Important aspects related to the new Law on Subsoil and Subsoil use Almaty, 29 April 2011

1. Important aspects related to the new Law on Subsoil and Subsoil useAlmaty, 29 April 2011 Odd Instefjord General Director Statoil North Caspian AS

2. Content • Overview of important aspects dealt with in the Law • Host governments expectations • Policy or strict regulation ? • Impact on mandated Local Content • Local Content targets • Successful tools

3. The New Subsoil Law (SL) • Entered into force on July 6, 2010 and replaces / combines two previous laws, the Petroleum Law (PL) and the previous Subsoil Law • Ministry structure has been updated in the SL (in particular the MOG and MINT responsibility) • State agencies for the sector are reorganized (per March 2010) and reflected in the New SL) • Separate Competent Authorities (“CA”) for oil & gas (MOG) and for hard minerals (MINT) • State regulatory functions of KazMunaiGas are removed

4. The new Subsoil Law (SL) (cont’d) • Split of E and P • Combined E&P only for strategic fields or fields with “complex geological structure” and per Governmental approval • “Exclusive right” to convert E to P contract through a complex application procedure • Foreign “strategic partner” company can still enter contract with KMG by direct negotiation (without tender) – and several such blocks are now in negotiation • KMG has the right to ≥50% of any new E&P project • SL restates survival of existing licenses and contracts – including PSAs)

5. The new Subsoil Law (SL) (cont’d) • Formation of separate operator company remains optional • if formed, KMG has right to ≥50% ownership • New terms for exploration stage: • for appraisal 6 years (+ one 2-year extension for offshore project) + extension • for production stage - no clear reference to 25 and 45 years, • No annual work programs - only minimum work programs

6. The new Subsoil Law (SL) (cont’d) • Stiffened gas flaring / utilization rules • Trunk pipelines confirmed to be strategic objects (per Civil Code and National Security Law) • Dispute resolution • right of int’l arbitration is retained (where allowed by Kazakhstan law or treaty), and • Kazakhstan-governing-law-only rule remains • Contract must be in both Russian and Kazakh language. English translation can be made, but not be given legal force / priority • The mineral tax regime remains under the Tax Code (Chapt. 10 and 11) • Stiffer grounds for termination of contract (and apparent intent to give Gov’t / CA wide grounds to terminate unilaterally without need for court decision first • definitive view on this must await practice)

7. Source: Policy or strict regulation ?Host governments expectations • Resource rich countries want to turn natural resources into long term economical development. • Job creation and business opportunities • Diversification of the economic base • Funding national development plans and social programs • IOCs and oil service companies are expected to behave as local players • Employment, training; • Local supply chain; • Technology transfer

8. Government Financial sector Oil companies Local Content Oil Service companies Education sector Local Private sector Source: Policy or strict regulation ?All stakeholders must play its part

9. Policy or strict regulation ?The policy maker’s challenge and question • Will interventions to leverage economic growth from expenditure in the oil, gas and mining sectors lead to more skilled and competitive domestic suppliers? • Or will it serve to perpetuate inefficient and uncompetitive national industries? • Will the local content regulation break the core principle that contracts are awarded on the basis of international competitiveness also on quality and delivery? • Three arguments are put forward below to justify why this principle might be temporarily suspended in emerging markets: • Infant industry argument, • Market power argument, • Social impact compensation.

10. Local Content in KazakhstanGeneral Promotion of ‘local content’ in the oil and gas sector is a major government policy priority. The new SL has made changes in the regulatory context and a variety of provisions are governing relations between investors and the state. In early April 2010, with new requirements in place, 34 contract termination notices were sent out to the subsurface users based on the incompliance with local content requirements. The Ministry of Oil and Gas (MOG) indicated that further 122 incompliance notices will be or has been sent out. The trend indicates that the legislative developments of the last few years had set the stage for changes in the investment climate and emergence of the new state direction for the governance of the natural resources

11. Local ContentSubsoil Contract and Local Content regulations Mandatory contract terms are to include provisions on % of Kazakhstan personnel and allocations of Kazakhstan goods, works and services. provision of equal conditions and remuneration for Kazakhstan personnel is given including those engaged in subcontract work. Provision in contracts is also to be made for fines for failure to meet local content requirements. Detailed rules on tendering procedures are contained in Rules for procurement of goods, works and services when carrying out subsurface operations. These Rules address all subsurface operations, and apply to subsurface users and their subcontractors purchasing goods, works or services for carrying out subsurface operations. Detailed procedures for the tender process contain a ‘positive discrimination’ in favour of Kazakhstan and says that comparing bids must be decreased by 20%.

12. Local content local deliveries – Who’s local? • Draft Public procurement legislation require a public tender for supply to state agencies (or state-controlled companies) of certain goods, works and services. • The Legislation aims to strengthen the position of local providers of goods and services and preference is to be given to local manufacturers where “the quotations presented are equal”. Furthermore, the draft Law addresses the wider definition of what constitutes ‘local’ content with • a “domestic provider of work and services” is a Kazakhstan resident individual ora legal entity whose workforce is no less than 95% local. • For a “domestic entrepreneur” to be recognized as such he/she needs to be a resident of Kazakhstan doing business in the country.

13. Local content local deliveries – calculation • the Uniform Method of Local Content Calculation for products and services has been decreed by the Government. In this formula, which still is part of the draft Law, some of the indicators has caused much debate among the stakeholders. • inclusion of the salary ratio of the domestic employees across an overall salary base of suppliers and contractors/sub-contractors has been considered very problematic by some companies for the reasons of confidentiality, competitive advantage and other commercial factors. • requirement concerns obtaining local content certificates, CT-KZ, for every product and service subject to calculation, from the Committee on technical regulation under MINT

16. Source: Policy or strict regulation ?Local Content requirements or targets – only the beginning? ++% 50 - 90% ?% 60% 50% 30-50% 65-100% 45-85% 25+% Tore Halvorsen, FMC

17. Source: What has been successful tools? • Project Procurement and Contract strategies • Local capacity building, training and R&D, when necessary • through tax incentives • Technology transfer requirements • Support for SMEs and entrepreneurs • Registry of competent and qualified local vendors • Advise on potential for Joint Venture and other mechanisms of cooperation with foreign companies • Cluster Programs • Mentor Programs • Infrastructure initiatives • Supply Base initiatives • Enterprise centres Incentives rather than stick

18. “Maximizing the benefits of local content is not the same as to maximize local content” Impacts must be measureable in terms of employment, training, infrastructure, well being of host communities And not seen as a percentage only … … …more through a target policy than strict legislation

19. ….views provided by experienced global companies Source IIED • In short term there are lack of domestic suppliers, who produce specialized products • There is currently insufficient growth of technological capacity on behalf of domestic suppliers • There is a deficit of qualified human resources domestically • Limited exchange between domestic producers, subsurface users and state bureaucracy • Long-term nature of investment in human resources training and education, as well as technology transfer and capacity building and short-to-mid-term local content • There is compliance targets stipulated by the Concept and the Law with administrative sanctions and termination of subsoil users’ contracts due to noncompliance • The LC requirements does not induce collaboration between the state and private industry and these measures, even though intended to boost domestic supplier base, can have an opposite effect, if not coupled with a significant investment into SME development

20. Thank you Important aspects related to the new Law on Subsoil and Subsoil use Odd Instefjord General Director, Statoil North Caspian AS www.statoil.com