Introduction
Subsoil Use Legislation
Oil and Gas
The Electricity Sector
Conclusion
Introduction
Kyrgyzstan's natural resources industry is the most important sector of its economy and its largest source of revenue. Gold mining has attracted the greatest foreign interest, since Kyrgyzstan is the third-largest gold producer in the former Soviet Union, with gold output exceeding 21 tonnes in 1998. Several hundred gold deposits have been discovered throughout the country, the most important of which is Cameco's Kumtor mine, which contains approximately 530 tonnes of gold. Other major proven gold deposits have also been found at Jerooi, Taldybulak, Solton-Sary and Makmal. However, gold mining is not the nation's only sector with foreign investment potential. Significant reserves of coal, aluminum, copper, wolfram, uranium, mercury, stibium, tin, molybdenum, marble, granite and salt are also ready for exploitation. Finally, antimony and related products are produced at the Kadamjai Metals Combine, and mercury is distilled at the Hidarkan plant near the nation's second city, Osh. There are also un-exploited deposits of marble, limestone and basalt.
The country also has oil and gas resources, although not in the same vast quantities as are found in neighbouring countries. These deposits are concentrated in the south of the country, and include five oil deposits, two oil and gas deposits, and one oil and gas condensate deposit.
Since its independence from the Soviet Union, the nation has taken significant steps toward integrating its economy with the rest of the world. On the trade side, in 1998 Kyrgyzstan became a member of the World Trade Organization (WTO). WTO membership is expected to increase Kyrgyzstan's exports to the 132 member states and improve the efficiency of Kyrgyz firms. These steps are also expected to be boosted by the US Congress's recent decision to remove Kyrgyzstan from those countries that remain subject to the Jackson-Vanik Amendment (which conditions most-favoured-nation status on compliance with international human rights norms). Further, Kyrgyzstan is also one of the few Commonwealth of Independent States countries which has already passed legislation permitting the private ownership of land. The government also professes a keen interest in attracting investment in the hydropower sector, agri-business, high technology, infrastructure projects and tourism.
Subsoil Use Legislation
Subsoil use rights
The legislative acts that regulate the subsoil use industry and exploration or exploitation of natural resources in Kyrgyzstan are primarily comprised of the Subsoil Law, dated July 1997, and the Oil and Gas Law, dated June 8 1998. In addition, a number of other legislative acts regulate specific aspects of subsoil use.
Under Kyrgyz law, no person or legal entity may engage in subsoil exploration or processing of natural resources without a licence. Licences are awarded by tender or negotiation, and are available to foreign investors for the purpose of exploration and/or production. In the event of a commercial discovery, the holder of an exploration licence has a pre-emptive right to receive a licence for production, provided that the requirements set forth in the exploration licence have been fulfilled.
The Agency of Geology and Mineral Resources is the state body which grants licences to explore or prospect for natural resources. Licences to process oil and gas are issued by the State Agency for Energy Industry.
Licences
Mining in the Kyrgyz Republic is comprised of two distinct kinds of activities: the use of subsoil and the conduct of mining activities. Generally speaking, each kind of activity requires a licence.
The following mining activities require government licences in the Kyrgyz Republic:
- searching for mining deposits;
- prospecting mining deposits; and
- exploitation of mining deposits.
In addition, licences are also required for the following specific kinds of mining activities:
- costeaning and conducting other kinds of underground workings (including sinking of shafts and driving of adits and tunnels) for the purpose of mapping and sampling;
- various kinds of drilling;
- various kinds of geophysical research;
- exploitation of hydro-geological slits; and
- the preparation of technical documentation related to a mining project.
These 'specialty' licences may be issued either for one particular kind of activity or for numerous related activities.
The term of a licence depends upon the particular activity to be undertaken. For example, for mining enterprises and geological organizations that are intended to be permanently on site, the licence will be valid for the full period of the project completion, not to exceed 20 years. For other legal entities and individuals, the licence term is two years, with a possibility for subsequent renewal.
In addition to the licensing rules mentioned above, the following categories of mining investors are also required to obtain clearance from the State Contest Commission prior to applying for a licence:
- those seeking to exploit or mine deposits of precious metals (eg, gold or platinum);
- those seeking to exploit ore deposits of mercury, antimony, tin, tungsten, molybdenum, bismuth and other rare metals involving capital investments of over $30 million; and
- those seeking to exploit oil, gas and coal deposits, as well as deposits of non-metallic minerals involving capital investments of over $30 million.
A licence for exploration, field extraction, processing, sale and export of the mineral recourses may be issued for a term of up to 20 years. If necessary, the effective term of the licence may be extended until the exhaustion of the mineral reserves within the territory covered by the licence.
A licence may be terminated in the following circumstances:
- expiration of the term of the licence;
- completion in full of the project for which the licence was issued;
- revocation of the licence by the licensor; or
- liquidation or reorganization of the legal entity to which the licence has been issued.
According to the Regulations on Licensing Rights to Use Subsoil in the Territory of the Kyrgyz Republic, approved by the Resolution of the Government of the Kyrgyz Republic 256, dated April 29 1997 and issued pursuant to the requirements of the Law on Subsoil, a licence will not be required for the following kinds of general subsoil study activities, as long as there is no substantial violation of the integrity of the subsoil:
- regional geophysical and geological studies;
- engineering and geological geodesic surveys;
- mineralographic and petrographic, geochemical, sedimentological and other special studies;
- seismological studies; and
- studies relating to underground waters.
All other kinds of activity relating to subsoil use require a licence.
Guarantees
In order to increase the volume of the surveyed mineral resources and to discover new mineral deposits, the Resolution of the Government 190, dated April 8 1994, guarantees to investors the right to exploit the new mineral deposits discovered and surveyed as a result of an investment. Resolution 190 also provides that if there is more than one applicant for a licence to the same area, the priority right to exploit the deposits will be given to the applicant that carried out the geological survey works at this deposit.
Resolution 190 also expressly allows geological survey organizations to carry out prospecting and exploitation activities which are funded by commercial entities or foreign investors at the deposits of all kinds of minerals (except radioactive raw materials), or to establish a joint venture for the same purpose.
Similarly, the Concept of the Development of Geological Survey Works and Improvement of the Regulation of Use of Subsoil in the Kyrgyz Republic, approved by the Resolution of the Government of the Kyrgyz Republic 418 dated July 4 1998, recognizes the government policy that geological survey works involving complicated or expensive activities are only permitted if they are financed by mining enterprises or foreign investors. It also provides that foreign investors that begin their geological survey works at the stage of 'general search' will thereby be guaranteed an exclusive right to exploit any deposits which they may discover.
Oil and Gas
Historically, and in distinction to most of its neighbours, Kyrgyzstan has never been perceived as a prospective country for oil and gas development. Although modern and in-depth exploration has only recently been undertaken in Kyrgyzstan, recent data based upon sound geological principles indicates that the opposite may in fact be true.
The most recently collected data indicates that the previously relatively unexplored Naryn Basin has the same geological structure as the well-known but heavily explored Tarim Basin. Since the two basins have the same source rocks, experts are increasingly of the belief that during their periods of petroleum generating formations, the two basins were in fact one and the same. There is also geological evidence of the presence of large structural traps in Naryn. The Naryn Basin may prove to be of significant interest to major investors, for, if the new data holds true, potential recoverable reserves may ultimately be in the range of several billion barrels. Parts of the Ferghana basin near Tash-Kumyr also hold much more promise for significant oil and gas reserves than had previously been thought.
It is unlikely that Kyrgyzstan will ever be as wealthy in petroleum reserves as its much larger neighbours. However, if this most recent data proves to be accurate, some predict that these recently discovered petroleum reserves will go a long way toward driving the nation's economic recovery, and making it energy sufficient throughout the 21st century.
Legislation
Due to a historical lack of oil and gas in Kyrgyzstan, oil and gas legislation remained fairly undeveloped for a long time. However, with the adoption of the Oil and Gas Law in June 1988 many issues relating to oil and gas activities have been clarified.
Under the Oil and Gas Law, a potential developer cannot be granted the right of exploration and production of oil on any particular field without a properly conducted tender or auction. The State Contest Commission carries out tenders for oil and gas fields whose exploitation require capital investments of over $30 million. Tenders for fields that require a smaller amount of investment are carried out by tender commissions established on a case-by-case basis in accordance with the Law on State Procurements.
The winner of a tender will have to enter into an agreement with and obtain a licence from the Agency of Geology and Mineral Resources in order to be entitled to perform any oil and gas operations. The Oil and Gas Law establishes that oil and gas activities in Kyrgyzstan should be performed on a concession basis, with the state having a priority right to purchase oil, gas and their derivatives produced in Kyrgyzstan.
The Electricity Sector
Kyrgyzstan has a distinct advantage over its larger and wealthier neighbours in that it has the capacity to control its water resources. The main indigenous energy resource is hydroelectric power, which meets approximately 20% of the country's primary energy requirements and accounts for some 20% of its total exports. At present, the energy system comprises 20 power stations with a total established capacity of 3.4 million kilowatts (kW), including 18 hydro-power stations (2.7 million kW) and two heat-power stations (659,000 kW). Electricity production is now over 14 billion kilowatt-hours (kWh) per year and potential reserves amount to approximately 170 billion kWh. Kyrgyzstan is the leading exporter of hydroelectricity to Uzbekistan and Kazakhstan.
However, increased demand for electricity, resulting from difficulties in securing natural gas supplies from its neighbours, has caused occasional system failures. In addition, expansion of the existing complex has been hindered by inadequate domestic production of transmission-related equipment, limited fiscal resources, and inadequate pricing and cost recovery.
The low electricity prices in the Kyrgyz Republic are subsidized by revenues from exports to Kazakhstan and Uzbekistan. Prior to the Russian crisis, it had been anticipated that these exports would rise significantly in the following years. The industrial and consumer conditions in Kazakhstan and Uzbekistan have been depressed by the Russian crisis, and by nationalistic policies of their governments. As a result, some export deals have been renegotiated at lower prices and volumes, and over longer time periods.
Another major problem of the Kyrgyz power sector is that of collecting customer payments effectively. Since consumers, particularly large companies, either are not being forced or do not have the means to pay their debts, Kyrgyzenergo currently has accounts receivable of $25 million. Debt has also accumulated as a result of the company's 40% technical and non-technical losses, poor quality metering and another problems familiar to the region.
The Kyrgyz government has taken concrete steps to begin privatization in the nation's hydro sector. In March of 1999 the Kyrgyz Parliament approved a portion of the Government's Programme of Denationalization and Privatization of JSC Kyrgyzenergo, of which 82% is owned by the state, 12% by a state social fund and 6% by individuals.
As a first step, Kyrgyzenergo, the nation's vertically-integrated electricity monopoly (also the primary generator and electricity distributor in the country) is being restructured into:
- five separate electricity distribution companies;
- one heating/distribution company;
- a single company responsible for generation; and
- a national grid operator, which will be the legal successor to Kyrgyzenergo.
The joint stock distribution companies will be established in the following regions:
- JSC Northelectro Kemin, Chui and Talas;
- JSC Eastelectro Issyk Kul and Naryn;
- JSC Oshelectro Osh PES;
- JSC JalalAbadelectro Jalal-Abad; and
- JSC Bishkekelectro Bishkek
Development of Kyrgyzstan's electricity sector faces serious challenges in light of the rapidly growing energy demand in the neighbouring Asian countries (particularly China) and the possibility of securing long-term export markets. However, hydroelectric power projects in Kyrgyzstan may yet provide attractive investment opportunities for international companies in the short to medium term.
Legislation
The energy sector is governed primarily by the Law on Electricity, dated January 28 1997 and the Law on Energy, dated October 30 1996. There are also a number of other legislative acts, presidential decrees and government resolutions regulating the production, transportation, distribution and consumption of electrical and heat energy.
Licensing
The state still maintains a high level of control over the energy industry. The energy sector is regulated by the State Energy Agency (SEA), which is responsible for issuing, reviewing, amending, revoking, suspending, modifying and enforcing all licences in respect of entities that participate in the sector, including all power generation, transmission and distribution facilities.
In particular, the SEA regulates the following areas:
- licensing the production, transportation and distribution of electrical and heat energy, and gas;
- tariffs;
- de-monopolization of the industry and developing competition;
- implementation of the state standards in the industry;
- implementation of economic use of the electrical and heat energy, and use of gas and oil;
- construction of energy production or transmission facilities; and
- other areas specified by the Law on Energy.
All public and private entities that generate, transmit, distribute or sell electricity must be licensed, and are responsible for the lawful and safe operation of their facilities. If a licence holder is unable to meet its obligations, or if it violates the conditions of the licence, the SEA may revoke, suspend or modify the licence and/or impose fines or penalties.
Tariffs
The government issues a tariff of sale prices of commercial electricity which are applicable throughout the country.
By law, the SEA is charged with establishing tariffs for electrical and thermal energy according to the following principles:
- Full cost recovery. Prices must reflect the full cost of producing, transmitting and distributing the electricity, including operation and maintenance costs, the recovery of capital and the cost of borrowing funds, as well as providing a return on investments. Prices should be adjusted to ensure that sudden economic hardship is not caused to producers or consumers;
- Non-discrimination. All consumers within the same classification and characteristics of users shall be subject to the same tariffs; and
- Differential cost of service. Subsidies from one class of consumer to another will not be permitted. Tariffs may be established to reflect the difference in the cost of providing the services in different seasons and at different times of the day.
Conclusion
Being small, distant and geographically isolated, Kyrgyzstan suffers from numerous disabilities. However, given appropriate conditions (in particular, favourable commodity prices), the nation's subsoil and energy resources are recognized throughout the world as having very good investment potential. Kyrgyzstan's recent accession to the WTO has been widely recognized as a landmark event, and the first major step which will ultimately result in the attraction of new and large-scale foreign investments in the country.
For further information on this topic please contact Mark Lockwood or Alex Korchagin at Baker & McKenzie's Almaty office by telephone (+7 3272 50 99 45) or by fax (+7 3272 50 95 79) or by e-mail ([email protected] or [email protected]). Allternatively, contact Robert Taylor at Baker & McKenzie's Tashkent office by telephone (+998 71 133 36 43) or by fax (+998 71 120 61 40) or by e-mail ([email protected]).
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