1. Herbert Smith

2. Energy law in the Republic of Kazakhstan ::0
(1)
"C
c:
C"
Recent developments in the
energy market in the Republic of Kazakhstan
By Yuliya Daurova, LLM, partner of Linkage &Mind, Kazakhstan
Oil and gas, mining, electricity, transport and service fo r over thirty years. A number of projects have
communications and chemicals and pharmaceuticals recently been started under the afore-mentioned state
are key industrial sectors in Kazakhstan. These sectors programme. Th ese include:
were included in the State Programme for Accelerated
• Modernisation of the country's electricity network
Industrial-Innovative Development (2010-2014) (the
and construction of the second 500kV electricity line
"Programme") as high priority sectors for development.
from the North to the South of Kazakhstan which are
The Programme aims to diversify the economy and being undertaken by KEGOC;
modernise existing industries. In 2011 , Samruk-Kazyna • Construction of a regional power station in the Third
a national welfare fund) is undertaking 20 projects at a Energy block at Ekibastuz;
combined cost of US$22 billion which represents around
• Construction of Moinak Hydro-Electric Power w ith a
51% of the total funds available under the programme.
projected total cost of the US$340 million;
US$6.8 billion is to be invested into the energy sector.
• Construction of the second 500kV power line from North
n the electricity sector, power generation is designated to South with total projected costs of US$295 million;
as a vital industry. Thus, the Programme includes
• Construction of an interregional power line in Aktobe
~ e modernisation of existing power plants and the
region in Northern Kazakhstan with a projected total
'ltroduction of new ones.
cost of US$165 million;
Samruk-Kazyna has many subsidiary • Construction of a thermal power plant at Balkhash at
companies, including: a total cost of US$4.7 billion;
• Samruk-Energo which holds stakes in • An international project involving the construction
thermal and hydroelectric plants and of new power lines from Kemin to Almaty with total
distribution companies; investments amounting to US$140 million;
• Kazakhstan Electricity Grid Operating Company • Kazatomprom started building a solar panel plant
(KEGOC), the national electricity grid operator; at Astana in March 2011. The cost of the project is
KazMunaiGas, a national company; and around US$230 million;
• Kazatomprom, a nuclear company. • Asia Green Power, a joint venture between Italy and
Turkey consisting of an agreement to build two wind
~.,e global economic crisis has dealt a heavy blow to
farms in order to reduce power shortages in the south
=:::anomie growth in Kazakhstan. However, measures
of the country. The project is valued at US$1 billion;
·-at were adopted to counter the crisis have been largely
::~ccessful. These measures included an injection of • Construction of an integrated chemicals complex
_S$19 billion by way of economic stimulus from NFW in the Atyrau region. The operator of the project is
:::amruk-Kazyna and other measures taken by the Kazakhstan Petrochemical Industries Inc (KPI); and
.a ional Bank. Kazakhstan was one of the first countries • The opening of the Central Asia to China gas
·:: emerge from the global economic crisis and recorded pipeline, which runs through Kazakhstan, has been
~~d economic growth of 7% in 2010. a major development in recent years. It is hoped the
development of the new Caspian gas pipeline will have a
::: .Jrrently 41% of the country's thermal power plants
similar effect although its progress has been delayed due
~-d 68% of its hydroelectric power plants have been in
to ongoing negotiations with Russia and Turkmenistan.
- the European Energy Handbook 2012 217

3. :a In addition a number of deals have recently been Under the New Subsoil Law, rights to use the subsoil
CD concluded with the aim of enhancing national energy arise from:
"C security by increasing production capacities and
c improving the quality of services:
• a right from the State obtained upon conclusion of
C'" an agreement on exploration and/ or extraction of
-
-·
(')
• In 2011 , JSC Kazmunaigas (National
Company) , a state-owned company purchased
hydrocarbons (like oil and gas);
• transfer of rights to use the subsoil by the previous
0 Aktaunefteservis LLP; user. This can either be done explicitly or through the
......
• In 2011 , Kazatomprom (a national holdings company) disposal of shares in a legal entity which holds rights
"
D.)
N
D.)
~
•
and Chemieanlagenbau Chemnitz GmbH (a German
company) entered into a Memorandum of Co-operation;
In 2011 , Tethys Petroleum Limited announced the
•
to use the subsoil; and
transfer of rights by all-party agreement in the event
of a legal entity which holds rights to use the subsoil
signing of a joint venture agreement between two of being reorganised.
::T
Ul its subsidiaries, Tetismuanygas and Eurasia Gas LLP;
r+ Exploration contracts can be granted for a period of up
D.) • In 2009, Kazakhmys Pic purchased 10% of the share to six years. Thereafter they may be extended twice for
:::l capital of Balkhashskaya Thermal Power Plant; a period of up to two years each. After a commercial
• In 2009, NWF Samruk-Kazyna purchased 50% of the discovery is made, the subsoil user has the exclusive rig ht
share capital of the electric power plant GRES- 1 to negotiate an extraction contract. Extraction contracts
Ekibastuz; and can be granted for up to 25 years or up to 45 years in
• In 2009, Mangistau Investments B.V. a case where the recoverable reserves consist of more
purchased 100% of the share capital of JSC than 100 billion cubic meters of natural gas.
Mangistaumunaigas. Almost all types of subsoil use activity are carried out
Given the old age of many of the power plants in for a limited period of time and the above contracts are
Kazakhstan , deterioration of plant equipment is a real subject to a fee.
issue that creates electricity shortages. This can even In accordance with the New Subsoil Law, subsoil model
threaten the stable economic development of the contracts contain local content, including a requirement
country. Therefore, the power industry has to solve to hire Kazakhstani personnel and to use goods, services
this problem . The market must operate in such a way and works of Kazakhstani origin . Those subscribing
as to ensure that the power supply companies (who, to model contracts for subsoil use also take on duties
effectively, are investors) are guaranteed a return on which, amongst others, include social responsibility,
the cost of commissioning new equipment and /or the commencement and rate of subsoil operations, amount
cost of maintaining existing power stations. Electricity of subscription bonus, size of investment, compliance
companies w ill sell power on the power market with health, safety and environment requirements under
to KEGOC, wh ile electricity will be freely traded at domestic legislation etc.
competitive prices.
The State has pre emptive and priority rights in relation
The main law regulating the electric energy industry is to all natural gas deposits. Where a new party is seeking
the law On Electricity dated 9 July 2004. Under the terms to enter the market, either by way of purchasing shares
of Article 9 of the Law, engineering and construction in a company that already has subsoil rights or by way
of standby (shunting) power lines and substations may of a transfer of rights, the State has a priority right to
only be performed with preliminary notification and acquire the relevant rights (or any part thereof) through
coordination with: a number of different entities unless the acquiring entity
• The Committee for State supervision and control has the relevant state approval. Approval to acquire
over energy; rights must be sought from the Ministry of Oil and Gas.
This procedure takes around 70 days.
• The Agency of the Republic of Kazakhstan for
Regulation of Natural Monopolies (AR EM); and AREM will subject new market entrants to further
• KEGOC (the system operator). requirements and approval processes if the transition
would be such as to create either a monopoly or give a
Projecting and construction of power stations, power strategic advantage to the new entity. AREM's consent
lines and substations as well as their operation may is requ ired to conclude transactions that would have
be performed on the basis of concession agreements. such an effect. AREM's approval is also required for all
According to the Law on Licensing dated 11 January transactions where the total book value of assets of the
2007, production, transmission and distribution of target or the purchaser exceeds 2,000,000 MCI' for the
electricity and operation of power stations, power grids last financial year. Approval from AREM is also required
and sub-stations are subject to licensing. if one of the persons participating in the transaction is a
The main law regulating relations among oil and gas company holding a dominant or monopolistic position
market participants is the Law of the Republic of in the relevant product market. The conclusion of such
Kazakhstan No 291-IV On Subsoil and Subsoil Use transactions without prior state approval can lead to
dated 24 June 2010 ("the New Subsoil Law"). nullity of the contract ab initio.
218 EER- the European Energy Handbook 2012

4. Currently, the Ministry of Oil and Gas is working on the
development of a Law On Gas and Gas supply. The draft
law envisages the establishment of a national operator
for the gas industry which will have the exclusive right
to purchase gas from the gas mining companies of
Kazakhstan. There is a pressing need for the new law
in order to ensure efficient modernisation of the current
gas infrastructure in the country. At present the country's
gas pipelines, which used to be an integral part of the
USSR single-union system, mainly serve the transit flow
of natural gas from Central Asia to the European part of
Russia, Ukraine and the Transcaucasian states. There is
no connection between the major gas pipelines meaning
that some regions of the country are gas islands. This
especially affects the western, southern and northern
regions of the country.
footnote
1. MCI is the minimum calculation index which is set by the Law on State budget annually. In 2011 it is 1,512 KZT.
EER- the European Energy Handbook 2012 219

5. Overview of the legal and regulatory
framework in the Republic of Kazakhstan
The Republic of Kazakhstan's key industrial sectors Monopolies ("AREM"). Projection and construction of
are oil and gas, transport and communications, power stations, power lines and substations, as well as
electricity, mining and chemicals and pharmaceuticals. operation of the same, may be performed on the basis of
Kazakhstan's State Programme for Accelerated agreed concessions.
Industrial-Innovative Development 2010 - 2014 (the
Interregional and interstate electric power lines,
"Programme") , the aim of which is to diversify the
substations and distributing installations with a voltage
state's economy and modernise its existing industries,
of 220kV or more which are built on the basis of agreed
emphasises these sectors as high priorities for
concessions are, for the period of their operation, for the
development. Samruk-Kazyna, a major state-controlled
temporary possession of and use by the concessionaire.
joint stock company with diversified interests in
The centra!ised operative-dispatcher control of such
Kazakhstan and abroad, carried out 20 projects in 2011
concessions, as well as their operation , are performed
alone under the Programme, at a combined cost of
by the system operator on the basis of agreements
US$22 billion. US$6.8 billion out of US$22 billion have
made. Upon the end of the concession term, the
been earmarked for investment into the energy sector.
concessions are transferred to the national power grid.
Law No 214- 111 On Licensing, dated 11 January 2007 2
A. Electricity (the "Licensing Law"), stipulates that the production,
transmission and distribution of electric and thermal
A.1 Industry structure power and the operation of power stations, electricity
grids and sub-stations shall be subject to licensing by
Within the electrical sector emphasis has been placed the relevant licensor, in this instance the Committee.
on power generation, and the Programme provides
for the modernisation of existing power plants as well Specific activities subject to Licensing under the
as the introduction of new ones. Samruk-Kazyna Licensing Law include (but are not limited to):
holds extensive domestic assets in the energy sector, • the production of electricity from sources with a
including Samruk-Energo (which holds stakes in thermal voltage of 35kV or more;
and hydropower plants and distribution companies),
• the transmission and distribution of electricity
Kazakhstan Electricity Grid Operating Company
to consumers;
("KEGOC") (which operates the national power grid),
KazMunaiGas (a national gas company) ("KMG") and • the operati on of power stations, electrical
Kazatomprom (a national nuclear company). The substations and grids of all types used at hazardous
electricity industry was privatised after Kazakhstan production facilities, except those used for municipal
gained its independence in 1991, and in addition to these and domestic purposes and for objects of power
major state-backed players there are numerous private used in a single process;
power production and distribution companies . • the production of thermal energy for heating
settlements, industrial buildings and facilities, except for
According to KEGOC 's annual report, electricity in
the production of heat by the same for their own use;
Kazakhstan is produced by 66 power plants. Thermal
plants account for 85.5% of the country's power • the projection, manufacture, assembly or repair of
generation, with the remaining power produced by chemical, drilling, petroleum and gas producing,
hydroelectric (8.8%) and gas turbine stations (5.7%). geological prospecting, mining, metallurgical,
power, or explosion-protected electric technical
The main law regulating the sector is law No 588-11 equipment or lifting facilities, as well as boilers with a
On Electricity, dated 9 July 2004 1 (the "Electricity working pressure of over 0.7kg/ cm2 and heat carrier
Law"), which regulates relations between electricity temperature over 115°C and vessels and pipelines
production companies and the market. Since June operating under a pressure of over 0.7kg/cm2, except
2010 the electrical sector's main regulator has been the for the projection, manufacture, assembly or repair of
Committee of State Supervision and Control over Energy, equipment used in common technological processes;
within the Ministry of Industry and New Technologies
• the purchase of electricity for resale purposes; and
("the Committee").
• project survey activities and electricity supply
Under Article 9 of the Electricity Law, projection and schemes of inhabited localities including the
construction of standby transmission lines (shunting) placement of items for production and the
and substations may be performed only with preliminary transportation of electricity in the building system , as
notification to and coordination with the Committee, well as electricity supply to industrial complexes to
the system operator (KEGOC) and the Agency of the be situated in territories between inhabited localities.
Republic of Kazakhstan for the Regulation of Natural
220 EER- the European Energy Handbook 2012

6. The relevant licence and, if necessary, a supplement to wholesal e and retail level, whereas the thermal energy
that licence will be issued by the licensor (in this case market is a single-level retail market.
the Committee) no later than 30 business days (1 0 in
On a wholesale level, the electricity market consists of:
the case of small business entities) of an application
being made. • a decentralised market functioning on the basis
of sale-purchase agreements executed by
A.2 Electricity trading market participants at prices and terms of supply
determined by agreement amongst the participants;
KEGOC guarantees market participants access
conditions to a power supply, and consumers have a
• a real -time balancing market aimed at regulating
any hourly imbalances arising throughout the day
right to choose their electricity supplier. KEGOC, as the
between the actual and contractual amounts of
system operator, ensures reliable operation of the united
production and the consumption of electricity in the
power system of the state and provides system services
national power grid; and
to enable power transmission and dispatch services
in balancing production and consumption. Tariffs for • a centralised market comprising the organised
KEGOC as the monopoly holder are regulated by AREM, trading floors for the sale of electricity on short-term
which sets the uniform tariff (described below) for (spot-trade), medium-term (weeks or months) and
electricity transmission services through KEGOC for all long-term (quarters or years) bases.
types of consumers. JSC Korem is the operator of the centralised
Tariffing electricity market, and is responsible for the
organisation of spot-trading and the regulation of
Power generation companies may apply an electricity centralised trading for the medium- and long-term.
tariff not exceeding the maximum stipulated specifically It is also charged with providing equal terms of
for them . This maximum can be (1 ) a unified, (2) a access for wholesale market participants to the
calculated or (3) an individual tariff. Exemptions from this centralised trading market and providing them with
ru le include the realisation of a spot bid (for no more than information on indicative electricity prices obtained
10% of the generated electricity) in the balancing market from such trading .
and the sale of electricity for export.
Conditions for access to the centralised
Companies are divided into 13 groups for the purposes market include:
of the unified tariff. A maximum tariff shall be approved • the filing of a statement of intent to participate
for a group of companies for a period of not less than in trade;
7 years but may be adjusted annually, if the need for
investment incentivisation arises or if the industry
• the provision of a copy of a contract between
the company and a designated bank engaged in
requires it. Under the Government's Order No 392,
service trades ;
dated 25 March 2009, the tariff limits vary from 3.3 to
7.7KZT/KWh for 2011. KEGOC's tariff for 2010-2011 is • the registration of the participant on the market
0.94KZT/KWh. operator's system, including the completion of
an application for registration and the provision
The calculated tariff is that determined in a feasibility of registration bidder cards in duplicate (the form
study for a given investment project, and the individual of these documents is determined by the market
tariff is the calculated tariff as adjusted during operator); and
implementation of an investment project, which is to be
• compliance with trading rules.
agreed with AREM . Power generation companies have
to conclude model investment contracts 3 under rticle Under Rule No 240 On Centralised Trading of
12.3 of the Electricity Law with authorised state bodies in Electricity, dated 8 October 2001, on the wholesale
case they are involved in the creation of new assets, or balancing "day ahead" market a participant who
the expansion, renovation, maintenance, reconstruction has the right to purchase and / or sell electricity must
or modernisation of existing assets. notify the system operator before 11am Almaty time
on the day before the relevant day. This rule does not
The final consumers' tariff charged by suppliers depends apply on weekends and holidays, and requests for
on the relevant consumer's type of use (ie whether trading on weekends or holidays must be filed before
individual or commercial), the volume of use, and the 11am on the working day before the first weekend or
time and usage of electrical appliances. holiday date. Such requests can be submitted up to
Power markets 7 days in advance.
Power supply in Kazakhstan is carried out by way Power generating companies are prohibited from
of the electricity and thermal energy markets, in selling electricity to natural or legal persons who are
w hich electricity and thermal energy are considered not participants in either the wholesale or retail market,
commodities. The markets operate as a series of with the exception of sales for export purposes. Utility
interconnected and co-existing markets : the balancing companies are prohibited from selling electricity to other
market, the auxiliary services market and the electricity utility companies otherwise than on the balancing market.
market. The electricity market operates on both a
C:ER- the European Energy Handbook 2012 221

7. A.3 Third party access regime covers, inter alia , principles of pricing and tariffing policy
within the Single Economic Space of the Customs Union.
There are no special restrictions in respect of third party
access to the national power grid, but all third parties
must ensure compliance with the rufes on licensing
and permissions. This will include the conclusion of a
B. Gas
contract with KEGOC as well as the agreement of a
tariff with AREM. B.1 Industry structure
The oil and gas (O&G) sector remains the engine of
A.4 Market entry (Supply and generation) the Kazakh economy. The country is one of the top
20 oil producers in the world and production continues
Full foreign participation (ie investments amounting
to increase. One of the major developments in the
to 100% of the project value) is permitted in the '
international O&G industry in recent years has been the
development of power projects in Kazakhstan.
project of a gas pipeline between Central Asia and China.
As noted in paragraph A.1, projection and construction
According to Kazakhstan's Ministry of Oil and Gas
of standby power transmission lines and substations
(the "Ministry"), natural gas production in the Republic
may only be performed with preliminary notification
amounted to 37.4 billion cubic meters in 2010. The
to and co-ordination with the Committee. Projection
Government plans by 2015 to export circa 30 billion
and construction of power stations, power lines and
cubic meters of natural gas annually to Russia and China
substations and their operation may be performed on
through gas pipelines. Under the terms of an agreement
the basis of concession agreements. All such activities
on the counter-delivery of gas between Gazprom (a
may be carried out only by licensed contractors or
Russian state-controlled gas company), Uzbekneftegaz
subcontractors.
(an Uzbek state-controlled gas company) and KMG
Concession agreements are subject to a calculated signed on 27 December 2006, all imported gas is
tariff which is to be agreed in the feasibility study for exchanged at Karachaganak, one of three major Kazakh
a given investment project. This calculated tariff may gas condensate fields, which in turn exports gas at the
later be adjusted to become an individual tariff during same price and in equal amounts.
the implementation phase of a given project, as agreed
The export of gas is subject to a rent tax, the rate of
withAREM.
which ranges from 0% to 32% depending on market
price, not including transportation costs or other
A.S Public service obligations deductions. In addition, export transactions must
and smart metering be registered with or notified to the National Bank
Power generating companies and network operators are of Kazakhstan.
subject to stringent controls by AREM, and must ensure The national supervisory and regulatory authority of the
that contracts concluded with KEGOC define the daily gas sector is the Ministry, which was established in 2010
minimum amount of electricity to be generated, as well as and is involved in the formation of public policy and in
the tariff applicable. coordinating management processes in the O&G sector.
Smart metering does not exist in Kazakhstan. Power It also has supervisory remit over the petrochemical
providers use home meters from which data is read and industries and the transportation of raw hydrocarbons.
recorded by an employee of the supplier. The Committee of State Inspection within the Ministry
monitors the compliance of mining companies and the
execution by the same of subsoil contracts, including with
A.6 Cross-border interconnectors
regard to relevant local content requirements.
The national power grid is part of the unified power
Key market players include KMG, KazMunaiGas
system of Commonwealth of Independent States ("CIS")
Exploration Production JSC (KMG EP), KazTransGas
countries, which involves the parallel operation of 11 CIS
JSC (KTG) and private companies such as
power systems as well as the power systems of the
Karachaganak Venture.
Baltic countries. KEGOC and the other national operators
are continually working towards the development of a KMG is the owner of 44 O&G onshore fields in the
common electricity market in the Eurasian region. Mangistau and Atyrau regions in Western Kazakhstan,
and provides 65% of oil transportation, all gas
KEGOC has stated that special emphasis is given to
transportation and 50% of tanker transportation carried
activities and proposals mooted within the framework
out domestically within Kazakhstan. Transportation of
of international organisations, including the Eurasian
gas via pipeline is undertaken by KazTransGas JSC, with
Economic Community (EurAsEC), Shanghai Cooperation
tanker transportation carried out by KazMorTransFiot JSC.
Organization (SCO), Single Economic Area (SEA) and
other communities and unions established for the purpose KMG EP was created in March 2004 following the merger
of mutually beneficial cooperation in the power sector. of JSC Uzenmunaigas (UMG) and JSC Embamunaigas
(EMG), and is a subsidiary of KMG. The company's
On 19 November 2010 Kazakhstan, Russia and Belarus
shares are listed on the Kazakhstan Stock Exchange
entered into a framework agreement on access to
and its Global Depositary Receipts (GDRs) are listed
monopoly services in the energy sector. The framework
222 EER- the European Energy Handbook 2012

8. on the London Stock Exchange. In September 2006, • a transfer of subsoil use rights by universal
the company raised approximately US$2 billion in its succession or in the event of the reorganisation of a
initial public offering, and is the second largest Kazakh legal entity who is a subsoil user.
oil-producer.
An exploration contract may be granted for up to six
KTG, also a KMG subsidiary, provides gas production, years and subsequently may be extended twice for a
transportation, marketing and trading services, including period of up to two years each time. After a commercial
the sale of gas and gas products. It operates the discovery is made, the subsoil user has the exclusive
country's assets for the generation and distribution right to negotiate an extraction contract, which may in
of heat and power energy. Currently, KTG owns the turn be granted for up to 25 years. For deposits with
main gas pipeline system, the regional gas distribution recoverable reserves of more than 100 billion cubic
assets in six of the country's regions and shares in meters of natural gas, an extraction contract may be
certain domestic power companies. At the same time, granted for a period of up to 45 years .
the company is developing its gas transmission base
·Almost all types of subsoil activities are carried out on
and expanding its gas sales market share abroad
the basis of temporary use in return for a fee.
by undertaking various projects !nternationally. KTG
subsidiary KazTransGas LNG LLP oversees the It is a requirement of the Subsoil Law that subsoil model
treatment and processing of natural gas. contracts contain certain obligations. This includes
obligations and restrictions as to, inter alia: the hiring of
The Kazakh gas market is liberal and privatised. The
Kazakh personnel; the use of Kazakh goods, services
largest private enterprise is the Karachaganak Venture
and works; implementation of social responsibility
(KPO BV consortium), which comprises BG Group
programmes; the commencement and rate of subsoil
(32.5%), ENI (32.5%), Chevron (20%) and Lukoil (15%) .
operations; the amount of any subscription bonus; the
Currently, ENI transmits up to 10% of its shares to KMG ·
size of investment; and compliance with health, safety
through various mechanisms. In 1997, partners in the
and environmental requirements of domestic legislation.
venture signed a Final Production Sharing Agreement
(FPSA) which stipulated that the partnership would Notably, the Subsoil Law introduced more stringent
operate Karachaganak until 2038. legal requirements than had previously been in place
in respect of prohibitions on gas flaring, which proved
The Ministry is currently working on a draft law On Gas
controversial with existing subsoil users.
and Gas Supply (the "draft Gas Law") , which contains
provisions for the establishment of a state-owned Activities subject to licensing by the Ministry include the
national operator in the gas sector which w ill have design, engineering, exploration, extraction, transmission
the exclusive right to purchase gas from national gas and storage of gas. In order to automate the licensing
extraction companies. process and establish an effective mechanism for
information exchange between state authorities and the
The main law currently in place regulating relations
business community, the Committee of State Inspection
amongst gas market participants is the law No 291-IV
implemented the national "e-licensing" database4 . The
On Subsoil and Subsoil Use, dated 24 June 2010 (the
Licensing Law requires that licences shall be issued within
"Subsoil Law"). It defines "oil" so as to include crude
30 working days of an application being made. The main
oil, condensate, natural gas and associated gas and
requirements are legal incorporation and compliance with
hydrocarbons that have been obtained after purification
certain qualifications (for example, availability of technical
of either crude oil, natural gas or the processing of oil
managers and specialists, certificates for construction
shale or tar sands.
or extraction works, proof of ownership or lease of the
Under the Subsoil Law, subsoil use rights arise from : industrial building, etc). The operation of a distribution
network and the storage of gas also require a licence from
• the direct provision by the State of a sub~oil use right
the Ministry, and many activities subsequently require
upon conclusion of an exploration;
appropriate environmental, sanitary, and other permits.
• extraction;
Given that the gas industry is dominated by state-backed
• joint exploration and extraction;
companies, the transportation of natural gas must
• agreements or a production sharing agreement comply with state-approved model agreements.
(note: since 2009 PSAs are no longer recognised
as a form of subsurface contract under the Gas export and import and other transactions involving
Subsurface Law); international business deals are subject to transfer
pricing legislation . The law On Transfer Pricing, dated
• construction and/or maintenance of underground
5 July 2008, stipulated that transfer prices are those
facilities not related to exploration and/ or production
which are agreed between related parties and differ
as the result of State tenders (note: there are some
from fair market prices. Transfer prices take into account
exceptions to this rule in which contracts can be
the price range in arms-length transactions, ie, prices
concluded in course of direct negotiations);
determined between independent and equal parties. Tax
• a transfer of rights of use by the previous and customs authorities exercise control by monitoring
rights-holder disposing of shares in a legal entity who transactions, carrying out inspections and various other
is a subsoil user to another entity; and/or procedures stipulated by national laws.
EER -the European Energy Handbook 2012 223

9. If it is established in the course of an inspection that the Under the Subsoil Law, the State has pre-emptive and
transaction price deviates from the market price (taking priority rights over gas deposits. In case of entry to the
into account any relevant price range), the competent market though the purchase of shares in a subsoil use
authorities will accordingly make adjustments to the company or a gas deposit itself (ie a transfer of subsoil
taxable and tax-related items. rights), the State shall have a priority right to acquire
subsoil use rights that are being alienated (or any part
8.2 Gas trading thereof). This right may be exercised through a national
management holding company, a State-owned company
The gas industry in Kazakhstan is, at the present time, or any other authorised state body. Thus, a person
still in the development stage. There is therefore no intending to acquire rights or objects associated with gas
national operator or special trade platform, balancing fields must ensure that he has received appropriate state
market or specific legislation on gas trading, and parties approval from the Ministry.
may conclude financial and/ or physical contracts on the
sale and purchase of gas on the commodity market. The Until1999 the principal prerequisite to obtaining the
Universal Commodity Exchange Astana, for example, is right to enter into a subsoil agreement was a preliminary
popular for trading liquefied gas (LNG). licence. However this procedure has since been
abolished and, as noted, currently the legal basis for
Only brokers and dealers accredited on a given conducting subsoil activities is a contract between the
commodity exchange may trade on it. The law On Ministry and the subsoil user. Despite this change in
Commodity Exchanges, dated 4 May 2009, requires that requirements, licences issued before the amendment are
a stock broker must be a legal person carrying out its valid until their expiry date (as Kazakhstani law does not
activities on the commodity exchange under a licence have retrospective effect).
issued by the competent authority. The broker must
exist in the legal form of a joint stock company or limited If the market entrance is conducted by way of a merger
partnership, and conclude deals on behalf and at the or acquisition that would lead to the creation of a natural
expense of the customer. monopoly or another type of economic concentration
under Article 50.2 of the Competition LaW', the
transaction will be subject to additional approvals by
8.3 Third party access regime to
AREM. The consent of AREM to conclude the aforesaid
gas transportation networks
transactions is required if:
There is an open regime with respect to third party
• the total book value of the assets of the reorganized
access to regulated services, goods and work in the
companies (group of persons), the acquirer (group of
gas sector and in respect of condensate gas storage
persons), or the target companies shares of which are
and transportation through mains and/or distribution
being acquired, or if the total volume of sales for the last
pipelines. Tariffs for gas pipelines are established by
financial year exceeds 2,000,000 Monthly Calculated
the pipeline operator but must be approved by AREM.
Indices or MCI 6 at the date of application; or
Pipelines built and used by a private company exclusively
for its own use are exempt from regulation by AREM , as is • one of the persons participating in the transaction is a
the CPC Pipeline (a cross-border pipeline) under special company holding a dominant or monopolistic position
agreements between Russia and Kazakhstan. in the relevant goods market.
The conclusion of transactions without prior State consents
KTG regulates the sale and purchase of natural gas
can lead to annulment of the relevant contract ab initio.
and approves annual tariffs. Other pipeline operators
are obliged to follow a model agreement and the
corresponding rules on access. 8.6 Public service obligations
and smart metering
8.4 LNG and gas storage Gas utilities are natural monopolies and are therefore
supervised by AREM , which also sets the tariffs for gas
Until the draft Gas Law is fully drafted and in force, LNG
supply, transmission and storage.
facilities and gas storage fall under the common legal and
licensing regime of the Subsoil Law. Smart metering is not developed in Kazakhstan ; gas
suppliers use home gas meters.
Gas storage contracts are based on model agreements
issued by the Government.
8.7 Cross-borper interconnectors
8.5 Market entry Gas pipelines in Kazakhstan , which functioned as an
integral part of the USSR single-union system, mainly
As- mentioned in paragraph B.1 , the requirement for
serve the transit flows of natural gas from Central Asia
entry into the gas market is the conclusion of a subsoil
to Ukraine, European Russia and the trans-Caucasian
use contract with the Ministry of Oil and Gas, resulting
states. A dearth of connections between the various
either from a successful tender or from the transfer of
main gas pipelines does not allow for the effective
subsoil use rights or objects from an existing subsoil
redistribution of gas between the various regions of the
user. New entrants to the local energy market are not
country. This is particularly the case for the Western ,
required to have a presence or a local subsidiary in order
Southern and Northern regions of the country, and is a
to participate.
224 EER - the European Energy Handbook 2012

10. major impetus for the draft Gas Law, which provides for As the main source of consumer energy in Kazakhstan
a national operator that w ill also supervise the further is thermal coal-based power plants, the Government is
development of the internal gas pipeline network. currently working to develop and implement cleaner coal
technologies. In 2006 the EU and Kazakhstan signed a
On 15 July 2010, the P.rotocol on Amendments to the
Memorandum of Understanding on Collaboration in the
Agreement between the Governments of Kazakhstan
Sphere of Energy relating to clean coal technologies and
and China on Co-operation in the Construction and
ecologically safe coal storage.
Operation of Gas Pipeline Kazakhstan- China (dated
18 August 2007) was signed relating to the second In June 2011 the first of a series of seminars relating to
phase of the construction of a gas pipeline flowing from carbon capture and storage, clean coal technologies,
Kazakhstan to China (the Beineu- Shymkent pipeline). and the ecology, health, safety and economy of clean
technologies were held in Belgium and Germany. A pilot
On 9 December 2010, Kazakhstan, Russia and Belarus
project called ACCESS (Assistance in ecologically Clean
signed an agreement on the rules of access to the
Coal and Environmentally Sound Storage), financed
services of natural monopolies in the field of gas
by the EU, has begun in Kazakhstan. The Ministry
transportation, including principles of pricing and tariff
of Industry and New Technologies works together
policy within Single Economic Space.
with local organisations to try to raise the profile of
Kazakhstan in the clean coal technology, carbon capture
and storage spheres.
c. Climate change
and sustainability C.4 Renewable energy
The law On Support of the Use of Renewable Energy
C.2 Emission trading Sources, dated 4 July 2009 (the "Renewables Law"),
The basic rules relating to emission trading are set out in aims to define the main targets for and guidelines for the
the Ecological Code of Kazakhstan (the "Code") , dated use of renewable energy sources ("RES") in Kazakhstan,
9 January 2007, which aims to reduce emissions into and thereby to encourage investment into the renewable
the environment. Article 105 of the Code states that energy sector. The Renewables Law provides benefits for
the Government has the authority to introduce market companies dealing with RES, including companies which:
mechanisms establishing limits and quotas for emissions,
• utilise RES for construction or exploitation in the
and to approve rules and obligations aimed at reducing
course of business;
emissions. In the case of establishing quotas, companies
shall be entitled to an annual quota of emissions. • produce electric or thermal energy using RES; or
• provide preferential investments to individuals and
The Code provides for the possibility of emissions
legal entities that utilise RES.
trading on an international level if relevant international
treaties are ratified by Kazakhstan in the future. In such Regional network companies are required to purchase
a scenario, companies would be able to enter into electricity produced using RES in order to compensate
appropriate agreements with foreign individuals and legal for the standard transmission losses in their networks,
entities in order to sell or to buy emissions. up to a maximum of 50% of the size of such losses.
KEGOC has committed to purchase energy from RES
Kazakhstan ratified the Kyoto Protocol to the United
companies that are fully connected to its grid.
Nations Framework Convention on Climate Change
on 26 March 2009. As such, the Government has Qualified RES generation companies can independently
committed to attempting to implement emissions trading set the selling price for their electricity, provided such a
mechanisms in relation to greenhouse gases, and to price does not exceed a rate specified in the feasibility
provide incentives to reduce emissions within Kazakhstan. study of the relevant RES construction project. Such
companies are also exempt from payment to power
Kazakhstan's domestic legislation obliges commercial
transmission organisations for the transfer of electricity
premises to control the amount of carbon dioxide
or thermal energy.
("C0 2 ") emitted, and caps C02 emissions for certain
activities in the energy, metallurgy, mining, agriculture At present, less than I% of energy consumption in
and manufacturing sectors. Regulated companies must Kazakhstan stems from renewable sources, but it is
obtain allowances for greenhouse gas emissions, which expected that RES consumption w ill surpass 1% by 2015
are allocated by the Ministry of Environmental Protection and will reach 5% by 2024. The development of RES is
m major emitters, defined as those whose overall annual also included as a goal in the Programme.
emissions exceed 20,000 tons of C0 2 .
The following RES sources are currently used in
Kazakhstan: solar installations; wind energy installations;
C.3 Carbon capture and storage hydroelectric plants; geothermal energy installations;
and installations utilising biomass, biogas and other
There is currently no specific legislation on carbon
capture and storage in Kazakhstan. However, fuel of organic wastes for the generation of electric and
thermal energy.
commitment to the principle of the reduction of
emissions is set out in Article 310 of the Ecological Code.
=-=R- the European Energy Handbook 2012 225

11. Kazakhstan has five operational hydroelectric plants, on the amount of biofuel that may be made by two or
which sit mostly on the lrtysh River. Other renewables more producers at any given biofuel plant.
are largely undeveloped . The Government and KazAgro (a national holdings
There is currently no "green" or "white" certificate trading company) regulate and supervise the industry. According
system in place in Kazakhstan . However, initial steps to the Government Decree No 204, dated 1 March 2011,
were taken when the regulatory framework for such a the planned annual limit for the production of biofuel for
system was developed in 2007 by the United Nations 2011 is 2.8 billion litres, with a potential expansion to
Development Programme (UNDP) and the Government, 3.2 billion litres by 2014.
in co-operation with the Renewable Energy and Energy In 2010 there was only one biofuel plant, Biohim, in
Efficiency Partnership and the Global Opportunities Kazakhstan, but the potential market is large due to
Fund. Under this framework, electricity producers would the country's developed grain production capabilities.
be obliged to possess renewable energy certificates Biohim produces bioethanol and biogasoline from feeder
to cover a certain share of their annual output. These
grain and its residues. Furthermore, there are some
certificates would be issued and initially sold by micro and small private biofuel producers, many of which
producers of 'green energy'. However, since the market are members of the Kazakhstan Biofuel Association.
for the trade of these certificates does not yet exist in
Kazakhstan, the certificates would have to be purchased
C.6 Energy efficiency
by green energy providers from the Agency for
Renewable Energy (which is yet to be created) for resale The Government has adopted several measures
to ele ctricity distributors.
aimed at improving energy efficiency, including certain
provisions of the Programme and the law On Energy
C.5 Biofuel Saving, dated 25 December 1997. These and other rules
and proposals focus not only on efficiency per se, but
On 15 November 2010, the President of Kazakhstan
also on the economic and organisational requirements
signed the law On State Regulation of Production and
Turnover of Biofuel (the "Biofuel Law"). The law is aimed that underpin efficient power generation and fuel usage.
The overriding aim of these various measures is to
at protecting the food security of the state, reducing
achieve greater environmental protection.
emissions of pollutants into the atmosphere, and
supporting research into and the application of scientific The Programme in particular includes several projects
technologies in the production and turnover of biofuel. aimed at the modernisation of the existing power
The law also introduced rules allowing the government infrastructure parallel to the development of new
of Kazakhstan to impose limits on volumes of biofuel technologies, in particular renewables and biofuel.
production facilities.
According to the Biofuel Law, biofuel production may be
carried out if:
D. Nuclear energy
The law On Use of Atomic Energy, dated 14 April
• the biofuel producers are in possession of a
1997, stipulates that activities associated with the
production passport and metering devices that
use of atomic energy must be carried out under strict
provide automatic transfer of information on the
supervision by the state. The basic principles of state
volume of biofuel to the authorised body; and
policy in the nuclear sector are designed to ensure
• production takes place in a factory for the production safety, and include: the prohibition of radioactive waste
of biofuel that belongs to the manufacturer on the disposal by other states on Kazakhstani territory; the
basis of a property right. provision of social protection for nuclear facilities;
Accompanying invoices must be attached for the and protections for those living and working in areas
realisation, export and transportation of biofuel. exposed to radioactivity. The law also aims to achieve
Realisation may be carried out by persons engaged in transparency in relation to the discussion of public policy
biofuel production and/ or those who are licensed in the in the nuclear energy field.
compounding of petroleum products. Kazakhstan has been a member of the International
The storage of biofuel must be in premises belonging Atomic Energy Agency (IAEA) since 1993.
to biofuel producers and producers of oil containing The major state regulator of the sector is the Atomic
biofuel on the basis of a right of ownership or other Energy Committee ("AEC") of the Ministry of Industry
proprietary right. and New Technologies. The AEC is the successor to
It is prohibited to use raw food materials in amounts the Agency on Atomic Energy, and is responsible for,
exceeding quotas set by the Government. This inter alia, nuclear safety issues and the supervision of
prohibition includes the use of grade 1 and 2 grain or the nuclear sector. The AEC has control over all goods
genetically modified materials during the production of exported and imported , as w ell as the provision of all
biofuel, and manufacturers must not produce alcohol or services, in the atomic energy field. This includes the
dispose of non-denaturised ethanol , except for in the use transfer, sale or procurement of nuclear energy for
of biofuel production. Additionally, there are restrictions commercial purposes or the transfer of the same for
226 EER - the European Energy Handbook 2012

12. non-commercial purpose. The AEC issues licences and
transport permits for nuclear export- and import-related
products under the terms of the law On Export Control,
dated 21 July 2007. Nuclear materials, technologies,
equipment and stations are classed as nuclear export
products, as are specified non-nuclear materials,
equipment, dual use materials and technologies,
radiation sources and isotope products.
Licences for nuclear import and export are granted only
to those legal entities possessing the correct licences as
issued by the AEC. The granting of export licences and
transit permits occurs only on the basis of a successful
application completed in the prescribed form and after a
comprehensive assessment of proposed export routes
and end-user reliability. Certain categories of nuclear
export require the assurance of an importing country
(usually one not possessing nuclear weapons) that the
obtained products are intended for peaceful use.
The AEC issues other types of licence based on The
Licensing Law and Governmental Decrees No 1894
and 270, dated 29 December 1995 and 19 March 2008,
respectively. A licence in this context is a document
confirming that a legal entity is able to provide the
safe use of the radiation sources, nuclear and other
radioactive materials.
The relevant national operator is National Holding
Kazatomprom ("NHK"), a subsidiary of NWF
Samruk-Kazyna. NHK regulates the import and export
of uranium, rare metals, nuclear fuel for power plants,
special equipment and dual-purpose materials.
Kazakhstan currently has no nuclear power-generation
capacity as the Aktau nuclear reactor, the country's
only nuclear power plant, was shut down in June 1999.
However, there are currently plans to build a new
1,500MW nuclear plant in near Lake Balkash in the
South East of Kazakhstan.
footnotes
1. The Law of the Republic of Kazakhstan On The Electric Power dated 9 July 2004, No 588-11.
2. The Law of the Republic of Kazakhstan On Licensing dated 11 January 2007, No 214-111.
3. The Decree of the Government of the Republic of Kazakhstan On Approval of Model Agreements dated
10 March 2009, No 276.
4. http://elicense.kz
5. The Law of the Republic of Kazakhstan On Competition dated 25 December 2008, No 112-IV.
6. MCI is the minimum calculation index which is set by the Law on State budget annually. In 2011 it is 1,512 KZT.
:::ER - the European Energy Handbook 2012 227

13. Herbert Smith
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