Kazakhstan has made a number of significant changes to its energy laws in recent years. It replaced the Subsoil Law and the Petroleum Law with a new Subsoil Law in 2010, which provided the government with greater authority in the regulation of extractive industries. This year was marked with the adoption of two new statutes: the Law on Gas and Gas Supply (on January 9) and the Law On Trunk Pipeline (the Law) on June 22. This article outlines some of the more important aspects and innovations of the latter.

Governance

The Law does not establish a clear test as to which pipelines may be deemed “trunk pipelines.” However, the Law does determine which pipelines are not trunk pipelines: these are pipelines intended for the transportation of products within the owner’s territory for internal purposes, in particular, within the contractual territory of a subsoil user, as well as distribution pipelines.

The Law applies to trunk oil pipelines, gas pipelines and oil products pipelines. However, the Law applies to gas pipelines only to the extent not regulated by the Law on Gas and Gas Supply. In addition, the procedures for accessing gas transportation services (in contrast with oil transportation services) are still governed by the natural monopoly laws and regulations.

The Law does not contain any special provisions on tariffs. Tariffs are still regulated pursuant to the law on natural monopolies.

Title and Government Preemptive Right

A trunk pipeline may be state owned or privately owned. In the latter case, the owner must be a legal entity registered under the laws of the Republic of Kazakhstan.

Share or other equity interest in legal entities that are owners of a trunk pipeline as well as shares in the parent companies of such entities are deemed strategic objects (properties), and regulated by other laws accordingly.

The Government has a preemptive right to participate by at least 51% in the project of a newly created trunk pipeline. The Government may waive this right or decide to participate by less than 51%. The Government does not have a preemptive right in the expansion of an existing trunk pipeline.

Access Rights

If there is free capacity, a trunk pipeline owner or its operator must ensure equal conditions of access to that capacity for all eligible shippers.

If a pipeline capacity is limited, the capacity for oil transport is offered in the following order:

  • to a shipper shipping oil to oil refineries in Kazakhstan;
  • to a pipeline owner for transportation of its own products or the products of its affiliates;
  • to a shipper fulfilling Government decisions and/or obligations under international treaties;
  • to a shipper recruited for investment into the construction of a trunk pipeline and/or for the expansion of capacity within a line or facility where the investments were made, until the full recovery of its investment;
  • to a shipper undertaking obligations to provide mandatory minimum annual oil volumes for transportation; or
  • to a shipper transporting oil, the quality of which is adequate to comply with the technical requirements for the quality of oil to be transported by pipeline systems of other states.

National Operator

A national operator is a legal entity, the controlling stake in which belongs to the state, a national management holding or a national company. The national operator is designated as such by the Government and has the following rights:

  • to render, within Kazakhstan, operator services for the trunk pipeline, where 50% or more of the voting shares (equity interest) of its owner directly or indirectly belong to the state, a national management holding or a national company; and
  • to organized transportation via pipeline systems of other states of products transported from the Kazakhstan using a trunk pipeline owned by the national operator.

These rights may be exercised only by a national operator, unless the Government decides to grant these rights to another entity, in order to implement international treaties. In this case, 50% or more of the voting shares (equity interest) of such person must be owned by the state, a national management holding or a national company.

Other Innovations

The Law permits transporters to exchange products with one another (swaps) if there is a free capacity in one pipeline and a lack of capacity in another pipeline. These operations are allowed to ensure the delivery of oil to domestic oil refineries.

The Law contemplates the creation of a quality bank as a mechanism to carry out mutual settlements between shippers due to the differences in the quality of the product.

Conclusion

The Law is the first statute in Kazakhstan specifically designed to govern the development and operation of trunk pipelines. Investors in the petroleum sector should generally welcome greater clarity on access rights, as well as the statutory recognition of swaps and quality bank arrangements.

Despite containing a number of innovations, such as the priority right of the Government to participate in pipeline projects from the outset, the Law does not represent a major shift in Kazakhstan policy. Adoption of the Law follows the overall trend of providing the government greater power in its dealings with petroleum investors.