Kazakhstan is a country primarily known for its wealth of oil and other natural resources. Aside from substantial oil reserves (official sources estimate Kazakhstan has 4.8 billion tons of recoverable reserves) the country also possesses major deposits of uranium, gold, zinc, copper, lead, coal, iron ore, manganese, chrome ore, nickel, molybdenum, bauxite and others.

In the current climate prices for natural resources are increasingly growing, and the sector is becoming increasingly attractive for investments and investors. Among significant Chinese investments in Kazakhstani oil and gas sector are PetroKazakhstan and CNPC-Aktobemunaigas.

In Kazakhstan, subsoil use is primarily governed by the Law of the Republic of Kazakhstan On Subsoil and Subsoil Use of 27 January 1996, as amended (the Subsoil Use Law). The Law of the Republic of Kazakhstan On Petroleum of 28 June 1995, as amended, gives specific regulation to petroleum exploration and production. There are also numerous laws and regulations governing various aspects of subsoil use.

State possesses title and ownership in the subsoil and resources therein and allots the right to use subsoil (subsoil use right) to subsoil users. Subsoil use right comprises the right to possess and use subsoil within a certain territory and is granted for:

1. state geological research of subsoil;

2. exploration;

3. development;

4. exploration and development; and

5. construction and/or operation of underground facilities not relating to exploration and/or development.

Subsoil use right to mineral resources which are not "widespread mineral deposits" (such as sand, gravel, clay, etc.) is granted for a limited period of time and on a paid basis.

Subsoil use right may arise by virtue of:

1. allotment by state;

2. transfer from another subsoil user; or

3. universal succession of title (when a company holding subsoil use right is reorganised, for example, in the case of merger).

State allots subsoil use right either through direct negotiations (in certain limited cases) or on the basis of a tender (open or restricted).

In order to pre-qualify, tenderers have to submit an application accompanied by a set of documents and information. Following prequalification, the relevant state authority releases geological information on the to-be-allotted subsoil plot. Based on this geological information tenderers prepare investment programs and bids. Preferred tenderer is defined based on such criteria as starting date and intensity of exploration/development, profitability of development, amount of subscription bonus, estimated initial and further payments to the state budget, investments, terms and conditions of project financing, participation in social development of the region, compliance with laws and regulations on subsoil and environment as well as safety and other factors.

Once the tender board selects a winner, the latter is obliged to enter into a contract with the authorised state authority which is the Ministry of Energy and Mineral Resources of Kazakhstan (MEMR).

A different procedure for allotment of subsoil use right applies if such an allotment is being made on the basis of a production sharing agreement, which is used for offshore oil operations on the Caspian and Aral seas.

If subsoil use right is transferred from another subsoil user (normally on the basis of civil contracts - sale and purchase, etc.), such full or partial transfer, including transfer of subsoil use right through the transfer of shares/participatory interest in a subsoil user and contribution into a charter capital of a newly formed company, is subject to pre-approval by MEMR. The same applies to pledges of subsoil use right. Non-compliance with this requirement entails invalidity of the relevant civil contract.

Another serious consideration that an investor needs to take into account in relation to investment into subsoil use business in Kazakhstan is the so called "priority purchase right" which the state has under the Subsoil Use Law. Under such a concept, the state has a priority over third parties to purchase, on the terms not less favourable than those offered by other purchasers, subsoil use right (or its part) and/or a share in a subsoil user or in a company which can determine/influence (whether directly or indirectly) decisions of a subsoil use (provided than such company's primary business relates to subsoil use in Kazakhstan). The purpose of this concept is to override shareholders pre-emptive rights and capture offshore transactions if such transactions' primary purpose is to dispose subsoil use rights in Kazakhstan.

Finally, we note that the Subsoil Use Law was recently amended to include a new provision whereby state authorities may request to amend a subsoil use contract if subsoil user's actions with respect to subsoil plots having "strategic importance" lead to "material changes in economic interests of Kazakhstan creating threat to national security" - that is another consideration relating to subsoil use contract's stability.