On the eve of January 1, it’s time to remember that obligations on the local content development in goods provided in the subsoil use contracts concluded before January 1, 2015 (WTO accession) are effective until the end of the contract term or January 1, 2021. Mr. Beket Izbastin, Director of the Subsoil Use Department of the Ministry of Energy of the Republic of Kazakhstan, told about what will become of the 20% conditional discount for Kazakhstan’s producers, and what awaits Kazakhstan’s producers.
“Local content” requirements in procurements of subsoil users contradict the WTO rules. Will the plans to reach 50% local content in oil and gas companies of Kazakhstan sustain?
As part of integration processes, by accession to the WTO and EAEU Kazakhstan has strengthened its positions on the global stage, but at the same time it has undertaken obligations that restrict the role of the state in the subsoil use market. Thus, according to the report of the working group on the accession of the Republic of Kazakhstan to the WTO (cl. 895), from January 1, 2015 Kazakhstan should not include the requirements on local content and on 20% conditional discount for Kazakhstan’s producers in the procurement of goods under new contracts with subsoil users. In addition, by the report of the working group on the accession of the Republic of Kazakhstan to the WTO (cl. 1127), from the date of Kazakhstan’s accession to the WTO, Kazakhstan shall not establish a minimum local content in works and services exceeding 50% when defining the conditions for holding a tender for the provision of subsoil use rights.
Local content obligations in works and services should be reduced to 50% by 2021 in the contracts concluded from September 2011 till January 1, 2015, and such obligations shall be reserved for the entire duration period of the contracts concluded before September 2011.
20% conditional discount for Kazakhstan’s producers of works and services in procurements of subsoil users will remain not limited by time. Therefore, the requirement of the government for the subsoil users to reach 50% local content share of the total amount of purchased works and services does not contradict the WTO rules.
All changes in the local content system within the integration processes have been reflected in the subsoil use legislation, in particular, in the Code introduced in December 2017.
The Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use” (hereinafter referred to as the Code) preserves the provision concerning conditional discounts for Kazakhstan’s producers, includes the requirements for local content in works and services of at least 50% of the total amount of purchased works and services, as well as at least 50% for each type from the list of priority works and services, the requirements for the minimum local content in staff, for mandatory financing of training of Kazakh personnel and science. In addition, the Code of the Ministry of Energy retains the state regulation of the procurement process of subsoil users, which is also an integral part of the system of support and protection of domestic producers.
Previously, the government expressed the ideas on the implementation of new supportivemechanisms for Kazakhstan’s producers complying with the WTO standards – the so-called “Early and futures contracts”, “Long-term contracts” and “Offset cooperation”. Will these mechanisms be implemented? Are there any other supportive mechanisms developed? Could you explain the essence of these new mechanisms and what is the progress of their implementation in legislation and in practice?
Regardless Kazakhstan’s accession to the WTO, local content development is still relevant for Kazakhstan and the Ministry continues its active work in this area. Thus, as I have noted before, the Ministry retained and formalized the most of the regulations of the local content system in the Code.
In addition, understanding the key role of large oil and gas projects in increasing the local content, we are actively cooperating with major operators – Tengizchevroil, Karachaganak Petroleum Operating and North Caspian Operating Company – in order to involve more domestic suppliers in their projects.
One of such projects is the TCO’s Future Growth Project. When approving the TCO’s Future Growth Project (FGP), the Ministry of Energy established the minimum conditions for the local content at 32%. In monetary terms, this amounts to almost USD 12 bn., which is planned to be spent on procurements from local companies.
This year the project has proceeded to the active implementation phase. Over 2017-2018, the Ministry held 9 meetings with TCO and its foreign general contractors, during which the mechanisms for the involvement of more Kazakhstan’s companies in TCO’s FGP were agreed. In particular, within the framework of awarding major construction contracts, general contractors undertook to ensure a maximum level of local content of at least 50% (Bonatti – 67%, Gate – 79%, Senimdi Kurylys – 76%).
Another large oil and gas project is Karachaganak Expansion Project, wherein by the initiative of the Ministry, in order to supply competitive Kazakhstan’s goods, works and services for major projects meeting the requirements of Operators, the “early tenders” mechanism will be introduced when the contract is awarded to Kazakhstan’s company that undertakes to organize the manufacture of necessary products in the country.
Thus, heat exchanger repair services of Tematech company, ball valve assembly services of Sferova company, and production of refractory casings by Contraflex Kazakhstan have been already localized in the territory of Aksai industrial park. Also, Weatherford-CER consortium has already been awarded a contract for pipe handling and gas logging works, the potential supplier of which is the plant of Tenaris company for the production of premium-class tubular goods in Aktau.
Moreover, in order to continue the localization initiative, the tender for FEED of Karachaganak Expansion Project provides the requirement for the contractor to enter into a mandatory partnership with Kazakhstan’s project company, where 40% or more of the work scope should be completed in the Republic of Kazakhstan, thereby laying the platform to provide supportive measures for local commodity producers.
The work is also ongoing to implement the “early tenders” mechanism at the North Caspian project. Thus, NCOC jointly with the Competent Authority (PSA) and other stakeholders created the relevant working group for the development of the list of goods, works and services in order to launch early tenders.
In addition, the work is being continued to localize the most demanded goods and services (TOP-10) within the framework of Aktau declaration. Under this initiative, the Operators reached an agreement concerning the localization of production of demanded goods, works and services from the TOP-10 list.
An example of this initiative is the localization of production of flanges (Continental Flanges & Fittings KZ based on Atyrauneftemash), electrical equipment (Alageum electric, KazCentre ElectroProvod, KazEnergoCable, KMG Automation), valves (Boehmer Valves) tubular products (Tenaris), modular structures (Daewoo-Ersai), machine-building and rotating equipment repairs (based on ZKMK using General Electric’s technology).
How can the notion “Kazakhstan’s producer” change after the transition period completion?
Kazakhstan’s producers of works and services include individual entrepreneurs and (or) legal entities established in accordance with the legislation of the Republic of Kazakhstan, located in the Republic of Kazakhstan, 95% of the total number of staff of which are the citizens of the Republic of Kazakhstan, excluding directors, managers and specialists engaged in labour activities in the territory of the Republic of Kazakhstan under the intra-company transfer in accordance with the legislation of the Republic of Kazakhstan on employment and migration of the population.
Within this, until January 1, 2022 the number of foreign directors, managers and specialists engaged in labour activities in the territory of the Republic of Kazakhstan under the intra-company transfer in accordance with the legislation of the Republic of Kazakhstan on employment and migration of the population should not exceed 25% of the total number of directors, managers and specialists in each respective category, and after January 1, 2022 – not more than 50% in each respective category.
– According to some experts, the majority of countries tend to review their approaches to cooperation within the WTO, including its freezing, focusing on the regional trade agreements. Will Kazakhstan have to freeze its relations with the World Trade Organization in the near future?
– The negotiation process on Kazakhstan’s accession to the WTO was started in 1996 and had been lasted for more than 19 years. During this period, the legislation of Kazakhstan and the international treaties ratified by it had been systematically amended to fully comply with the WTO rules.
Regional trade agreements such as the Treaty on establishment of a single customs territory and the formation of a Customs Union and the Treaty on the Eurasian Economic Union were also amended in accordance with the WTO rules in order to make the accession to the WTO smooth and less painful for all participants in foreign economic activity.
In this regard, I believe there is no reason to suspend our cooperation with the WTO. If we talk about local content, there is definitely no contradiction between the WTO and the EAEU in this area.
– Thank you for the informative conversation.