https://unicaselaw.com/blog/revocation-of-license-termination-of-subsoil-use-contract-eng
Authors: Raushana Chaltabayeva (Partner)
In this brief overview, we have examined the procedure and cases in which a subsoil user may be deprived of a license or a subsoil use contract.
Subsoil use is a licensed type of activity. With the introduction of the Code on Subsoil and Subsoil Use (hereinafter referred to as the «Code») in 2017 in Kazakhstan, there are two regimes of subsoil use: contractual and licensing. In practice, numerous cases of violations of the terms of license agreements and subsoil use contracts are observed. These issues are raised both in judicial and extrajudicial proceedings, making understanding the grounds, procedures, and possibilities of appealing decisions on these matters critically important for stakeholders. Regular updating of knowledge in this area helps lawyers, legal experts, and entrepreneurs effectively protect their interests and make informed decisions in complex legal situations, thus enhancing the quality of legal services and reducing potential business risks. In this regard, clients — subsoil users — frequently seek advice on measures to prevent such violations, as well as on issues related to judicial proceedings in cases where corresponding sanctions have already been applied.
Under the licensing regime, the right to subsoil use arises based on a license issued by the relevant competent authority. Currently in Kazakhstan, there are six types of licenses for subsoil use: for geological exploration of subsoil, for exploration of solid minerals, for extraction of solid minerals, for extraction of common minerals, for the use of subsoil space, and for prospecting.
The contractual regime of subsoil use involves the establishment of the right to subsoil use based on a contract concluded between the competent authority in the field of subsoil use for hydrocarbons (Ministry of Energy of the Republic of Kazakhstan) and the subsoil user. Currently, the following types of contracts are concluded: for exploration and production of hydrocarbons, for production of hydrocarbons, and for extraction of uranium.
Regulation of contracts and licenses for subsoil use occurs in accordance with the Code. In this brief overview, we have examined a list of grounds, violations that may lead to early revocation of a license or termination of a subsoil use contract.
Among the main breaches of obligations under contracts and licenses, notable violations include failure to pay taxes, threats to national security and the environment, as well as failure to comply with obligations regarding the remediation of subsoil use consequences.
Below, we have provided a more detailed description of the grounds, procedures for license revocation, and appeal procedures, as prescribed by the legislation of the Republic of Kazakhstan. The list of grounds, license revocation procedures, and appeal procedures vary depending on the type of minerals being extracted or explored by the subsoil user, as well as depending on the specific stage of such exploration or extraction. Additionally, grounds, procedures for termination, and appeal procedures for subsoil use contracts have been considered.
Geological exploration of subsoil
Grounds for license revocation[1]
- Violations of the provisions of paragraph 4 of article 89 of the Code: «within the area of geological exploration, the subsoil user is not entitled to erect capital structures, permanently store explosive substances, create pits, trenches, and other types of mining operations, or conduct excavation work. The subsoil user is only entitled to drill wells within the area of geological exploration for purposes related to geophysical research and exploration for groundwater»;
- on-payment of the signature bonus for the issuance of a license for geological exploration of subsoil in the amount and within the deadlines set by the tax legislation[2] of the Republic of Kaakhstan.
Procedure for license revocation in accordance with article 92 of the Code[3]
- Upon identification of a violation, the authorised body for subsoil exploration notifies the subsoil user in writing.
- The subsoil user is obliged to rectify the identified violation within twenty working days from the date of receipt of the notification from the authorised body for subsoil exploration.
- Within the specified period, the subsoil user notifies the authorised body for subsoil exploration in writing of the rectification of the violation, attaching documents confirming such rectification.
- In case the violation is not rectified within the specified period, the authorised body for subsoil exploration revokes the license.
- License revocation is carried out by the authorised body for subsoil exploration by sending a written notification to the subsoil user of the license revocation. The license ceases to be valid ten calendar days from the date the subsoil user receives the notification of license revocation.
- The subsoil user is obliged to immediately cease operations under the revoked license from the date of receipt of the notification of license revocation and remove from the territory of the geological exploration site all structures, materials, and equipment located within that territory
Appeal procedure:
The subsoil user has the right to challenge the revocation of the license in court from the date of receipt of the notification of license revocation. During this challenge period, the deadline specified in paragraph 5 of the License Revocation Procedure may be extended until the court’s decision takes effect.
Exploration of solid minerals and its procedure
Grounds for license revocation[4]
- threat to national security paragraph 1 of article 44;[5]
- non-payment of the signing bonus[6] and fees for the use of land plots[7] (rental payments) in the amount and manner prescribed by the tax legislation of the Republic of Kazakhstan;
Procedure for license revocation
Upon identification of a violation, the competent authority notifies the subsoil user in writing.
- In case of a threat to national security, the violation must be rectified within a period not exceeding one year by restoring the condition that existed before the violation, and if restoration is not possible, by conducting other transactions related to the transfer of objects related to the right of subsoil use with the permission of the competent authority.
- In case of violation due to non-payment, the subsoil user must rectify the violation within three months from the date of receipt of the notification from the competent authority. The subsoil user notifies the competent authority in writing of the rectification of violations within the specified period, attaching documents confirming such rectification. In case the violation is not rectified within the specified period, the competent authority revokes the license.
- License revocation is carried out by the competent authority by sending a written notification to the subsoil user of the license revocation.
The license ceases to be effective three months from the date the subsoil user receives the notification of license revocation.
Appeal procedure
The subsoil user has the right to challenge the license revocation in accordance with the legislation of the Republic of Kazakhstan within fifteen working days from the date of receiving the notification of license revocation. During this challenge period, the deadline specified in paragraph 4 of the License Revocation Procedure may be extended until the court’s decision takes effect.
The license revocation is not permitted if the failure to fulfill or improper fulfillment of obligations, which served as the basis for the license revocation, occurred due to force majeure, i.e., extraordinary and unavoidable circumstances (natural disasters, military actions, etc.). Such circumstances do not include the absence of technical and/or financial means for the subsoil user, absence of necessary goods, works, or services on the market, as well as imposition of administrative penalty.
A person deprived of the license for exploration is obliged to immediately cease operations related to subsoil use and commence work on the site remediation within the timeframe prescribed by the Code.
Revocation of the license for exploration of solid minerals is the basis for entering information about the respective subsoil area into the unified state cadaster of subsoil.
Use of subsoil space
Grounds for license revocation[8]
- Failure to pay the signature bonus for the issuance of a license for geological exploration of subsoil in the amount and within the deadlines established by tax legislation[9] of Republic of Kazakhstan;
- use of subsoil space that does not correspond to the intended purpose.
Procedure for License Revocation
- Upon identification of a violation of license terms, the authorised body for subsoil exploration notifies the subsoil user in writing. The subsoil user is obliged to eliminate the violation and notify the authorised body for subsoil exploration in writing with accompanying documents confirming the elimination of the violation within three months from the date of receiving notification of the violation. In case the violation is not rectified within the specified period, the authorised body for subsoil exploration revokes the license.
- License revocation is carried out by the authorised body for subsoil exploration by sending a written notification to the subsoil user. The license ceases to be effective within three months from the date of receiving notification of license revocation by the subsoil user.
Appeal procedure
However, in accordance with paragraph 7 of article 221, the subsoil user has the right to challenge the revocation of the license in the manner prescribed by the legislation of the Republic of Kazakhstan within fifteen working days from the date of receiving the notification of license revocation. During the appeal period, the term specified in clause 2 of the License Revocation Procedure is extended until the decision of the appeal is enforced.
License revocation is not allowed if the non-performance or improper performance of obligations, which served as the basis for license revocation, occurred due to force majeure, i.e., extraordinary and unavoidable circumstances (natural disasters, military actions, etc.). Circumstances such as lack of technical and/or financial resources by the subsoil user, absence of necessary goods, works, or services in the market, as well as imposition of administrative penalties, are not considered force majeure.
The entity whose license has been revoked is obliged to immediately cease subsoil utilisation operations and commence work to maintain the subsoil area in a safe condition.
Revocation of the license for subsoil utilisation is the basis for entering information on the corresponding subsoil area into the unified cadastre of the state subsoil fund.
Grounds for Declaring a License Invalid:
- when establishing the fact of providing deliberately inaccurate information to the state body that issued the license, which influenced its decision to issue the license;
- violation of the established procedure for issuing the license, which led to an unjustified decision of the state body to issue the license, due to the established fact of collusion between the official of the state body and the applicant;
- issuance of a license to a person recognised as legally incompetent and who was such on the day of issuance;
- if the issuance of the license is not provided for or is prohibited by the Code.
- Grounds Termination of Subsoil Use Contracts[10]
- conducting operations on hydrocarbon subsoil use without the corresponding approved project documents endorsed by the subsoil user and obtaining positive conclusions provided by the Code and other laws of the Republic of Kazakhstan;
- violation of the requirements of paragraph 1 of article 44[11] Code, which poses a threat to national security.
Procedure for Contract Termination
Early termination of subsoil use contracts unilaterally is carried out by the competent authority by sending a written notification to the subsoil user about the termination of such contract.
The contract terminates within two months from the date of receiving such notification by the subsoil user.
Appeal procedure
The subsoil user has the right to challenge the legality of the early termination of the subsoil use contract by the competent authority in court within two months from the date of receiving the notification. In case the subsoil user appeals to the court, the deadline mentioned in paragraph 2 is suspended until the court decision becomes legally binding.
Grounds for Early Termination of Uranium Mining Contracts[12]
The competent authority notifies the subsoil user in writing of the committed violation in cases of:
- failure to provide or provision of deliberately inaccurate reporting as stipulated by article 180[13] of the Code;
- failure to provide or provision of deliberately inaccurate reporting as stipulated by;
- conducting uranium mining operations associated with the violation of the integrity of the earth’s surface without forming the security deposit in accordance with the established schedule or in violation of the schedule for forming the security deposit;
- in other cases of subsoil user’s violation of obligations established by the uranium mining contract;
- if the actions of the subsoil user during uranium mining operations on a subsoil area of strategic importance lead to changes in the economic interests of the Republic of Kazakhstan, creating a threat to national security.
The subsoil user is obliged to eliminate violations within three months from the date of receiving the notification of the committed violation. In case of non-elimination of violations within the specified period, the competent authority may terminate the uranium mining contract early.
Additionally:
In case the actions of the subsoil user during uranium mining operations concerning subsoil areas of strategic importance[14] lead to changes in the economic interests of the Republic of Kazakhstan, creating a threat to national security, the competent authority may demand the amendment and/or addition of contract terms, including those concluded before the enactment of the Code, to restore the economic interests of the Republic of Kazakhstan.
The competent authority may terminate the uranium mining contract early unilaterally if:
- within two months from the date of receiving the notification from the competent authority about amending and/or supplementing the contract terms, the subsoil user fails to confirm in writing their consent to negotiate changes and/or additions to the contract terms or refuses to conduct them;
- within four months from the date of receiving the subsoil user’s consent to negotiate changes and/or additions to the contract terms, the parties fail to reach an agreement on changes and/or additions to the contract terms;
- within six months from the date of reaching an agreed decision on restoring the economic interests of the Republic of Kazakhstan, the parties do not sign the amendment and/or addition to the contract terms.
Procedure for Contract Termination
- Early termination of uranium mining contracts unilaterally is carried out by the competent authority by sending a written notification to the subsoil user.
- The contract terminates within two months from the date of receiving such notification by the subsoil user.
Appeal procedure
The subsoil user has the right to challenge the legality of the early termination of the uranium mining contract by the competent authority in court within two months from the date of receiving the notification. In case the subsoil user appeals to the court, the deadline mentioned in paragraph 2 is suspended until the court decision becomes legally binding.
Based on the existing and available judicial practice, the procedure for license revocation occurs as follows: when violations by the subsoil user regarding the license or contract are identified, the relevant authority files a lawsuit for license revocation.
The above are brief excerpts from the current legislation of the Republic of Kazakhstan regarding the processes of license revocation and termination of subsoil use contracts. As mentioned, the subsoil user has the right to challenge the legality of the early termination of the license or contract. We can also conclude that the legislator has directly provided for the performance procedure for subsoil users and all possible consequences in case of their improper execution, as well as the appeal procedure.
However, practical questions of a more detailed nature arise, especially regarding appeal procedures and deadlines, which may vary depending on the specific situation. In this regard, we recommend that subsoil users seek advice from specialists for correct and timely response to such problems and questions.
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[1] Code on Subsoil and Subsoil Use, art. 89
[2] Code on Taxes And Other Obligatory Payments to The Budget (Tax Code), art. 727
[3] Code on Subsoil and Subsoil Use, art. 92
[4] Code on Subsoil and Subsoil Use, art. 200
[5] Code on Subsoil and Subsoil Use, par.1 art. 44
[6] Code on Taxes And Other Obligatory Payments to The Budget (Tax Code), art. 725
[7] Code on Taxes And Other Obligatory Payments to The Budget (Tax Code), art. 560
[8] Code on Subsoil and Subsoil Use, art. 221
[9] Code on Taxes And Other Obligatory Payments to The Budget (Tax Code), art. 560
[10] Code on Subsoil and Subsoil Use, art. 106
[11] Code on Subsoil and Subsoil Use, par.1 art. 44
[12] Code on Subsoil and Subsoil Use, art. 163
[13] Code on Subsoil and Subsoil Use, art. 180
[14] Resolution of the Government of the Republic of Kazakhstan dated June 28, 2018 № 389 On approval of the list of strategic subsurface areas
