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Legal Framework for Investment Onshore and Offshore in TurkmenistanTurkmenistan Gas Congress

Kenyon Weaver

T +993 65 852193 / +7 727 258 1950kenyon.weaver@snrdenton.com

snrdenton.com

26 May 2011

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Outline

About SNR Denton Legal Framework for Hydrocarbons Investment

in Turkmenistan Legal Framework for Onshore Exploration Legal Framework for Offshore Exploration Outlook Conclusion

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About SNR Denton

SNR Denton is a client-focused international legal practice delivering quality and

value.

We have been in Central Asia since 1992, first project in Turkmenistan in 2000.

Our affiliated office is AK Counsel here in Ashgabat.

Merger of Denton Wilde Sapte LLP and Sonnenschein Nath & Rosenthal LLP

completed on 30 September 2010.

Joining the complementary top tier practices of its founding firms, SNR Denton

offers business, government and institutional clients premier service and a

disciplined focus to meet evolving needs in eight key industry sectors: Energy,

Transport and Infrastructure; Financial Institutions and Funds; Government; Health

and Life Sciences; Insurance; Manufacturing; Real Estate, Retail and Hotels; and

Technology, Media and Telecommunications.

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Our Locations

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Legal Framework for Investment in Hydrocarbons

Legislative Development Framework Decree of the President “On Measures of further

development of the legislation of Turkmenistan” (2007)– Established State Commission of Legislation headed by

President Five-year plan for development of national legislation

adopted by Parliament (2008) Four main areas of development

– Constitutional Law, Human Rights

– Economy and Social Policy

– Science, Education and Culture

– Foreign Policy and International Relations

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Legal Framework for Investment in Hydrocarbons

Primary Law Law on Hydrocarbon Resources (2008, amended 2010)

Other Relevant Laws Rules on the Development of Hydrocarbon Files of Turkmenistan

(1999) Subsurface Law of 1992 Maritime Shipping Code (2009) – for offshore exploration Foreign Investment Law (2008) Tax Code, Civil Code, Law on Licensing, etc.

New for 2011 Law on the Legal Status of Foreigners (2011) Law on Unfair Competition – due in 2011, effect?

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Legal Framework for Investment in Hydrocarbons

Exploration/Production Generally: Law on Hydrocarbon Resources

– Prevails over conflicting provisions of other Turkmenistan laws; where silent, other Turkmenistan laws apply (art 2)

– Creates State Agency and outlines its scope of authority vis-à-vis other agencies, COM

– Provides for license/contract regime, identifies types of contracts

– Provides rights, privileges, obligations of Contractor State Agency

– Substantial powers: conduct tenders, issue licenses, execute contracts, oversee ops, receive revenues, etc.

Turkmenistan State Companies (Turkmengaz, e.g.)– Execute joint activities with investors, manage own assets

(including pipelines)

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Legal Framework for Investment in Hydrocarbons

Exploration for gas – onshore and offshore License (arts 9 – 20)

– By open tender or closed invitation– Agency determines tender procedures– Exploration: 6 years, 2 2-year extensions– Exploration + Production: Adds 20 years + 5-year ext– Commercial discovery = exclusive right to production cont

Contract– Allows for 4 (or 5, in combination) types of agreements– Need best practices, int’l standards (arts 33, 34)– Use of Operator, subcontractors (arts 32, 25)– Stabilization (art 52)– Assignment with consent only (art 53)

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Onshore Exploration

Service contracts for the future Oil and Gas Roadshow, March 2011 (Singapore)

– PSAs in the past, Service contracts in the future Service contracts

– South Yoletan – $9.7b service contract: CNPC, Hyundai, Gulf, Petrofac

– Further investment now with expanded reserves in SY-Osman?

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Offshore Exploration

Offshore Exploration PSAs dominant

– Variety of offshore blocks now producing– Discovery of commercial field under PSA allows for right of

reimbursement of expenses on Petroleum Operations (art 25) Offshore environmental/ecological considerations (arts 27,

44)– Permit required for artificial islands, structures in Caspian,

with safety zones, cannot harm fisheries– Offshore drilling platforms only allowed where “maximum

possible preservation of sea areas” – Pipelines where “minimum disturbance of land and water

bottom”

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Offshore Exploration

Offshore drilling – Drilling rigs, barges, etc. (vessels) Primary legislative act in Turkmenistan regulating marine

vessels is Maritime Code– Adopted 23 October 2008, effective 1 January 2009– Competent authority is Turkmen Sea and Riverways

Agency (Turkmendenizderyayollary)– Previously, maritime activities regulated by Soviet-era

code– Requires re-flagging to Turkmenistan flag

Registration– Every vessel in Turkmenistan must be registered in one

of three registries: State or BBC (third, ship’s book, not applicable for drilling rigs)

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Offshore Exploration

Vessels – cont. State Registry

– Vessel becomes flagged under Turkmenistan flag; where issues resolved by law of flag, will be regulated by Turkmenistan law

– For vessels registered in the State Registry and which move out of Turkmenistan waters, temporarily re-flagging under a foreign flag permitted by decision of COM, for up to 2 years

BBC Registry – for foreign-flagged vessels– Only Turkmenistan legal entity may be BBC charterer,

not branch of foreign entity– Foreign-flagged vessels may be temporarily re-flagged

under Turkmenistan flag by decision of COM

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Legal and Sector Outlook

Legal Outlook Legislative

– Mejlis continues to develop new law for adoption– New “Law on Legal Status of Foreign Citizens” provides

framework for foreign personnel– Financing of hydrocarbon exploration/production:

Requirement for IFRS-level accounting, new Law on Credit Institutions, new Law on Central Bank,

Upcoming– Law on Unfair Competition; will there be any application

to hydrocarbons sector?

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Legal and Sector Outlook

Sector Outlook Development Plan to 2030

– Plan accepted in 2006– Plan’s production targets of 160 BCM by 2015, up to

250 BCM by 2030

Considering variety of export routes– Pipeline to China, 40 bcm by 2015, then to 60 bcm– TAPI – 33 bcm, GPFA signed December 2010 – CNG to cross Caspian to Baku in 2014– East-West, undersea Caspian pipeline?

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Conclusion

Since 2007, Turkmenistan has made great legal and economic changes to make investment more appealing, with more work to be done.

Law on Hydrocarbon Resources main law, growing number of corresponding laws

Onshore, service contracts going forward Offshore, PSAs possible. Environmental considerations

need to be taken into account. For drilling rigs, barges, and other vessels needed to

explore and produce offshore, Maritime Law (2009) governing.

For the future: new laws for 2011, new and expanding export routes this decade, gas production targets by 2030.

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Köp sag boluň

Thank you very much!

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Kenyon Weaver

Associate

SNR Denton CA Ltd.

In association with AK Counsel

Paytagt Trading Center, 3rd Floor

10 Yil Abadanchilik Avenue, Building #60

Ashgabat, 744000 Turkmenistan

kenyon.weaver@snrdenton.com

Telephone +993 65 852193 / T +7 727 258 1950

© 2011 SNR Denton.

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Legal Framework for Onshore/Offshore