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Turkmenistan’s Oil and Gas Sector: Overview of the Legal Regime for Foreign Investment
22 January 2007
Turkmenistan’s Oil and Gas Sector: Overview of the Legal Regime for Foreign Investment

This article was first published in the Journal of Energy & Natural Resources Law, Vol 24 No 4, November 2006, published by International Bar Association, London, UK.
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Turkmenistan’s Oil and Gas Sector:
Overview of the Legal Regime for Foreign Investment

by Jonathan H. Hines and Alexander V. Marchenko[1]
LeBoeuf, Lamb, Greene & MacRae, LLP
May 30, 2006

 

The proven and otherwise probable hydrocarbon riches of the former Soviet Republic of Turkmenistan, spanning sizeable offshore Caspian fields in the west to the Amu Darya Basin reserves bordering Uzbekistan in the east, are by now quite clear.  The worldwide E&P industry community — mostly Western European, Asian and Russian, and also some Middle Eastern and American players — have been entering this new game, even while serious pipeline transport obstacles remain.

The U.S. and some other major western companies seem to be particularly hesitant about Turkmen projects to date for various political and geographic reasons, including the proximity to Iran and presumed need to connect into export solutions through that U.S.-boycotted and increasingly isolated country for the time being – although new opportunities may open up through Russia, and most interesting, by trans-Caspian connection to the BTC crude oil pipeline (and a parallel gas line) soon. 

Indeed, ExxonMobil suspended its operation in the country a few years ago (citing uneconomic field size and disappointing results), and Shell also suspended its once-active discussion about large-scale gas development activities (apparently for inability to move forward a trans-Caspian gas line proposal of the time).  On the other hand Russian companies – with Gazprom in the lead – for natural geo-political and economic reasons appear to be moving forward with renewed vigor on Turkmenistan E&P and transport venture projects (in addition to the updated Turkmen gas purchase and resale arrangements involving Ukraine and Western Europe).  And there are recent press reports of Turkmenistan-China preliminary agreements to jointly develop large eastern region gas fields to feed a planned new pipeline to China.  In general there is hope that foreign companies' project negotiations, stalled for some time by political developments in 2005 (see just below), may regain momentum soon.

Another obstacle has been the still unresolved status of the Caspian Sea and its delineation among the littoral states – at least as far as the promising fields of Turkmenistan’s southern Caspian zone, abutting Iran’s presumed zone, are concerned.  While Russia, Kazakhstan and Azerbaijan have essentially settled their respective Caspian seabed boundaries by bilateral and trilateral treaties (essentially adopting the internationally accepted "modified equidistant median line" approach) signed and ratified over the past few years, the Southern Caspian zones have not been settled.  This is largely because of Iran’s continued insistence on a full shared five-nation “condominium” approach, or at least a minimum 20% geographic area share for itself.  This rigid position of Iran seemingly has caused the Turkmen Government to hold back from signing on to the other three states’ approach. 

The practical consequence is that negotiation/finalization of PSA agreements with a number of potential investors (including Wintershall of Germany and the "Zarit" group of Zarubezhneft, Rosneft and Itera of Russia) to develop Turkmenistan’s southernmost Caspian blocks has been slowed given the “Iran risk”, while other investors – including Maersk Oil of Denmark in 2002, and Petronas and Dragon before that – in Turkmen central and northern zone blocks have not been hindered by this obstacle.  (The Turkmen-Azeri boundary line also remains unresolved and some prospective areas – most notably a field referred to as Kyapaz by the Azeris and Serdar by the Turkmen – are apparently still in dispute, but it is thought that this can be settled without too much difficulty in due course. This whole subject of Caspian delineation is beyond the scope of the present paper.[2]  (It is possible that progress may naturally follow upon Iran's tentative recent moves at exploring fields on its own Caspian shelf area.)

Nor do we address the issue of general political risk, which may be seen as somewhat accentuated with the recent regional events in Kyrgyzstan and Uzbekistan.  (Certain recent Turkmen domestic political developments also serve to remind potential investors of the very tight government control exercised by the President in general, and over the oil & gas sector in particular – as recently tightened even further.)

This article examines the legal regime applicable to foreign investments in Turkmenistan’s upstream oil and gas sector.  These types of investments are significantly influenced in Turkmenistan, as in the other ex-Soviet countries, by the starting-point rule that all underground natural resources – including oil and gas – are in exclusive state ownership.

While Turkmenistan is characterized by extraordinarily strong centralized presidential rule, the relevant legislative regime is more formalized and developed to date in Turkmenistan than, for example, in Azerbaijan, which has similar governmental characteristics.

Further and significantly, in the year 2000 Turkmenistan adopted detailed administrative rules for conducting oil operations.  Prior to these rules, operating companies inevitably found themselves in noncompliance with antiquated Soviet-era operational rules that dated back to 1970. The new rules fill out many details not covered in Turkmenistan’s general Subsurface Law of 1992[3] and the more specific Petroleum Law of 1996 (the "Petroleum Law" or "PL").[4]

The Turkmen authorities have expressed pride in the fact that these two foundation laws long stood unchanged since their enactment, and there may be something to be said for this in terms of effective stability in terms of substantive legal terms (see further discussion of de jure stabilization at Section 11 below). But note that the Petroleum Law has in fact just been amended twice in the second half of 2005 (see the date citations at footnote 4). Investors may take some comfort in knowing that the changes thus effected are essentially just "political"/administrative in nature.  That is, there was first a power shake-up in August 2005, which among other things did away with previously self-standing "Competent Body" with which all hydrocarbon project investors had been dealing since 1997 and placed its powers in the Ministry of Oil & Gas Industry (the "Ministry").  Then in December 2005 the second PL amendment in four months reflected a rethinking, by which the Competent Body was reinstated – but under much tighter express control of the President (even though that control had seemed to most observers remarkably tight already before).  We touch on the 2005 amendment highlights in the discussion below. 

A further Law on Trunk Pipeline Transportation is reported to be in preparation but has not yet been enacted.

In Turkmenistan the administratively-issued license is the dominant document, and the contract must conform with the license (and rises and falls with it) in all respects.  See Sections 2 and 3 below.  (This is unlike the contract-only regime of Kazakhstan, and Russia too is about to shift to a contract-based regime.)

1.  Relevant State Agencies and Their Roles

Articles 4-5 and 27 of the Subsurface Law, and PL Articles 4-7 as amended, vest the nation’s authority over the subsurface and its natural resources in various respects to:  (i) the President, (ii) the Cabinet of Ministers (the “Cabinet”), (iii) the state agency designated by the President to regulate the use of hydrocarbon resources (the “Competent Body”), and (iv) certain other state bodies on specific regulatory aspects.  (As in the other Caspian-region states – central executive authority over hydrocarbon disposition is in law, and thus far in practice, relatively free of interference by regional authorities.)

a.  Cabinet of Ministers.  Article 4 of the Petroleum Law broadly vests the Cabinet with the authority to determine overall strategy for development of the Country's hydrocarbon reserves, including rates of production, sequence and priority of development, rules for the conservation of hydrocarbons, protection of the environment, public health, and work conditions, compilation of statistical reports on reserves, and restrictions on conducting operations in certain geographic areas.

b.  Competent Body.  Articles 5 and 6 of the Petroleum Law establishes that a special agency, under direct supervision of the President, actually administer the development of hydrocarbon fields for the State.  Since its initial establishment by decree in 1997[5] and to date (with a technical "gap" of a few months in late 2005 as noted above), this role has been played by a special independent super agency, the so-called Competent Body for Use of Hydrocarbon Resources and on Matters of Carrying Out Petroleum Operations.  Although the Cabinet has broad regulatory power, as a practical matter the Competent Body has been and evidently will now remain as the critical interface for investors.

But in some respects the newest Petroleum Law amendments have left the Competent Body under even shorter reins from the President than was so before. Most notably, PL Article 6 now makes clear that basically each of the Competent Body's powers (see details below) may be exercised only on the basis of a specific decree of the President himself – and even goes so far as providing (specifically with respect to agreements, but likely also meant to apply beyond that) that:

"The authority granted to the Competent Body on the basis of an authorizing decree of the President of Turkmenistan is for one-time use and does not give the right to conclude an additional agreement or to introduce changes that may substantially affect the essence as the terms of carrying out an agreement previously concluded between the partners – for which the issuance of a separate decree is required."

This restriction is repeated a number of times, with respect to various types of Competent Body actions, throughout the law as newly amended.

The Competent Body also seems to be given more of a high-level, perhaps almost ceremonial "oversight" nature than was so before. Thus, newly elaborated PL Article 5 provides, in addition to the President's leadership role, that the Central Bank Chairman, the Deputy Prime Minister responsible for the oil and gas sector and "leaders of the industries constituting the oil and gas sector" (presumably to include one or more high officials from the Ministry) are members.  It is further provided that the Competent Body members shall meet at least once every two months, and that its activities are to be governed by a Regulation.  It would seem that the existing 1997 Regulation (see footnote 5) should formally be amended or replaced to reflect the new PL provisions and realities.

The Competent Body’s sphere of competence, as set forth basically unchanged in revised PL Article 6, encompasses establishment of field development rules; conducting tenders on awarding licenses for conducting petroleum operations; development of  model contracts; negotiations on licensing issues, negotiation and signing of contracts; registration, suspension and revocation of licenses and agreements for petroleum operations; and monetary control over fulfillment of license and contract conditions.

The basic field operations rules administered by the Competent Body, and further rules on its interaction with other relative State bodies are elaborated in the 1999 Resource Use Decree and attached detailed Agency Interaction Regulations and Operations Rules adopted pursuant to the Petroleum Law and published in 2000.[6]

In accordance with that Resource Use Decree and attached Operations Rules, the Competent Body is also to issue to an investor a permit for each of the many phases of work associated with petroleum operations.

The intended interaction between the Competent Body and other authorized agencies, as set forth in the Agency Interaction Regulations, is complex.  Investing companies’ operational plans are being channeled through the Competent Body to several different Turkmenistan state agencies for examination.  Essentially, the Competent Body (having only a small staff) has been acting as the clearinghouse and coordinator for issuance of operations permits by many other interested Turkmenistan state agencies, which permits are supposed to be issued according to set deadlines enforced by the Competent Body.[7]

These Rules and Regulations, as administered by the Competent Body, are intended to regularize and streamline the daunting multi-agency review processes. The Competent Body has been having some success in this leadership role, given its close link to the President in Turkmenistan’s highly centralized system of power.  Some bureaucratic gridlock has still been encountered, as each of the interested agencies may delay approval or exercise a veto within its specific domain. 

It remains to be seen whether, and if so how, these 1999 Operation Rules and/or Agency Interaction Regulations, will now be amended to reflect the recent PL and related political/administrative changes.

c.  Caspian Sea Enterprise.  On projects for development of Caspian Sea hydrocarbon resources, the State Enterprise on Caspian Sea Issues (the "Caspian Enterprise"), formed (on the basis of a predecessor state body) by Decree No. 3405 of May 30, 2001, is supposed to play a role.  The specifics of the respective authorities of the Competent Body on the one hand and the Caspian Enterprise on the other hand have not been entirely clear.  Knowledgeable officials have clarified to us that the Caspian Enterprise's primary current function is to facilitate resolution of the Caspian Sea boundary delineation issue, although it may also take part in preparation and negotiation of offshore production sharing agreements. 

Rules for the interaction this state enterprise with other relevant agencies of the Turkmen sector were approved by Decree No. 6274 of the President "On Approval of Rules for the Interaction of the State Enterprise on Caspian Sea Issues with the Ministries and Agencies in the Area of Development and Use of Natural Resources and Conservation of the Ecosystem of the Turkmen Sector of the Caspian Sea and its Coastal Zone", dated June 16, 2003.

d.  Role of State Petroleum Concerns.  Article 7 of the Petroleum Law permits the so-called "State Petroleum Concerns" to assist the Competent Body in the exercise of its powers.  Until the 2005 amendments, the Petroleum Law vested these Concerns with the power to sign contracts, independently perform petroleum operations in certain specifically defined areas, act as participant in joint ventures, and supervise petroleum operations – which potential multiple roles could lead to some tension vis-à-vis foreign investing companies in certain cases.  In any event, these specific powers provisions have now been deleted from the Petroleum Law – which puts the role of these state enterprises in limbo until further practice develops.

Currently, the most important of these enterprises are Turkmenneft (oil), Turkmengaz (gas), Turkmenneftegaz (refinery, transportation and trading), and Turkmengeologiya (geological exploration), these being state-owned and controlled successors to the Soviet-era state ministries and/or enterprises transformed pursuant to the 1996 Decree on the Creation of State Petroleum Concerns.[8]  (The government earlier had been insisting that foreign investors accept Turkmenneft as a carried minority interest partner in some E&P projects, but this has not been so in most recent practice and the legal basis for such is now doubtful.)

2.  License for Petroleum Operations

PL Article 15 stipulates that natural resources found in the subsurface may be developed only on the basis of a license, and that the licensee has the right to conduct only those operations specified in the license. There is either a tender, or direct negotiations, prior to the issuance of a petroleum license (as detailed in this Section 2) and the conclusion of a petroleum operations contract (as detailed in Section 3 below). 

a.  Foreign-Owned Licensees.  Licensees may be:  (i) Turkmenistan legal entities (irrespective of the form of ownership) or nationals; or (ii) in accordance with Article 14 of the Petroleum Law, foreign legal entities, provided that they register in Turkmenistan a branch or participate in a joint venture. Somewhat tighter requirements for foreign entity licensees are found in the 1998 License Issuance Decree,[9] however, these conflict with the Petroleum Law, and it appears that the more liberal statutory provisions prevail. 

b.  Types and Periods of Licenses.  PL Article 8 establishes the following types of petroleum licenses: license for exploration; license for production; and combination license for exploration and production.

PL Article 19 allows issuance of an exploration license for up to six years plus two two-year extensions; a production license for up to 20 years plus a possible single five-year extension; and combined exploration and production license for the maximum combined exploration and production terms (plus extensions) together. (Note that the official Model PSA (see Section 3(c) of this article, below), at Arts. 3.2, 3.4 and 5.2, provides for somewhat different initial and extension period arrangements.  Such regulatory inconsistencies need to be borne in mind.)  The Petroleum Law now specifically states – at Articles 16 and 19 – that any extension of the terms of a license shall be made by the Competent Body only on the basis of an authorizing decree of the President. 

PL Article 13 stipulates that an exploration license holder that makes a commercial discovery has an exclusive right to apply for and obtain a production license. (Here again, a presidential decree may now be required for this; not entirely clear in the PL as amended.)

c.  Tenders or Direct Negotiations.  Licenses are now to be granted by the Competent Body – and, according to PL Article 16, only on the basis of a presidential decree (per PL Article 16) as noted above – and following a tender or direct negotiations carried out between the Competent Body and the license applicant.  A tender may be either open to all applicants, or closed (that is, open only to a limited number of short-listed participants).

Despite the CIS-region governments' attraction to tenders (or auctions) as the economically preferred form, in Turkmenistan the large new development projects still commonly proceed by direct negotiations.

d.  Annulment of Licenses.  Investors have expressed concern in Turkmenistan, as in neighboring countries with similar rules, over the government’s power unilaterally to annul a petroleum license – and have the associated contract simply be terminated and deemed invalid – on various grounds outside of the parties’ contractual agreement.  See PL Articles 21-23 and 27-28.  (See also Section 3.e. below.)

e. Assignment of Licenses.  PL Article 51 allows a contractor to assign all or part of its rights and obligations under the license and agreement to an interested third party only with the prior written consent of the Competent Body.  A more permissive assignment rule applies to assignments to affiliates and shareholders, where consent is not required.  However, this more permissive treatment does require the assignor, for as long as it retains a part interest, to bear joint and several liability together with the assignee.  (Note that the Petroleum Law defines an “affiliate” relationship as involving control of “more than 50%” of voting rights.) 

f. Priority of License Over Contract.  The resource-use license has clear prevalence in the Turkmenistan regime.  PL Art. 25 states:  “The period of effectiveness and the terms of a contract shall be determined by agreement of the parties in accordance with this Law and the license, and with account taken of the provisions of the model contract.”  See also Petroleum Law Article 15: "The terms of a contract must accord with the terms of the license."  (See further Section 3.c. below regarding Turkmenistan’s officially-sanctioned model contracts.)

3.  Contracts: Types; Main Features

The Petroleum Law provides for certain types of contracts that may be used for conducting petroleum operations: (i) production sharing agreements (PSAs), (ii) joint activity agreements (JAAs), or (iii) as permitted by PL Article 24, a combination of these two types of agreement, as well as other kinds of agreements suited to the specific situation. The terms and conditions for conducting petroleum operations, including the program of work and expenses for such operations, are defined in these agreements. 

a.  Production Sharing Agreements.  In accordance with PL Article 24 (as recently amended), PSAs are to be signed on the Turkmenistan side by the Competent Body – again on the basis of a specific presidential decree.  This change should add certainty in an area previously marked by some confusion.  (The PL had earlier provided that the PSA could be signed by the Competent Body and/or a State Concern – and there was uncertainty over the possible role of the State Concerns, and who other than President Niyazov himself could legally sign on behalf of the Competent Body (although the PSAs to date seem to be signed by the President – acting in his capacity of Chairman of the Competent Body – in any event). The agreements concluded between the government and investors to date for fields now under exploration or development, as well as the pending E&P project negotiations, are all PSAs as far as we are aware.

b.  Joint Activity Agreements.  JAAs are to be signed by a state body on the basis of a presidential decree (apparently, not by the Competent Body, although it would appear that the President may also authorize the Competent Body to sign a JAA).  In a JAA, the State is evidently always a party to the agreement through the state body authorized by the President.  It is not clear to us whether any such JAA, as a type of petroleum development contract with the state (as distinct from a PSA), has been executed or is even in negotiations or discussion to date.

c.  Model Contracts.  Government-generated “model” contracts on production-sharing (the "Model PSA") and joint-venture activities (the “Model JAA”) in Turkmenistan have been in place at least since 1997, adopted by the Decree on the Competent Body and Model Contracts.  (See footnote 5 above.)  Note also that there have been at least three versions of the Model PSA made available from that time forward, as well as a considerable amount of de facto updating of the model from negotiation to negotiation – as each new potential PSA investor company has found. 

These model contracts are commonly considered to be recommended templates, rather than mandatory in all particulars.  The Petroleum Law does not clearly state in which areas and to what extent deviation is permitted.  Likewise, Articles 3 and 4 of the Decree on the Competent Body and Model Contracts simply “approve” the model contracts, respectively, without elaboration as to permitted deviations.  On the other hand, under this Decree the model contracts were adapted expressly to implement the Petroleum Law, and this may be considered to have some special force. 

In any event, investors have been generally receptive to the evolving models, at least as general anchor points of negotiation.  And some deviation – and certain expansion, in areas not covered (or at least not detailed) in the relevant model contract – has been permitted in specific project negotiations to date.

The Model PSA covers a wide range of issues, including, among others: exclusive rights to the delineated deposit; the minimum work program (and appropriate guarantees, including bank guarantees); relinquishment (at the exploration stage); memorialization of the investor’s rights to favorable import and export terms (or exemptions); joint management in the form of an “operating committee” of investor and government representatives; pipeline construction and operation rights; elaboration of the production-sharing formula with a definition of permitted recoverable costs; valuation and measurement of petroleum; requirements of contractor marketing for the State, and of mandatory sales to the State in certain circumstances; gas field retention; local goods-and-services and labor input rules, to assure maximization of benefit to the national economy; obligations to develop social infrastructure; rules pertaining to subcontractors and their taxation; assignment; insurance; bonus and royalty payments; transfer of assets upon full cost recovery or termination of the agreement; field unitization; and dispute resolution.  Many of these points are discussed individually further below.

The Model JAA covers a range of issues similar to the Model PSA, but there are several important differences (reflecting the distinct core natures of these two forms of agreement).  For example, unlike the PSA in which all costs and risks are borne by the investor, in a JAA the costs and risks are allocated.  Accordingly, the Model JAA provides for a more specific elaboration of participating interests and financing commitments.  Again, we are not aware of any JAA having been concluded to date. 

On most issues, the model contracts fairly faithfully reflect provisions of the Petroleum Law and other applicable laws.  On some points, however, there are inconsistencies, including model contract provisions that are more flexible or favorable than the law toward investing companies.  These discrepancies leave room for debate in cases where such a model contract provision has been incorporated into a signed agreement; in the event of an important dispute one must face the prospect that the law will be held to control.  In other cases, the model contract fills in detail of obligation not stated in the law, and so may well give rise to debate in contract negotiations as to whether the State is entitled to impose concrete obligations beyond the law on such points.  Examples of such discrepancies are given below.  (See also Section 2.a. above, regarding license periods.)

For simplicity, for the most part specific references are made below only to the provisions of the officially adopted Model PSA (which, as noted above, is being updated on a de facto regular basis to date); in many cases similar provisions can be found in the Model JAA as well.

d.  Cost Recovery.  Pursuant to PL Art. 29, contractors may recover their petroleum operations costs only upon declaration of a commercial discovery, and only up to the amount of the income to which said contractor is entitled for its share of the produced hydrocarbons.  (This rule apparently is meant to cover participants in either PSAs or JAAs.)

e.  Termination.  As indicated above, in the Turkmen hydrocarbon development regime the license has priority over the contract, and contracts – PSAs and others – are subject to immediate declaration of invalidity and termination upon revocation of the license for one of the many reasons provided in the law.  This is quite clear from the Petroleum Law itself, Art. 27 ("the contract shall be recognized as invalid upon revocation of the license") and Art. 28 ("revocation of the license shall entail termination of the contract"), and is reinforced in the Model PSA Art. 35.1 and in the Model JAA Art. 35.1.

Furthermore, these Model PSA termination provisions (for various claimed breaches of the contract or license and failure to cure upon notice) are not stated to be conditioned on a definitive finding of such breach by the chosen dispute-resolution tribunal under Model PSA Art. 29.2.  Foreign investors should try to insist on such express linkage in the contract, to reduce the risk of arbitrary license revocation and/or contract termination – although to date there has been little if any negotiating success by investors in this regard as far as we are aware.  (Some disputes in the area of agreement/license termination have arisen already.  See discussion at Section 12 below.)

4.  Operations Rules (Permitting, etc.)

The requisite operations permits are distinct from the basic petroleum license described in Section 2 above.  Operations permitting is meant to ensure that the operator possesses the necessary qualifications in a particular sphere of technical activity.  In accordance with the Operations Permit Decree,[10] an operations permit is needed for virtually each key element of exploration, extraction, and transportation.  These operations permits must be received prior to commencing each specific type of subsurface operations.

The Operations Rules, adopted by the President’s Resource Use Decree in late 1999, are a set of comprehensive rules (some 155 pages in all) covering virtually all aspects of petroleum project work.  These Operations Rules replace outdated Soviet-era rules from 1970 and 1984, but also range beyond to some matters that had not previously been regulated.  The subjects covered include (in order): permitting and bonding, exploration plan, appraisal plan drilling, completion, workover and abandonment, development plan, operation of production wells and facilities, conservation of oil and gas resources, environmental protection, safety and health, specific offshore rules, records and reporting, and remedies (dispute resolution provisions) for investors’ violation of the Rules.  (See Section 12 below for further discussion of dispute resolution in general.)

These Operations Rules, developed with the assistance of Western consultants and meant to reflect current international practice, are now of central importance for all hydrocarbon-sector investors, with regard to new as well as already-licensed fields; practical experience in recent negotiations confirms this importance.  Section 1.2.2 of these Rules stipulates that the Rules apply to all operators, contractors, State Petroleum Concerns, the Competent Body, state entities and all other persons “engaging in the conduct or administration of Petroleum Operations” in Turkmenistan.  (Per Section 1.5.2, there was a two-year transition period from the old rules until early 2003 for field operations being conducted entirely by one of the State Petroleum Concerns.)

Section 1.2.3 of the Rules does state that in the event of a conflict between the provisions of the Rules and a pre-existing contract, the contract provisions prevail.  However, it is then stated:

“A conflict shall not be deemed to exist merely because a Contract is silent as to any matter as to which these [Rules] contain express provisions, except, as to Contracts entered into prior to the effective date of the [Petroleum] Law, to the extent such provisions materially affect a Contractor’s rights, interests and benefits under the Contract and License.”

In other words, full “grandfathering” protection may extend to projects involving foreign companies only in those few projects involving contracts already signed in March 1997 when the Petroleum Law came into effect.[11]

The Competent Body is charged with administering these Operations Rules, as well as with developing additional regulations “for the exploration, appraisal, development, production and abandonment of Petroleum fields according to International Oil Field Practice.” (Section 1.3). 

5.  Taxes and Other Payments

Petroleum operations are subject to the taxes and fees, and are granted the exemptions and benefits, summarized below.

The Petroleum Law first provides (at Art. 49) that only the specific taxes and other levies set forth therein may be charged to contractors for their petroleum operations.  (Both the Model PSA and the Model JAA also state – at Article 16.4 of each – that "no tax, duty, fee or other impost shall be levied on the Contractor or its shareholders in respect of profit derived from Petroleum Operations hereunder or in respect of any property held," other than those provided for in the agreement.)  The following are then specified (or, in some cases, may be extrapolated from other Turkmenistan legal acts):

a.  Tax on Profit.  Petroleum Law Article 49 provides that petroleum contractors are to pay profit tax at the rate provided by general law.  Article 172 of the Tax Code[12] sets this rate (i.e., the general corporate profit tax rate) for entities operating under the auspices of the Petroleum Law at 20%.[13]   (Note that the Tax Code establishes lower rates for local privately owned legal entities; however, entities operating under the Petroleum Law appear to be expressly excluded from application of this lower rate.)

Article 49 goes on to state that "the manner of determining taxable profit shall be established by the agreement."  See also Article 177 of the Tax Code, providing that legal entities acting under the auspices of the Petroleum Law calculate their profits tax, file tax returns and pay the profit tax in accordance with the provisions of this Law.  

With regard to tax-deductible expenses, the Model PSA (at Art. 16.2) first refers back to the old Profit Tax Law for the general list of such expenses, then "more precisely define[s] and identif[ies]" them to include: royalties; operating expenses (as broadly defined in the Model PSA); interest and fees on loans taken out to finance project development operations (such loans not to exceed 70% of the project finance cost); exploration expenses (as defined, at maximum depreciation rate of 50% per year); development and production expenses (as defined, at maximum depreciation rate of 25% per year); and a catch-all for other expenses.  There is also a seven-year maximum expense carry-forward provision.[14]

b.  Royalties.  A royalty on the extraction of hydrocarbons is established, the size of which is to be determined in each agreement. The Model PSA (Art. 35) evidently contemplates a graduating scale of royalty percentage for increasing daily production levels of oil and gas, but with the actual percentages left blank for negotiation; payment of the royalty in cash or in kind is left to the State's discretion.   According to various reports, the royalty has ranged from 3% to 15%, depending on the particular circumstances of a project.

The treatment of royalties is essentially the same under both the Model PSA and the Model JAA; however, under the JAA the royalty is due jointly from the State Concern participant and the investor oil company(ies) (and payable to the state) whereas under the Model PSA the royalty is due only from the investor oil company(ies). Royalty is stated to be payable in cash or in kind, at the State's option.

c.  Bonus.  The Law also provides for bonus payments (not mandatory for each agreement), at signature and at achievement of set production levels.  The Model PSA (Art. 33), not surprisingly, contemplates both types of bonuses – including the possibility of several staged production bonuses in each project, keyed to production volumes of oil or oil equivalents, again with the amounts left blank.

d.  Other Levies.  (1) Rentals: The Subsoil Law (Art. 32) contemplates annual surface rental payments, in distinct amounts for the various exploration and production periods.  However, there is no express basis for rentals in the Petroleum Law (in Art. 49 or elsewhere), and we do not know of their being included in any recent E&P contract. (2) Transport tariff:  The Law itself (Art. 40) provides that a "transport tariff shall be established and assessed by the pipeline company."

e.  Stabilization, etc.  The Petroleum Law and Foreign Investment Law (sometimes referred to below as the “FIL”),[15] taken together, provide a degree of stabilization protection from changes in tax and other laws.  See Section 11 below.

f.  Tax Holidays.  The following would likely not benefit investors in PSAs or JAAs  (by the nature of which, normally, no new legal entity is formed for the investment), but may well be useful for petroleum investors in other forms. 

Namely, Article 17 of the Foreign Investment Law grants tax holidays to Turkmen legal entities in cases where a foreign investor has contributed hard currency amounting to more than 30% of the entity’s charter fund, for the investment recoupment period:  There are exemptions from the profit tax on the legal entity itself, as well as from the tax on dividends to the foreign investor. Further, after the recoupment of the initial investment, such a foreign investor is exempt from taxes for any reinvested part of income.  Finally, it is stated that the Cabinet of Ministers may grant legal entities with foreign participation other tax incentives on a case-by-case basis. 

g.  Value-Added Tax.  According to Art. 95 of the Tax Code, the contractors and subcontractors under the Petroleum Law are not payers of VAT.  Also, oil exported by a producer company under a PSA or JAA is supposed to be free of VAT assessment – by virtue of various provisions of the Petroleum Law and the model agreements (see above and below).  It is important in each project to try to obtain extension of the VAT exemption to all suppliers (and suppliers of suppliers) who provide goods and services for contractor’s petroleum operations

6.  Import/Export Regime

Turkmenistan maintains a partial licensing regime for exports and imports (albeit somewhat loosened by now), and a customs duty/tax regime for imports (and some exports) of good and services.  There are the following exemptions designed to encourage foreign investment in the oil and gas sector and generally.

a.  Exemptions For Petroleum Operations.  By Article 48 of the Petroleum Law, all materials and equipment used solely in petroleum operations are stated to be exempt from customs duties and required registration with the State Commodity and Raw Material Exchange.  This exemption (for contractors and their subcontractors) is elaborated in Model PSA Arts. 6.1.1 (k) and 23.1.[16]

With regard to free export of production, the Petroleum Law (at Art. 37) itself provides only in vague and somewhat confusing terms that a contractor has the right "freely to dispose of the portions of hydrocarbon resources belonging to it in Turkmenistan, as well as in other countries in cases of special agreements with those countries." (There are no such "special agreements" yet in existence as far as we are aware, as confirmed by local counsel. The Model PSA (Art. 23.8) elaborates and clarifies the intent as follows:

"There shall be no license, other than a Production License, required for, and Contractor shall be exempt from any duty, fee or other financial levy (except those charges paid to the Authority for actual services rendered) in respect of the export of petroleum to which Contractor is entitled hereunder."

Of course, a contractor's direct "entitlement" to a share of production for free export, and possible subjection to the general licensing/duty regime, may well vary depending on the nature of the contractual arrangements (PSA or other).  Investors should make all effort to have the product export right clearly stated in the agreement – and further supported in an appropriate presidential decree, where possible.

Problems have arisen in the application and employment of these exemptions in practice.  In 1999 a set of customs clearance rules were adopted, specifically targeted to petroleum operations, intended to improve the situation.  These rules are set forth in the Decree on Rules for Customs Clearance,[17] and meant to simplify customs clearance (and eliminate customs registration duties) for: (i) goods, materials and equipment imported to Turkmenistan by contractors and their subcontractors for conducting petroleum operations under PSAs and JAAs; and (ii) crude oil and natural gas exported by contractors as allocated volumes under PSAs and JAAs. Some burdensome customs clearance paperwork will inevitably remain, however.

b.  General Exemptions for Foreign Investment.  Activities that do not qualify as petroleum operations may nonetheless qualify for a general foreign investment exemption. 

FIL Article 16 provides that Turkmen legal entities with foreign participation may be exempted from the import licensing rules for imports (goods and services) used as inputs for such entities’ own activities. Further rules for determining eligible imports/inputs are to be specified by the Cabinet of Ministers.  In addition, contributions by a foreign investor to the charter fund of a local entity (essentially, its capitalization), and property intended for its own material production, may be exempted from import taxes and customs duties.[18]

7.   Currency Rules

The Petroleum Law (Art. 47) has only a few brief provisions on this subject. Initially, there is stated the general and somewhat uncertain rule that "[t]he manner of conducting currency operations by contractors and subcontractors is determined by the current legislation of Turkmenistan and is set forth in the agreement."  Turkmenistan's generally applicable currency regime – based on two 1993 laws[19] and a series of presidential decrees and central bank regulations – is beyond the scope of this article.

However, the general regime is then qualified (i.e., specially liberalized) to some extent by the Petroleum Law and by the Model PSA. 

8.  Environmental Protection

This has been a very sensitive area for investors throughout the CIS.  The proper interplay between the old Soviet environmental rules (which were themselves an odd mix of inflexible, zero-tolerance strictness as written, and uneven enforcement) and modern international practice is difficult to understand and navigate.  The regime in Turkmenistan is evolving.

PL Article 38 states that petroleum operations are to be carried out, among other things, “with observance of the requirements of environmental protection.”   There are further broad statements here that measures are to be taken to avoid various types of pollution of the surrounding land, water, etc., and that environmentally appropriate clean-up and restoration measures are to be taken in the event of any pollution.  Article 32 appears to add a flat prohibition on the dumping or storage of petroleum operations waste at sea, and permits dumping of waste-water at sea only after it is cleaned "to within established permitted levels of pollution."

PL Article 45 requires contractors to submit in advance a plan for environmental protection measures, which plan is to be reviewed within thirty days by the proper state authorities.   As indicated in the Petroleum Law, Turkmenistan’s existing general environmental laws and regulations must necessarily be taken into account.  For example, Article 3 of the Law on State Environmental Evaluation requires an environmental review (essentially, an environmental impact assessment) for various generally defined activities, which would normally include drilling and other extraction operations.  Various state agencies may be involved, depending on the specific activity.

The Model PSA (Art. 28.2) further provides that: "In order to protect and preserve the natural environment, including flora, fauna and marine life of the contract area, including in particular the special ecological conditions of the Caspian Sea" (emphasis added), contracts "shall implement such environment protection actions as are dictated by good oilfield practice."  These actions are to include:

  • "establishment and application of procedures to ensure the highest reasonable international standards of environmental protection, with specific reference to the preservation of the Caspian Sea ecological conditions";
  • advance submission of an environmental impact report analyzing the possible effect of the operations on the Caspian Sea ecological system; and
  • obtaining the State's consent to proceed with the operations, such consent not to be unreasonably withheld as long as the effects on the Caspian Sea ecology will not be greater "than would result from application of the aforementioned highest reasonable international standards."

Further, the Operations Rules have a detailed section on environmental protection in general (Chapter IX) and special rules for offshore operations (Chapter XI) as well as on safety and health (Chapter X).  Current and potential investors will have to carefully examine these Rules as to their consistency with international standards.  The Competent Body is also supposed to be developing further rules in certain areas, to be consistent with international standards.

See also the note above on the role of the Caspian Enterprise and its interaction with other agencies on environmental matters.  Finally, one should note the National Plan of Turkmenistan on Warning and Liquidation of Oil Spills, enacted by Decree of the President No. 5361 of August 21, 2001. This is focused on the Caspian Sea area.  And we understand that further regulations are being developed in this realm.

9.  Local Content and Labor

Turkmenistan’s local content and labor preference rules, found in Article 38 of the Petroleum Law, are rather mild in comparison with Kazakhstan’s and Russia’s; no minimum thresholds are mandated, either for product content or workers.  These rules should thus be manageable (although the Model PSA does add some more substance to the requirements).   

Preference is to be given to “equipment, materials and finished goods that are manufactured in Turkmenistan, if they are competitive in quality, price, specifications, and delivery conditions.”  (Under Model PSA Art. 20.3, tender procedures are to be established for procurement of goods and services.)

Note also that Turkmenistan adopted state procurement rules in 2002.[20]  These appear to require Turkmenistan state entities to procure goods and services for state needs via open or closed tenders.  From our brief review, the selection process involves both objective (price, quality, quantity, etc.) and subjective (professional reputation, reliability, environmental and health safety) criteria, thereby affording considerable flexibility to the procurer.  A contractor might consider adhering to these procedures or stipulating similar ones in its PSA.  This may, however, raise a concern of whether consistent selection of foreign suppliers/supplies through an open, transparent and “officially recognized” tender process might nonetheless be seen to violate the “prefer local” requirement under the Petroleum Law.  (From our project negotiations practice, there also needs to be agreement on one or more dollar price thresholds for goods/services procurement – above which a tender is required, certain Management Committee approval is required, etc.)

Further, Turkmenistan workers are to be given preference in hiring. (The Turkmen Government's approach on this recent PSA negotiations has been to focus on limiting the number of expatriates to ceiling of 30% of the staff – save for temporary urgent-need instances.  This approach is based on a certain presidential decree plus apparently some informal recommendations from high state offices insisting on "strict policing" of investors in this area.[21] And operations contractors are to provide training programs.  (Under Model PSA Art. 21:  subcontractors are to have the same training requirements as contractors; a program of annual phase-in of Turkmenistan employees is to be followed; training is also required for personnel to fill monitoring/supervisory jobs with the State; and specific minimum annual dollar training expenditure levels are to be imposed for the exploration and production periods.)

10.  Other Obligations and Rights

Other notable obligations and rights of contractors under the Petroleum Law and the Model PSA include the following:

  • Mandatory relinquishment.  Model PSA Art. 5.2 requires that contractors under an exploration license relinquish 25% of the original contract area upon entering into each successive two-year renewal period, and has related provisions that apply upon transition from exploration to production.
  • Required sale of State’s share.  By notice at any time in the course of the project, the State may require the contractor to use best efforts to sell all or part of the State’s share of oil or gas production.  (Model PSA Art. 17.1)
  • Emergency requisition.  In the event of “national emergency,” the State is entitled, on notice, to buy “up to the required amount” of contractor’s share of crude oil production – this right to be exercised pro rata among all products in the country, and such oil to be paid for in U.S. dollars at the normal wellhead price, with contractor’s provable damages also to be compensated.  There is a further provision allowing the State to requisition up to 50% of each contractor’s share of production in the event of particularly acute need.  (Model PSA Art. 18)
  • Gas.  There is a special provision regarding natural gas discoveries.  Associated gas may be reinjected, marketed or flared per agreement of the contractor and the State of (Model PSA Art. 19.1).  Upon discovery of non-associated gas, the contractor may – if commercial production is demonstrably not yet expedient for technical or market demand reasons – have up to an additional five years’ extension of the exploration period before commercial production or relinquishment will be required (Art. 19.2).  And the contractor is given the opportunity to agree to special production-sharing terms for commercial production of non-associated gas, on terms “no worse than” and that will allow “comparable net economic benefit” as for production of crude oil (Arts. 19.5 and 19.6).
  • Field unitization.  The State may require two or more contractors having adjoining field licenses to proceed jointly with a unitized field development and production program, if one or another of these fields is not commercial absent unitization.  A contractor that declines to proceed in this way may be forced to relinquish the affected portion of its license area.  (Model PSA Art. 26)  The Turkmen side has been quite tough in negotiations in this area.
  • Insurance.  The Petroleum Law (Art. 53) describes a full range of insurance coverages that contractors are required to acquire and maintain, ending with a catch-all "other forms of insurance carried by contractors in accordance with international petroleum project practice."  The Model PSA basically repeats this, and adds that up to 100% of reinsurance coverage may be through contractor's insurance affiliates, as long as the terms are competitive.
  • Management.  Governance requirements for Management Committees established for PSAs are touched on in the Operations Rules, and also covered in some detail in the specific Regulation on Committees to Manage Contract Territories, enacted by Presidential Decree No. 4001 of December 19, 1998.  The two documents are not consistent on all points.
  • Accounting and audit.  In general, contractors are to keep their petroleum operations accounting records of income and expenses, and taxable profit, "in accordance with international practice" (Petroleum Law Art. 46 – or, as more precisely stated at Model PSA Art. 37.1, "accepted international petroleum industry accounting standards and procedures"), in both US dollars and Turkmen manat.  There are further rules, in the Petroleum Law and the Model PSA, on general reporting, bookkeeping on local laborers' wage and social security matters, and the State's right to audit contractors' books.

11. Investor Protections

Investors may look to both the Petroleum Law and the Foreign Investment Law for certain stabilization and other legal guarantees and protection, although these two laws address this issue differently.  Unlike the general 10-year stabilization afforded under the FIL, there is a possible interpretation that the Petroleum Law protects only from changes of tax laws, and not laws in general (i.e., the Petroleum Law’s only stabilization clause – while itself containing general language not limited to tax law changes – is built into the tax article).  The Model PSA has followed the latter approach, addressing only stability of tax legislation.  But an appropriate stability clause, covering non-tax changes of law as well, makes sense and ought to be achievable in negotiation; there is experience in this.

In any event, instead of the “frozen law” approach under the FIL (albeit with a 10-year limit), the Petroleum Law does not at all provide for “freezing” the applicable law but instead provides only for parties to review and amend relevant PSA so as to re-establish the balance of economic interests as of the time investments were first made.  As a result, in the Model PSA and in PSA negotiations, the Competent Body has consistently approached the “stabilization clause” with a view only of balancing economic interests (in general and in the tax context specifically). 

The reliability of this balancing-of-interests approach has just been diluted somewhat more by one of the recent Petroleum Law amendments (at Article 49), which makes the introduction of compensating adjustments into an amended PSA also subject to a specific authorizing presidential decree. 

Note further that, unlike Petroleum Law which contains an explicit supremacy clause overriding other conflicting Turkmenistan laws, the FIL would not prevail in such cases of conflict.  There is indeed a fundamental issue of whether the FIL applies at all to matters that are addressed differently in the Petroleum Law.  For instance, notwithstanding the FIL’s general assertion of jurisdiction over foreign investments in “concessions on use of natural resources” (Art. 1), it might be argued that its general 10-year stabilization clause does not apply to PSAs for it is not fully consistent with the “more-directly-on-point” Petroleum Law’s stabilization clause which is limited to taxes and provides only the economic balancing mechanism.  We suppose that there should be room for application of FIL protections to hydrocarbon development projects, save for areas of direct conflict with the Petroleum Law.

Various bilateral and multilateral treaties of Turkmenistan – including the Energy Charter Treaty[22] – may also afford certain valuable protections (although that treaty does not contain any stabilization-type provisions as such).

12.  Dispute Resolution

a.  Choice of Forum.  Article 57 of the Petroleum Law expressly allows the parties to choose international arbitration for resolution of any disputes “associated with issuance, refusal to issue, suspension of effect and or annulment of a [resource-use] license, as well as associated with performance of a contract.” (Further, FIL Article 32 provides:  "The disputes of a foreign investor with legal entities and physical persons shall be reviewed in the courts of Turkmenistan or, by agreement of the parties, in an arbitration tribunal.")

The Model PSA (Art. 29.2) is consistent with the above, providing that "differences or disputes aris[ing] out of and in relation to [the PSA]" be referred to arbitration in Stockholm under the UNCITRAL Rules.  There is a further special provision (Art. 29.3) for certain types of technical matters in dispute to be referred instead to a sole expert, by agreement of the parties.

In practice to date investors have not had any difficulty obtaining a foreign arbitration clause in their PSAs.

Note that the Operations Rules contain their own administrative hearing provisions (Section XIII, Remedies) for adjudication of possible violations by contractors of most substantive sections of the Rules.  Under these provisions, the Competent Body is to bring charges and appoint an administrative judge from within its ranks to hear evidence and render a decision, which decision was to be appealable to the Executive Director of the Competent Body and further to the Supreme Arbitration Court of Turkmenistan.  Civil penalties of up to $10,000 are assessable; and recommendations of criminal prosecution may be brought.  Happily, Section 13.1.1 of the Rules also expressly provides:  “In the event a Contract contains dispute-resolution provisions agreed to by the Competent Body, any violation of or failure to comply with these Regulations shall be governed by the dispute-resolution provisions contained in the Contract.”  Foreign investors acting in Turkmenistan’s oil and gas sector will presumably seek to take advantage of protection under this provision.

There is some basis for concern at the absence of a specific provision binding Turkmenistan (or at least the Cabinet of Ministers) to the enforcement of arbitral awards rendered in such disputes, particularly in the absence of any express sovereign immunity waiver in the Petroleum Law or any other Turkmenistan law.  (Turkmenistan has not yet acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.  It is a party to the ICSID Convention.)

Another basis of concern is the number of actual disputes that have already arisen in international arbitral bodies and elsewhere, directly or indirectly involving the Turkmen Government and oil and gas investment contracts, to date.  There has been difficulty in trying to enforce awards rendered by foreign tribunals.  (For the most part these disputes appear to have arisen from some of the early foreign investments in Turkmenistan, including that of the Bridas company from Argentina.) 

b. Sovereign Immunity.  It has been further suggested by some commentators that Article 62 of the Petroleum Law constitutes an express assertion of sovereign immunity by Turkmenistan in the context of petroleum operations disputes.  This concern is not necessarily unjustified, however, based on the language itself.  Article 62 reads:

“The license holder and contractor are obligated to ensure the inviolability [in Russian, neprekosnovennost] of the Cabinet of Ministers (Government) of Turkmenistan in relation to all actions, claims and demands that may be brought against the Government in connection with any acts of the license holder and contractor in the enjoyment of their rights and carrying out of their obligations in accordance with this Law, the license and the contract.”

This appears (to us, and to local counsel in Ashgabat with whom we have consulted on this matter) rather to be only a hold-harmless or indemnification provision, to protect the Government against claims by third parties arising out of the actions of the licensee/contractor.  It does not appear an effort to block direct claims by the licensee/contractor.  (Turkmenistan officials with responsibility for the petroleum sector have in the past informally confirmed the same for the authors; we have also seen a clarification letter from the Ministry of Justice that appears to confirm this view.  Yet the degree to which an investor could rely on these interpretations is not clear.)  This should be further clarified to the extent possible in the investors’ petroleum operations agreement (PSA or JAA) with the Government.  The agreement should also ideally contain an express waiver of immunity by the Government, which also may be achievable in negotiation.

c.  Choice of Law.  The Petroleum Law does not clearly speak to the issue of governing law (choice of law) for petroleum operations contracts.  Further, the Civil Code of 1999 does not touch choice of law, and a long-planned relevant law on Private International Law evidently will not be ready soon. Thus, there appears to be no express bar in current Turkmen law to the parties’ choice of a foreign body of law to govern their mutual relations under the contract.

However, the Model PSA does clearly provide (at Art. 29.1):  “This Agreement shall be governed by, interpreted and construed in accordance with the laws of the Republic of Turkmenistan.”  (The Model JAA, also at Art. 29.1, provides the same.)

This point may give rise to lively debate in the contract negotiations.  Certain acceptable compromise formulations have been developed in the agreements to date.  In any event, it must be understood that the investor's actual project operations in Turkmenistan will be regulated by local law (environmental, labor, safety, tax, etc.) and other imperative norms unless otherwise specifically allowed by exception in the law.

*               *               *

Copyright LeBoeuf, Lamb, Greene & MacRae LLP March 2006.  Some rights reserved.  This material or portions hereof may be used in any form with express acknowledgement of the source.


[1]    Mr. Hines is a partner of LeBoeuf, Lamb, Greene & MacRae, LLP, international law firm, based in Moscow.  He heads the firm's CIS-wide oil and gas practice, and can be reached at jhhines@llgm.com.  Mr. Marchenko is an associate with the LeBoeuf Moscow office, and can be reached at amarchen@llgm.com.  The authors have experience assisting clients in a number of hydrocarbon development projects in Turkmenistan over the past 12 years to date.  The authors express thanks to Takhir Bayramsakhatov (Moscow Law Academy 2006), legal assistant in the Moscow office for his valuable assistance in the preparation of this article.

Information contained herein is accurate as of mid-March, 2006, to the best of our knowledge as confirmed by local counsel in Ashgabat.  But the contents hereof should not be relied on as legal advice – all the more so given the relative lack of transparency of legal developments in Turkmenistan (even by general CIS region standards).  Potential investors should consult qualified legal advisors before proceeding with any specific project.

[2]     There has been much scholarly commentary focus on that subject in the post-Soviet years to date. See, e.g., Brice M. Clagett, Ownership of Seabed and Subsoil Resources in the Caspian Sea under the Rules of International Law, Caspian Crossroads Magazine, Vol. 1, No. 3 (1995), Bernard H. Oxman, Caspian Sea or Lake: What Difference Does It Make?, Caspian Crossroads Magazine, Vol. 1, No. 4 (1996), Eric W. Sievers, The Caspian, Regional Seas, and the Case for a Cultural Study of Law, The Georgetown International Environmental Law Review, Vol. 13:361 (2001), and V.I. Kalyuzhnyi, Problemy prinyatiya pravovogo statusa Kaspiyskogo morya [The Problems of Recognition of the Legal Status of the Caspian Sea], Neft Gaz Pravo, No. 3, at 12 (2004). 

[3]     Law on the Subsurface, December 14, 1992.

[4]     Law on Hydrocarbon Resources, December 30, 1996, as amended on August 22, 2005 and December 2005.

[5]     Decree of the President No. 3189, dated June 6, 1997, On Measures for the Realization of the Law of Turkmenistan on Hydrocarbon Resources (the "Decree on the Competent Body and Model Contracts"). See in particular Appendix 1 to this Decree – the Regulation on the Competent Body on Use of Hydrocarbon Resources under the President of Turkmenistan.

[6]     Decree of the President No. 4416, On Further Measures to Improve the Principles of the Use of Hydrocarbon Resources (adopted October 22, 1999), approving (i) the Rules of Development of Hydrocarbon Fields of Turkmenistan in the “Golden Age” of the Turkmen People (the “Operations Rules”), and (ii) the Regulations on Interaction Between the Competent Body and Other State Bodies (the “Agency Interaction Regulations”).  These Rules and Regulations were developed with substantial input from the Haigler Bailly consulting firm from the United States under a grant from the U.S. Agency for International Development.

[7]     These other agencies include: the Main State Service for Foreign Investments, Main State Tax Service, the Main State Service Turkmenstandartlary, the Ministry of Oil & Gas Industry and Mineral Resources, the Ministry of Economy and Finance, the Ministry of Natural Resources and Environmental Protection, the Paramilitary BOP Service and the Institute BalkanNIPINeft (both divisions of the State Concern Turkmenneft), the Oil and Gas Institute of the State Concern Turkmengaz, and the Scientific Research Institute For Geological Exploration (NIGRI) of the State Concern Turkmengeologiya.

[8]     Edict on the Improvement of the Oil and Gas Complex and the Efficient Use of Mineral Resources, No. 1848, July 1, 1996.

[9]     Decree of the President No. 3999, On the Procedure of Issuing Licenses for the Right to Conduct Petroleum Operations on the Territory of Turkmenistan, December 18, 1998.

[10]   Decree of the President No. 1743, On the Creation of the National System of Standardization and Certification, of April 6, 1994, as amended.

[11]   See also Section 1.2.4 of the Rules, regarding Management Committee approval of plans, programs, etc., under contracts entered into prior to adoption of the new Rules.  Section 1.5.1 of the Rules further provides: "The continued operation of any well placed in operation prior to the effective date of these Rules shall not be cause for issuance of a Notice of Violation under Section 13.1.4 of these Rules so long as no major workover is undertaken on such well and as long as the continued operation of such well conforms to a Development Plan approved by the Competent Body.  The undertaking of major workover operations on such well for increasing the production from such well, or for replacing major equipment or components on such well, or the undertaking of major repairs on such well shall remove the exemption provided by this provision and such well shall thereupon become subject to these Rules as any other new well."

[12]   The Tax Code of Turkmenistan came into effect on November 1, 2004 (and amended effective November 1, 2005).  It repealed the 1993 Law on Taxation of Profit and certain other tax laws. 

[13]  The current Model PSA (Art. 16.1) leaves a blank for the profit tax rate to be filled in, but we understand this to be for convenience in the event the generally applicable rate is changed – as it just was, from 25%, by the new Tax Code; given the above-cited clear statements of law, this "blank" in the Model PSA would not afford investors firm legal ground on which to try to negotiate a special tax rate lower than the generally applicable rate.

[14]   See Model PSA Art. 13 for the related proposed cost-recovery and production-sharing provisions in the context of PSAs.  As noted above, the Model PSA has not been officially updated for a few years and, therefore, may contain references to repealed laws.

[15]   Law on Foreign Investments in Turkmenistan, May 19, 1992.

[16]   The Model PSA (Art. 23.3) goes on to provide, however, that this import duty exemption (as well as the companion exemption for personal goods of contractors' employees) does not apply "when, in the reasonable opinion of the Authority, items of the same, or substantially the same, kind and quality are manufactured locally and  are available for purchase and timely delivery at Contractor's operating base in the Republic at a price equal to the cost of the imported item...." (See Section 9 below for further discussion of the local sourcing preference.)

[17]   Decree of the President No. 4390, On Approval of the Rules of Customs Clearance of Imports to Turkmenistan of Goods, Materials and Equipment for Petroleum Operations, Exports from Turkmenistan of the Said Goods, Materials and Equipment, As Well As Volumes of Crude Oil and Natural Gas Due to Contractors Operating in Accordance with the Law of Turkmenistan “On Hydrocarbon Resources”, September 28, 1999.

[18]   The FIL Art. 16 provision also grants certain export licensing exemptions to legal entities where a foreign investor has contributed hard currency amounting to more than 30% of the charter fund.  To qualify, the exporting entity is supposed to receive a certificate issued by the appropriate state agency, certifying that the exports were outputs from that entity. The exports/outputs thus exempted are not to exceed in value the amount contributed to the charter fund by the foreign investor.  Note, however, that para. 4 of Decree of the President No. 3724 of May 28, 1998, On Measures for Stimulation of Export Production of Turkmenistan (as amended), did away with general prohibitions and limitations on export, except for obligatory registration of export contracts with the State Commodity and Raw Materials Exchange and licensing for export of particular products included in lists approved by the President or Cabinet of Ministers depending on the type of particular product. Thus, because presently export licensing, except with respect to products included in such lists, is not applied in Turkmenistan, there is no agency empowered to issue certificates on the basis of FIL Art. 16.

[19]   Law No. 889-XIII, On the Currency Unit of Turkmenistan, October 8, 1993; Law No. 891-XII, Law on Foreign Currency Control, October 8, 1993.

[20]   Decree of the President No. 5551, On the Procedure of Conducting Tenders for the Selection of Suppliers and Contractors (adopted March 5, 2002), approving Regulation on the Procedure of Conducting Tenders for the Selection of Suppliers and Contractors.

[21]  Decree of the President No. 6135, On Improvement of the Procedure for Entry, Exit and Stay of Foreign Citizens in Turkmenistan (adopted February 5, 2003), and attached Regulation on the Procedure for Invitation of Foreign Citizens for Temporary Work in Turkmenistan (see in particular paras. 2 and 5 thereof).

[22] Turkmenistan is a signatory to the Energy Charter Treaty and ratified it effective July 17, 1997.

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