The government of the republic has yet to decide how to acquire ownership of the assets (infrastructure, plants, etc.) that will remain at the Tengiz, Kashagan, and Karachaganak fields after the contracts with foreign oil companies expire.

In Kazakhstan, the contract for Tengiz expires in 2033, for Karachaganak in 2038, and for Kashagan in 2041. But already now, at the level of the government and the companies themselves, the parties need to prepare for parting ways. Many facilities necessary for servicing the enterprises have been built at all three fields, including wells, plants, oil pipelines, oil storage facilities, etc. All this property currently belongs to the extracting companies. But what will happen to them when the contracts expire? Will they automatically become the property of the state, since it is the owner of the land, or will the government have to buy them from the subsoil users? What rules and regulations govern this process? What conditions are stipulated in the contracts with the subsoil users themselves? There is no clear answer to these questions. It would be logical to think that the assets should be transferred to the republic. However, this may require several laws to be changed. At the same time, there may be objections from investors.

Must be transferred free of charge

In general, the disposal of assets or property used in oil operations after the termination of contracts may be governed by Kazakhstani law and the terms of exploration and production agreements.

Almost all contracts concluded with foreign investors provide for the use of methods and techniques applied in international oilfield practice, which is one of the sources of international oil law, along with legislation, agreements, etc.

From the point of view of general procedure under Kazakh law, contracting companies, i.e., oil production enterprises, must carry out liquidation work at the field at their own expense upon completion of the contract. The Ministry of Energy, as the competent authority, must notify the subsoil user at the end of the contract term of one of its three decisions: a) to liquidate the consequences of subsoil use at the field; b) to mothball the site so that it can be transferred to another person; and c) to transfer it to the trust management of the national company KazMunayGas (KMG).

In international practice, in most cases, concessions in the oil industry end with the transfer of property to the state free of charge, if it does not require liquidation work. This is the case in the US, the UK, the Netherlands, Mexico, India, Denmark, several Middle Eastern countries, and many other countries. In this case, the transfer of assets to the state free of charge is not considered a violation of private property rights and is not expropriation, where the investor is entitled to compensation, but is considered the investor's obligation, analogous to a concession fee. However, there are rare examples where small compensation is paid.

At the same time, according to one of the provisions of the Code of the Republic of Kazakhstan “On Subsurface Resources and Subsurface Use,” the Ministry of Energy may not instruct the subsurface user to carry out liquidation work and preserve the deposit to subsequently transfer it to another mining company.

In this case, the assets are transferred to the trust management of a national company with subsequent transfer to a new subsoil user, and the former owner of the site receives compensation for the preserved transferred assets.

Changes and more precise wording need to be made to the legislation, as well as to subsoil use contracts, so that when subsoil use rights are terminated, the extracting company transfers the remaining property to the republic free of charge. According to international practice, if the host country so desires, the assets are transferred to the state free of charge (considering the possible subsequent transfer to other subsoil users) or liquidated at the expense of the departing extractive company.

Some lawyers believe that the transfer of production assets to KMG's trust management constitutes expropriation, i.e., the seizure of property by the state against the will of the subsoil user, and therefore the investor is entitled to compensation. But this is a one-sided view. It does not consider international oil law. In addition, it should be noted that in our case, the assets are being transferred after the expiration of the subsoil use contract, and not during the operation of the field.

For example, the Tengiz contract is a concession. As with any contract, it is impossible to foresee absolutely all the conditions governing the relations and circumstances that may arise during its term. This is especially true when it comes to such a long-term, almost half-century contract. Therefore, the Tengiz contract itself contains references to international oil industry practice for cases that were not provided for in the contract. And the transfer of property to the state free of charge after the expiration of the concession is precisely such a case.

Expropriation is when property is taken away from an investor during the term of a valid subsoil use contract. In the case of large oil projects, the transfer of property will take place after the contracts have expired. In this case, it is necessary to find out how the field operator plans to dispose of the property after the contract expires, when the investor will have to leave the site. Usually, in such a situation, the consequences of subsoil use, including property, are liquidated, which entails large costs, or the property is transferred to the state free of charge, which is most beneficial to the investor.

Usually, investors seek to fix the contract period until the date of decommissioning of the production facility to avoid the costs associated with liquidation work and transfer such obligations to the state. It is more profitable for them to leave all production property at the facility without claiming any compensation. But in our case, some people believe that Kazakhstan should pay even for the facilities that are left behind, i.e., for what the subsoil user will try to get rid of and therefore does not want to bear the costs for.

The fact that repair work at the Tengiz facilities has recently been carried out less frequently than before—once every five years instead of every three years—indicates the operator's desire to reduce costs as the contract expiry date approaches. This suggests that investors have a plan for how to dispose of the property. And most likely, this plan may not be entirely related to its further operation. This may indicate an intention to carry out liquidation work or to leave the property as it is.

The transfer of property to the state free of charge after the completion of subsoil use will not constitute expropriation, since the subsoil use contract has been completed and the investor has received all the necessary benefits. The investor must return the contract territories in the condition in which they were received. In doing so, they must carry out liquidation work. If not, then they must transfer the assets to the state free of charge, in which case the subsoil user will not have to spend their own money on liquidation. This is the order of things in the international oil industry practice.

Do you have a plan, Mr. Fix?

According to Kazakhstani law, an extractive company is obliged to eliminate the consequences of subsoil use, even if this is not stipulated in the contract at the time of its conclusion. At the same time, the company must create a fund in advance, where money is accumulated for the implementation of liquidation work after the contract is completed. One of the provisions of the Republic of Kazakhstan's Code on Subsurface Resources and Subsurface Use stipulates that, in the absence of such a fund, a bank deposit or a full guarantee from a legal entity (instruments to secure the performance of obligations) may serve as collateral.

As a rule, most concession agreements around the world stipulate that the subsoil user is obliged to decommission the field or eliminate the consequences of its activities after production has ceased, unless the state decides to retain the facilities located on the site after the contract expires. In addition, the subsoil user must prepare a plan for decommissioning the field and a schedule for replenishing the liquidation fund, which are approved by the competent authority.

At the same time, the law must clearly and competently formulate the rights and obligations of subsoil users. It is necessary to amend the Code “On Subsoil and Subsoil Use” and exclude the provisions stating that the liquidation fund is a measure to ensure the fulfillment of obligations to eliminate the consequences of subsoil use. It cannot be such by its legal nature. Such measures may include, for example, a bank guarantee, a pledge, or a guarantee from a legal entity, which can only be used when the main obligation is not fulfilled. If it is fulfilled, then such guarantees do not apply. In the case of a liquidation fund, it must be used for liquidation work. Therefore, it must be clearly stated that a liquidation fund is a cash reserve (not a security measure) used to finance liquidation work. And in the event of the transfer of assets to the state after the termination of the contract, the rights to such reserve funds are also transferred to the state.

Kazakhstan, like any other civilized state, follows the norms generally accepted in world practice. If we rely on world experience in matters of subsoil use, then in many oil-producing countries, the most common approach is to return the assets necessary for exploration and production to the state.

Thus, in Brazil, subsoil users are not entitled to compensation for services rendered, wells drilled, buildings constructed, or any returnable property. These assets become the property of the federal government and are managed by the National Agency for Oil, Natural Gas, and Biofuels.

Similar laws exist in Argentina, where, upon termination of the contract, the field is decommissioned and all assets necessary for its operation and maintenance are transferred by the extracting company to the state free of charge, without any compensation.

In Denmark, upon expiration of the license, the state has the right to take over, free of charge, all or part of any assets, facilities, equipment, and installations intended for long-term use in the relevant territory, as well as any necessary accessories and materials. In addition, the subsoil user is obliged to ensure that assets not belonging to it are removed from any third parties so that they can be transferred to the state free of charge and without encumbrance.

In India, the state may require the subsoil user to transfer to it, without any compensation, full ownership of the assets, free of any encumbrances, upon expiry of the contract or upon its early termination.

In Mexico, upon expiration of the license term, ownership of any immovable materials (essentially, any structures and equipment attached to the land) transfers to the state without any liens, encumbrances, payments, or compensation.

In Norway, ownership is transferred only through private transactions. This usually occurs at the end of the license term. However, the state has a special right to acquire ownership of permanently located assets owned by the subsoil user.

In Thailand, the state can determine which assets it wishes to retain. The subsoil user transfers them free of charge within one year of concluding a transfer agreement with the state.

What else can we do for you?

The world is constantly evolving, and relationships and rules in the oil industry are changing too. In the early 1990s, when the Energy Charter Treaty (ECT) was first adopted, arbitration focused on protecting investors' rights by applying standards of “fair and equitable treatment of foreign investors” and “legitimate expectations of investors.” The issue of protecting the interests of states using the “right to regulate” standard is now becoming increasingly acute. This is happening in part because of the “green” agenda in the energy sector. It is precisely because of the limited opportunities to exercise the “right to regulate” that some EU members, such as France, the Netherlands, and Spain, have withdrawn from the ECT negotiations, as this is not in line with their national climate change objectives. It is therefore necessary to study the relevant analytical legal materials, as cases are also changing. The case involving the assets of three large fields could become a separate case if the right strategy is developed to achieve the state's objectives. At the same time, it is necessary to be prepared for possible arbitration proceedings.