Should the Oil Service be Afraid of the WTO?
What will happen to more than 100 measures to support domestic producers and local content, prescribed in some legal documents of Kazakhstan, after January 1, 2021, when the transition period will end, and we will become full participants in the global market, within the framework of WTO agreements? The Council for the development of strategic partnerships in the oil and gas industry, created with the participation of the Kazenergy Association and NCE Atameken asked Mira Dosova, the partner of the law company DASCO Consulting Group, to answer this question. For more than 15 years she has been specializing in providing legal services on international investments, corporate law, commercial law, subsoil use, construction, including the implementation of innovative and industrial projects. The main task of Mira Dosova was to explain the legal limitations and opportunities of domestic business in the new conditions.
Local content: WTO vs. Subsoil Code
The closer the year 2021 approaches, the more acute in the business circles is the concern of Kazakhstani producers of goods, works, and services (GWS) with the limit of access to customers-subsoil users in the future. Kazakhstani business will be in a harsh competitive environment with and without the opponents from around the world already breathing down their neck.
Let's try to understand and find out what in the legal environment are the WTO rules in terms of how they are reflected in the issues of local content in the GWS procurement of subsoil users. Thus, in this regard, the following main provisions of the recently entered into force Code "On subsoil and subsoil use" of the Republic of Kazakhstan dated 27.12.17 No.125-VI (hereinafter - the Code on Subsoil):
- the share of local content in the works and services purchased for subsoil use operations, established in terms of subsoil use contracts, licenses for the extraction of solid minerals, should be at least 50% of the total volume of purchased works and services during the calendar year;
- subsoil use contracts and licenses for the extraction of solid minerals must contain obligations for the share of local content in works and services (in the amount established by the requirements of the legislation);
- notice of the auction for the granting of subsoil use rights for hydrocarbons should contain minimum obligations for local content in the works, services, and personnel;
- for violation of the obligation to ensure a minimum share of local content in the works and services used in operations for the extraction of solid minerals, a penalty of 30% of the cost of works and services related to the outstanding amount of obligations. Payment of the penalty for breach of the obligation shall terminate the principal obligation, the performance of which is provided for in the relevant calendar year;
- under the subsoil use contracts concluded before January 1, 2015, when purchasing goods during subsoil use operations, the organizer of the tender in the process of determining the winner conditionally reduces the price of the tender bid of participants - Kazakhstani producers of goods by 20%. This provision shall apply until the expiry of the said contracts or until January 1, 2021, whichever is earlier;
- the procedure for the procurement of goods, works and services by subsoil users and their contractors operating under production sharing agreements (contracts) approved by the government of the Republic of Kazakhstan or under a subsoil use contract approved by the President of the Republic of Kazakhstan shall be determined by the procedures established in accordance with such agreements (contracts). At the same time, such an order should ensure: 1) implementation of approved programs for the development of local suppliers of goods, works and services; 2) provision of full and fair opportunities for all potential suppliers of goods, works and services to participate in the tender for the purchase of goods, works and services; 3) application of objective criteria for the pre-selection of potential suppliers of goods, works and services.
It is assumed that the contracts concluded before January 1, 2015 (except for PSA and TCO contract, as provided by article 278 (30) of the Subsoil Code), it is necessary to amend the exclusion of obligations on local content in goods and replace them with measures compatible with the WTO rules, or such requirements will become invalid from January 1, 2021.