On 27 September 2007, the Upper House of the Republic of Kazakhstan's Parliament unanimously approved a law on subsoil use which will have important ramifications for foreign energy companies operating and investing in the country.

The new law had already been approved by the Lower House on 26 September 2007 and now only needs to be signed by President Nursultan Nazarbayev, although this last step is seen largely as a formality.

The new law will affect the certainty of contracts on subsoil resources, including those granting rights to explore and produce hydrocarbons.

The new subsoil law provides that, in cases where subsoil operations adversely affect the "national security" of Kazakhstan and its "economic interests", then theGovernment of Kazakhstan will be given the power to demand that the subsoil users alter the terms and conditions of their contract with the Government. This, theGovernment believes, would result in the economic interests of Kazakhstan being reinstated through any such amendments. Failure of the user to agree to:

  • conduct negotiations;
  • reach a new agreement; or
  • sign a new agreement,

will, under the new law, give the Government the right to terminate the existing contracts.

All existing oil contracts could be affected by the new law, as it applies retroactively. This means that all current contractual rights and obligations may be subject to renegotiation and failure to renegotiate with the Government may result in termination of existing arrangements under Kazakhstan law. It also has implications for future agreements for the exploration and production of oil fields deemed to be of specific importance.

Kazakhstan follows in the footsteps of Venezuela and Bolivia who have sought to renegotiate contracts with foreign investors in oil & gas and other strategic industry sectors, to enable the state to obtain better terms. In such circumstances, energy companies are left with a stark choice between renegotiating the terms of their existing contracts or potentially losing their contract and bringing claims for compensation against the Government.

Investors affected by this new law will want to consider their contractual remedies as well as remedies under applicable investment protection treaties. Kazakhstan is party to a number of bilateral investment treaties and to the Energy Charter Treaty, which offer investors direct recourse to international arbitration for government breaches of treaty protections. In addition, oil contracts with States often include arbitration agreements. Given that Kazakhstan is a party to the New York Convention, those arbitration agreements might also provide investors with an appropriate forum to resolve disputes arising as a result of the new law.