The state and the subsoil: ownership of resources

When we talk about oil projects, it is easy to mix up three different things. The first is the subsoil itself and what lies in it. The second is the subsoil use right: the right to explore and produce in a defined area. The third is the oil and gas already brought to the surface. Each of them can have a different owner, and the position of the investor depends on how the law separates them.

The Constitution of the Republic of Kazakhstan was adopted at the republican referendum on 15 March 2026 and has been in force since 1 July 2026. It speaks of the subsoil in the same way as the 1995 Constitution after the 2022 amendments. Land and its subsoil, waters, flora and fauna and other natural resources belong to the people, and the state exercises the right of ownership on behalf of the people (paragraph 3 of Article 8). Land may also be privately owned, on the grounds, under the conditions and within the limits set by law. For the subsoil there is no such provision.

The Subsoil Code (the Code of the Republic of Kazakhstan “On Subsoil and Subsoil Use”) repeats this rule. It adds that the state exercises the right of ownership through the regime of state ownership, in the interests of the people. It gives the subsoil for use on the grounds, under the conditions and within the limits that the Code provides. Transactions made in breach of state ownership of the subsoil are void (Article 11). The Code defines the subsoil as the part of the earth's crust below the soil layer, or, where there is no soil layer, below the earth's surface and the bottom of bodies of water and watercourses (Article 10).

The Code defines the subsoil use right as a possibility, secured by law, to use the subsoil for a fee, within an allocated area, for business purposes and for a defined period (Article 17). This is a real right (a right over a thing, as opposed to a claim against a person), and it is indivisible. The rules on the right of ownership apply to it as far as they do not contradict the nature of a real right. But the object of the right is the use of the subsoil, not the subsoil itself. Under a subsoil use contract, the Republic of Kazakhstan, represented by the competent authority, undertakes to grant the right for a defined period. The subsoil user undertakes to carry out the work at its own expense and at its own risk (Article 35). The words “at its own expense and at its own risk” are the economic core of the deal: if no oil is found, the investor bears the loss, not the owner.

In almost every country in the world, oil and gas in the ground belong to the state. A notable exception is the United States, where ownership of natural resources is closely linked with ownership of land. The land, and the oil, gas and coal under it, are owned there by citizens and companies, the federal government, the states and local authorities, and Native American tribes and their members. Wide private ownership of resources is a legacy of the 19th century. At that time, the laws on the settlement of the West passed public land into private hands together with the resources.

In the USA, the rights to the surface and to the subsoil can be separated: a plot is sold, and the rights to the minerals under it are kept or sold separately. This kind of ownership is called a split estate. The opposite also happens. On part of the lands of the West that were given to settlers at the beginning of the 20th century, the federal government kept the minerals for itself. So under private land, the oil and gas belong to the state.

A company that wants to produce oil in the USA leases the rights from the owner of the mineral rights: a private person, a US state or the federal government. The owner receives a bonus when the lease is signed and a royalty, an agreed share of production or of its value. The state, as the authority and not as the owner, collects taxes. The resources of the seabed within three miles of the coast (for Texas and the west coast of Florida, three marine leagues, about 9 nautical miles) belong, as a rule, to the US states. Farther out, on the outer continental shelf, they belong to the federal government.

The main consequence for the investor is this. Where the subsoil is state-owned, there is one owner, and the terms of access are set by law and a model contract. This owner also writes the laws and collects the taxes, so the investor makes a deal with a party that can change the rules. This is why stability of the contract and firm rules on what happens when the law changes are so valuable (the section on Kazakhstan below).

A private owner of oil rights usually wants one thing: to get more for the oil. The state has more goals, and they pull in different directions. The Subsoil Code names as the aim of legislation the sustainable development of the mineral resource base for the economic growth of the state and the well-being of society. Among its tasks are protecting the state's right of ownership of the subsoil, observing the interests of the state and of citizens and the rights of subsoil users, and creating conditions to attract investment (Article 3).

• Income. The state wants to get as large a part as possible of the rent, the income over and above all costs and the investor's normal profit (the next section). Subsoil use in Kazakhstan is paid for: the fee is paid through taxes and other obligatory payments to the budget (Article 8 of the Code).
• Saving for the future. Oil is exhaustible, and income from it is in effect a sale of national wealth. The direct taxes of the oil sector go to the National Fund of the Republic of Kazakhstan. These are corporate income tax (CIT), mineral extraction tax (MET), excess profit tax, bonuses, rent tax on export, the Republic's share under production sharing and others, except those paid into local budgets. Under the Budget Code, the Fund is meant for social and economic development through the accumulation of assets, and for reducing the dependence of the economy on the oil sector and on unfavourable external factors (Articles 57, 58).
• Rational use of the subsoil. For the owner, it is important to get as much as possible out of the field over its whole life, not as fast as possible. Hence the design documents and their state expert review, the requirements for development, and the ban on flaring raw gas except in the cases named in the Code (State regulation of field development).
• Work for its own economy. Subsoil users must give preference to Kazakhstani personnel, and the share of in-country value in the works and services bought in a calendar year must be at least 70%, except for complex projects in the Kazakhstan sector of the Caspian Sea (Article 28). In the production period, as a rule starting from the second year, the subsoil user each year directs 1% of its production costs to the training of Kazakhstani personnel and to scientific work or digitalisation. It also directs 1% of its investment to the social and economic development of the region (Article 129).
• Energy security. Subsoil users supply oil for processing in Kazakhstan on delivery schedules, so that the domestic market is supplied with oil products (Article 130; there are exceptions, for example for complex offshore and gas projects). Under the Law “On Gas and Gas Supply”, the state, through the national operator, has a pre-emptive right (the right to be first in line) to buy the raw and commercial gas that subsoil users sell. There are exceptions, including gas from gas and gas condensate fields.
• Control over strategic resources. A transfer of the subsoil use right needs the permission of the competent authority, and for strategic areas the state has a priority right to buy the rights that are being sold (Articles 43, 44). The permission is refused if the transfer threatens national security, including through a concentration of rights in one person or in a group of persons from one state (Article 45).
• The environment. Subsoil use must be environmentally safe (Article 6), and after the work the subsoil user eliminates its consequences at its own expense. This obligation does not end with the contract (Articles 54, 55).

The economic meaning of owning the subsoil is the right to the resource rent. Oil has to be found, wells have to be drilled, and a field has to be built. All this costs money, which the investor could put into other business with a return at least equal to its hurdle rate (Choosing the discount rate). The rent is what remains from the value of the produced oil after all the costs are paid back together with this return. In terms of cash flow, it is the NPV of the project before payments to the state, calculated at the investor's rate.

The rent is the value of the resource itself, and so the owner has a claim on it. But the owner cannot take all of it. The investor will accept a project only if at least the required return is left, that is, if the NPV after all payments is not less than zero. Subsoil use terms decide how the rent is divided, and good terms leave the investor enough to invest.

It is convenient to calculate the rent per barrel too. At a constant price, the NPV before tax is equal to $(P - c)\,Q_\text{disc}$, where $c$ is the discounted technical cost per barrel and $Q_\text{disc}$ is the discounted production (technical cost per barrel). For each discounted barrel, the owner and the investor divide the difference between the price and the cost.

How much can the owner take? As long as the investor's NPV is positive, the project has a rent that the investor is ready to share. If we raise one payment, for example the royalty, the state's share grows and the investor's NPV falls. At some rate the NPV becomes zero: the investor gets exactly the required return and nothing above it. This is the limit rate.

The owner can receive part of the rent even before the first oil. At a hydrocarbon auction in Kazakhstan, the winner is the participant who offers the largest signature bonus (a payment for the right itself, made at signing; Article 100 of the Code). The investor cannot offer more than the project is worth to it at the required rate, with all payments and the bonus itself taken into account. Otherwise its NPV becomes negative (Net present value (NPV)). Competition pushes the offers towards this limit. But for exploration areas the bonus is paid when nobody knows whether there is any oil, and the whole risk of failure lies with the investor. So the offers take the probability of success into account (Expected monetary value and preference theory). The lesson Licences and contracts for subsoil use explains how auctions and contracts work.

The general logic is that the owner sells not oil but the right to produce it, and takes its share of the rent through payments. In Kazakhstan, this logic is written into the Subsoil Code and the laws connected with it. Below is what follows directly from state ownership. The lessons Licences and contracts for subsoil use, State regulation of field development and Petroleum fiscal systems and taxation cover in detail how a company gets the right, how development is regulated and how taxes work.

• Who represents the owner. The Government designates the competent authority, the central state body that represents the interests of the Republic in the field of subsoil use (Article 60). For hydrocarbons, this is the Ministry of Energy. It holds auctions, grants and terminates the subsoil use right and monitors the performance of contracts. Contracts are drawn up on model forms. They may depart from them only in the cases and within the limits that the Code provides (Article 36).
• Which areas, and to whom. The areas for auctions are set by the State Subsoil Fund Management Programme. In drawing it up, the state takes into account national, environmental and energy security, the country's needs for minerals and the development of the regions (Article 70). A right to hydrocarbons is awarded at an electronic auction, where the largest signature bonus wins. Without an auction, by direct negotiations, only the national company in the field of hydrocarbons (a national oil company) can get the right. This is a joint-stock company whose controlling stake belongs to the state or to the national managing holding. For large fields, its share in the contract must be at least 50% (Articles 100, 103).
• For how long. The right is temporary. The exploration period is up to 6 years (up to 18 for complex projects), and the production period is up to 25 years (up to 45 for large fields). From the day the contract ends, the area is considered returned to the state. The competent authority decides whether to eliminate the consequences of the work, to mothball the area for another subsoil user, or to hand it over in trust management to the national company (Article 107).
• The fee. The fee for the use of the subsoil is taxes and other obligatory payments under tax legislation (Article 8). These are the signature bonus, the payment for reimbursement of historical costs, mineral extraction tax, excess profit tax, rent tax on export (from 2027 it is not charged on oil produced by payers of mineral extraction tax, Article 746 of the 2026 Tax Code) and corporate income tax. Under production sharing agreements, there is also the Republic's share in production.
• Stability. Changes of legislation that make the results of the subsoil user worse do not apply to signed contracts. The exceptions are changes in the fields of national security, defence capability, environmental safety, public health, taxation, customs regulation and protection of competition (Article 36; for complex projects there is an exception for export duties). So the tax terms of most contracts change together with the Tax Code. A stable tax regime is kept for production sharing agreements signed before 1 January 2009 that passed the mandatory tax expertise (a state review of the tax terms), and for contracts approved by the President. It covers the taxes whose stability is expressly stated in them (Article 755 of the 2026 Tax Code). For contracts on complex projects, some norms of the Tax Code apply in the version at the date of signing the contract (Article 756).
• Transfer of rights. A transfer of the subsoil use right, of a share in it and of the objects connected with the right needs the permission of the competent authority. This covers participation interests and shares of the subsoil user and of the companies that determine its decisions (except shares traded on an exchange). Intra-group and some other transactions are excepted (Articles 41, 44).
• The priority right. For strategic areas, the state has a priority right to buy the subsoil use right that is being sold, or the objects connected with it, ahead of any other person, including those who have pre-emptive rights by law or by agreement (Article 43).
• Review of terms. If the actions of a subsoil user in an area of strategic importance change the economic interests of the Republic in a way that threatens national security, the competent authority may require changes to the terms of the contract. This includes a contract signed before the Code. If the parties do not agree within the set time, it may terminate the contract unilaterally. On the same ground, the contract can also be terminated by a decision of the Government. The subsoil user may challenge the termination in court (Article 106).

Strategic subsoil area

An area of one of three kinds. The first has geological reserves of more than 50 million t of oil (oil in place) or more than 15 billion m³ of natural gas, confirmed by a report with a positive conclusion of the state subsoil expert review. The second is any area in the Kazakhstan sector of the Caspian Sea. The third is an area with a uranium deposit. The competent authority approves the list in agreement with the authorised body for the study of the subsoil (Article 43).

How the priority right is exercised

The question is considered together with the application for permission to transfer the right. By decision of the competent authority, the national managing holding or the national company buys out the right or the share, at a price and on payment terms no worse than those stated in the application. If the right is transferred free of charge or contributed to the charter capital, it is bought at the market price (Article 46).

The present regime has taken shape over 35 years of independence. Its history explains why projects with different contracts and different rules work side by side in one industry.

The Soviet period. The 1977 Constitution of the USSR placed land, its subsoil, waters and forests in the exclusive ownership of the state (Article 11). State organisations explored and developed the fields. The giant Tengiz and Karachaganak fields were discovered in 1979. Gas production at Karachaganak began in 1984, and in 1985 the state production association Tengizneftegaz was created to develop Tengiz.

Sovereignty and the first deals. The Declaration on the State Sovereignty of the Kazakh SSR of 25 October 1990 declared land and its subsoil the exclusive property of the Republic and the basis of its sovereignty. The Constitutional Law “On the State Independence of the Republic of Kazakhstan” of 16 December 1991 repeated this (Article 11). To develop the largest fields, the new owner began to attract foreign companies. On 6 April 1993 an agreement was signed to create the Kazakh–American joint venture Tengizchevroil to develop Tengiz, and from 1992 negotiations were held on production sharing at Karachaganak.

The decrees of 1995–1996. The Decree “On Oil” of 28 June 1995, which had the force of law, declared all oil in its natural occurrence the exclusive property of the Republic. It left it to the contract to decide who owns oil that has been brought to the surface. The Constitution adopted on 30 August 1995 placed land and its subsoil in state ownership (Article 6). The Decree “On Subsoil and Subsoil Use” of 27 January 1996, which also had the force of law, built the system of “licence plus contract”. The subsoil use right arose on the basis of a licence, and exploration and production were carried out under a production sharing contract, a concession, a service contract, a joint activity contract or another kind of contract. On 18 November 1997 the production sharing agreement for the North Caspian was signed, and under it the Kashagan field was discovered in 2000. In November of the same year, the final production sharing agreement for Karachaganak was signed, for 40 years. In 1999 the chapter on licensing of exploration and production was removed from the decree: the subsoil use right came to be granted by signing a contract, as a rule after a tender.

The end of new production sharing agreements. From 1 January 2009, the type of contract “on production sharing” was removed from the laws on oil and on the subsoil. At the same time, the 2005 law on production sharing agreements in offshore oil operations lost force. The agreements that were signed earlier remain in force. Both laws of 1995–1996 (the decrees have been called laws since 2004) were replaced by the Law “On Subsoil and Subsoil Use” of 24 June 2010.

The Subsoil Code. The Code “On Subsoil and Subsoil Use” of 27 December 2017 has been in force since 29 June 2018. The 2022 amendments to the 1995 Constitution wrote that the subsoil belongs to the people, and that the state exercises the right of ownership on their behalf. Article 11 of the Code was changed accordingly. The Constitution adopted at the referendum of 15 March 2026 and in force since 1 July 2026 kept this wording (paragraph 3 of Article 8).

On land, the borders of the subsoil coincide with the state border. When production moved onto the shelf, rules were needed on who owns the resources of the seabed. For seas connected with the world ocean, these rules were set by the United Nations Convention on the Law of the Sea (UNCLOS) of 1982, which came into force in 1994.

• In the territorial sea, no wider than 12 nautical miles (22.2 km) from the baselines (the coastal lines from which the zones are measured), the sovereignty of the coastal state extends to the waters, the seabed and the subsoil.
• In the exclusive economic zone (EEZ), no farther than 200 nautical miles (370 km) from the baselines, and on the continental shelf, the state has not sovereignty but sovereign rights: to explore and develop the natural resources of the seabed and the subsoil.
• The rights on the shelf are exclusive: if the coastal state does not itself explore or develop its resources, nobody may do so without its express consent.
• The boundaries of the shelf between states with opposite or adjacent coasts are set by agreement on the basis of international law.

The Caspian Sea has no natural connection with the world ocean, and its status is set by the Caspian states themselves: Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. Before 1991 there were two coastal states. The five states signed the Convention on the Legal Status of the Caspian Sea in Aktau on 12 August 2018. Kazakhstan ratified it in 2019. It comes into force when the depositary (the state that keeps the treaty documents), Kazakhstan, receives the fifth instrument of ratification. Under the convention, the seabed and the subsoil are divided into sectors by agreement between neighbouring and opposite states, taking into account the norms of international law, for their sovereign rights to subsoil use.

Kazakhstan has delimited its sector by bilateral agreements: with Russia in 1998 (a protocol of 2002 set the coordinates of the line), with Azerbaijan in 2001, and with Turkmenistan in 2014. Under the agreement with Russia, the seabed and subsoil of the northern part of the sea are divided along a median line modified by agreement of the parties, and the water surface stays in common use. For promising structures and fields that the line crosses, the parties have the exclusive right to joint exploration and development. For a subsoil user it matters too that any area in the Kazakhstan sector of the Caspian is strategic: the state's priority right applies to it (Article 43 of the Code).