Box 4.5 Local Benefit: The Kazakhstani Experience As Kazakhstan moves toward the status of a major oil and gas producer, it has developed a policy on sourcing hydrocarbons-related work to Kazakhstani firms. Legal mechanisms have been put in place to require oil and gas companies (or “subsoil users”) to use local goods, works, and services in their operations and to increase the proportion of Kazakhstani employees in their staff and in the staff of their contractors. The policy was first introduced into hydrocarbons legislation in 2004 with the terms Kazakh manufacturer and Kazakh origin applicable to goods, works, and services. It had little practical impact. The Kazakh Content Law of 2009 took a more robust approach to implementation and has proved effective. Virtually all of these provisions migrated into a new Law on the Subsoil and Subsoil Use (2010). Why was this change necessary? When goods, works, and services were purchased from a foreign supplier, the funds benefited non-Kazakhstani economies, often the same country of origin as the subsoil user. All such expenses were treated as contributions to the annual minimum level of investments that were required under contracts between subsoil users and the state. Failure to meet this target could lead to unilateral termination by the state. Finally, once production was started, the subsoil users had the opportunity
Natural gas
Agreements for the exploration and production of petroleum typically cover both oil and gas. They usually contain clauses dealing with the peculiarities of the gas industry: longer lead times to identify viable markets if gas is found and to reach agreement with buyers for long-term sales contracts. Longer times are also needed for securing the high levels of investment for field development, processing, and transportation. (See pages 70–71 and 107–08 in this chapter.)47 The fiscal terms applicable to gas production have to be more attractive to investors than those for oil, because the selling price is lower than its oil equivalent (and hence offers lower profitability), transportation costs are higher, and the production profile is longer and flatter. The duration of the project and the long payback period mean that investors will tend to pay extra attention to the guarantees provided by stabilization clauses. To anticipate the complexities of contracting, a government may provide a special legal instrument for the interim
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to avoid paying higher taxes for the investments, giving them an incentive to overstate their costs at the exploration stage. In response, Kazakhstani content on goods is defined as a percentage share of the cost of Kazakhorigin materials and the producer’s expenses for goods processed in Kazakhstan. For services, Kazakhstani content is defined as an aggregate cumulative share based on the cost of goods used for the performance of works, as well as the agreement value and/or payments to Kazakhstani employees. It also takes into account the salary fund of the entity performing works or providing services. Among the key elements in the Kazakhstani regime is an online registry of goods, services, and work in subsoil operations that allows the authorities to monitor the operation of the procurement rules, according to the 2010 law. Quarterly reports by subsoil users ensure that this mechanism allows the authorities to monitor fulfillment of obligations on content. Calculation of the local benefit percentage is done by means of a uniform method. Certification of local benefit is also used. There is also a long-term plan with targets for local benefit set in percentage terms. Violations of procurement rules are treated as a breach of the subsoil contract and the penalties may include termination of that contract.
negotiating period. For example, Vietnam’s amended Petroleum Law (2000) states the following: If discovering gas with commercial value, while lacking the consumption market as well as conditions on pipelines and suitable treatment facilities, contractors may retain the areas where gas is found. The duration of retention of such an area shall not exceed five (5) years and may, in special cases, be extended for two (2) more years. Pending the consumption market and the conditions on pipelines and suitable treatment facilities, the contractors shall have to proceed with the work already committed in the petroleum contracts (Le Leuch 2011, at 8.6.2). The concept of a specific retention lease was first developed in Australia. Its objective is to encourage the exploration of gas and the identification of commercial gas markets by granting the contractor enough time to assess the
