in some cases, the establishments of measures to support local producers, the consequences do not go without litigation, where these measures are compared in detail with WTO rules in order to identify their compliance / non-compliance. That is, in essence, the judicial practice and precedents of the WTO reveal and form exactly the specifics of such contradictions and violations. Therefore, taking measures on local content, not all of which, in principle, may contradict WTO regulations, WTO member countries, including Kazakhstan, have to do this with an eye to such moments of WTO.

Of course, each state determines for itself the most optimal, promising ways of developing and supporting local content. Obviously, when adjusting local content requirements and measures to support domestic producers to WTO rules and regulations, Kazakhstan should approach this issue by examining the practices used by WTO member countries who have managed to maintain state support measures for domestic producers of goods, without violating however, the rules and regulations of the WTO.

Almost 3 years ago, determining the local approach to regulating local issues to a greater extent as an administrative one, generating contradictions to WTO norms, and an alternative to which is liberal (partner), expert Miran Maulenov gave successful examples from international practice. For example, a partnership approach from the UK experience, when a Memorandum of Understanding was signed between the UK Government and the Association of Foreign Offshore Operators, according to which the parties agreed on joint approaches in order to increase the proportion of local content.[7]

Gradually moving away from administrative measures, as unpromising, in recent years, Kazakhstan has also universally observed the conclusion of memorandums on the development of local content between oil and mining companies, on the one hand, and the government or akimats of different oblasts of Kazakhstan – on the other. For example, one of the last such memorandums is a memorandum of cooperation on the development of local content, signed at the end of last year between the operator of the largest oil extraction project, the NCOC, and the akimat of the Karaganda oblast.[8]

Also, in world practice there are many examples of achieving a successful balance between stimulating local content (sustainable development of domestic production and human resources) and ensuring competition in international markets, as required by the WTO.

To apply the incentive approach, Kazakhstan adopted a number of regulations under the auspices of, mainly, the Entrepreneurial Code of the Republic of Kazakhstan of October 29, 2015 No. 375-V, providing for measures to assist Kazakhstani enterprises and organizations in creating new industries with the involvement of advanced technologies, quality management systems in accordance with generally accepted international standards such as ISO, АPI, АSTM and so on. Also, there are specially created for this organization (for example, NADLoC).

In conclusion, I would especially like to note that along with this, the national economy of the country must also be considered from the social component and develop economic ideology among domestic producers of TRU and their consumers, who, under competitive conditions, will themselves contribute to the development of “commercial patriotism” and “unwind” own brands, increase the popularity of domestic products.

It would be nice for Kazakhstani producers of GWS to remember that the country’s competitiveness implies the ability of national companies to produce goods and services, at prices and quality, not inferior to their counterparts of foreign production and satisfying, both domestic and, if they try, external consumers.

Mira Dossova, Dasco Conculting Group Partner

Nikolay Yeffimchuk, Dasco Consulting Group Partner

[1] This article does not address issues of local content in frames in accordance with the legislation on subsoil use of the Republic of Kazakhstan.

[2] Art. 28 (2), 36 (7), 95 (2- (11), Art.162 (3), 208 (3), 278 (29-30) of the Subsoil Code. In addition, in the context of this article, the provisions of the Code on subsoil on local content should be considered, bearing in mind also the Rules for the acquisition by subsoil users and their contractors of goods, works and services used in mining operations for solid minerals, approved by Order No. 196 of the Minister of Energy of the Republic of Kazakhstan dated May 18, 2018.

[3] It is also necessary to consider the List of priority works and services, approved by the Order of the Acting Of the Minister of Energy of the Republic of Kazakhstan No. 124 dated April 13, 2018.

[4] Subsurface use contract for the Tengiz oil field / Tengizchevroil JV (TCO).

[5] The market access obligations of individual countries are summarized in the lists of their obligations. These lists are legal obligations of each country and form part of the protocol on the country’s accession to the WTO.

[6] Canada – Certain Measures affecting the Renewable Energy Generation Sector Appellate Body Report, WT/DS412/AB/R, DS426/AB/R (6 May 2013). https://www.wto.org/english/tratop_e/dispu_e/412_426abr_e.pdf.

[7] And again about the Kazakhstani content in the procurement of subsoil users http://petroleumjournal.kz/index.php?p=article&aid1=44&aid2=213&id=501&outlang=1

[8] North Caspian Operating Company N.V. (NCOC) – NCOC uses the industrial potential of the Karaganda oblast in the North Caspian project https://kapital.kz/business/72962/ncoc-ispolzuet-promyshlennyj-potencial-karagandinskoj-oblasti-na-severo-kaspijskom-proekte.html

Photo: 24.kz