03.09.2014 legal developments in 2014: changes and future developments, erdenedalai o. & blormaa...

02 September 2014

Legal Developments in 2014:Changes and Future Developments

Frontier Securities Conference

Erdenedalai Odkhuu, AssociateBolormaa Gulguu, AssociateHogan Lovells (Mongolia) LLP

www.hoganlovells.com

Content

1. Legal developments in 2014

2. Legal framework for the petroleum sector

3. Amendment to the Minerals Law and lifting of

the moratorium on granting exploration

licences

4. Laws pending Parliamentary approval

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1. Legal developments in 2014

• Previous fundamental changes - Repeal of Strategic

Foreign Investment Law and Enactment of

Investment Law

• Enactment of Securities Market Law

• Lifting of Exploration Licences Moratorium

• New Regulatory Regime for Oil & Gas

• "Glass" account law

3


Legal Reform Update

• Legislation

• Court system

– Restructuring first instant courts and increasing the

number of judges

– Specialization of courts and judges (administrative,

criminal and civil matters)

– Expectation: Increase the efficiency of court procedures

and dispute settlement period. Business and commercial

disputes will be settled quickly and judges will be more

specialized.

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2. Introduction to the legal framework for the petroleum sector

Upstream Downstream

Petroleum Law

(enacted on 1 July 2014)

Petroleum Production Law

(enacted on 1 July 2005, as revised)

New Petroleum Law sets out a

comprehensive legal framework for the

petroleum sector - the former

petroleum law enacted in 1991 had

been criticized as being out of date.

The latest development:

Specific Regulation of Petroleum

Products Licences by Ministerial Order

#171 on 29 August 2013 - separate

licences in order to engage in (i) the

import of petroleum products, (ii) retail

trade, and (iii) wholesale trade.

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Overview of Petroleum Law

Provides two types of petroleum:• Oil (crude oil and gas);

• Unconventional oil (oil sands, oil shale etc.)

Provides three main petroleum activities;• Research ("эрэл")

• Exploration ("хайгуул")

• Extraction ("ашиглалт)

Latter two activities are licensed activities:• Exploration licence for Oil and Gas;

• Exploration licence for Unconventional Oil;

• Extraction/development licence for Oil and Gas; and

• Extraction/development licence for Unconventional Oil;

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Overview of Petroleum Law (2)

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• The Ministry of Mining and the Petroleum Authority of Mongolia ("PAM")

are the two primary regulators for the petroleum sector.

– The Ministry of Mining is responsible for policy issues, the issuance of

licences and organising tenders for exploration sites.

– PAM is the main implementing authority responsible for matters such as

concluding production sharing agreements (as authorised by the Cabinet),

approval of annual plans, and the supervision of fee payments

• Contractor, Operating Company and Subcontractor

– The latter two must be Mongolian-incorporated companies



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• Research

– Not a licensed activity, subject to a contract with PAM

– a term of no more than three years.

– Production sharing agreement - may take several months to conclude as the process involves the

completion of negotiations with PAM, the procurement of an approval from the Ministry of Mining,

and the issuance of an authorisation from the Cabinet.

• Exploration

– the term of an oil exploration licence may be no more than 8 years and can be extended twice by up

to two years for each extension.

– unconventional oil exploration licences are issued for a term of no more than 10 years which can be

extended once for a maximum of a further five years.

– Registration processes (well and discovery-well)

– Exploration test

• Extraction

– The term of an oil extraction licence may not exceed 25 years and can be extended twice by up to

five years for each extension.

– The term of an unconventional oil exploration licence can be no more than 10 years and can be

extended once for a maximum extension of five years.



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Fees and Expenses

Licence

fee

Exploration licence:

US$ 3 per square kilometre for initial term; and

US$ 8 per square kilometre for any extension period

Extraction licence:

US$ 100 per square kilometre for initial term; and

US$ 200 per square kilometre for any extension period

Royalty

fee

Oil and gas:

5 - 15 percent of extracted crude oil and gas

Unconventional oil:

5 – 10 percent [of extracted unconventional oil]

Other • Recovery cost and cost oil

• Product Sharing (Profit oil)

• Other contributions, including a contract signing contribution, an extraction

commencement contribution, an extraction ramp-up contribution, a training

contribution, and a local development contribution.


3. Introduction on the Amendment to the

Minerals Law

• Amendments to the Minerals Law

• Lifting of Exploration Licences Moratorium

• Government Resolution re 106 revoked licences

• Commercial laws pending approval by the

Parliament of Mongolia

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Amendments to the Minerals Law

• Several minor amendments were made in 2014

(preferential royalty rate for gold, obligations pertaining to

cultural heritage)

• The Law on Amending the Minerals Law adopted on

1 July 2014

• Introduced 13 new provisions and altered a number

of existing provisions

• Became effective on 1 July 2014

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• Principal amendments are:

– Common minerals are no longer regulated by the Minerals Law;

– Policy Council (ad hoc) is to provide recommendations and support the implementation of the state mineral policy;

– National Geological Office is to (i) conduct various geological cartographic surveys; (ii) research patterns of distribution and occurrence of mineral resources; and (iii) maintain a national database on geological studies, mining and mineral resources;

– Technical experts and specialists are to be involved in the preparation of exploration reports and feasibility studies;

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– The Mineral Council under Mineral Resources

Authority of Mongolia ("MRAM") is to review and

issue recommendations in respect of feasibility

studies;

– Exploration licence area is reduced from 400,000 to

150,000 hectares;

– An exploration licence term is extended to 12 years;

and

– Up to 10% of employees of subcontractors of licence

holders may now be foreign citizens.

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• New obligations of licence holders:

– appointing a full time employee for liaising with government on environmental and mine closure matters;

– giving priority to business entities registered in Mongolia when procuring goods, work or services;

– giving priority to Mongolian concentrator plants when selling its products;

– informing MRAM re suspension or closure of mine; and

– notifying the Petroleum Authority of Mongolia if methane is discovered during coal mining.

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• Reporting obligations:

– prepare feasibility study within one year of obtaining

the mining licence;

– submit an exploration work plan by 15th April each

year and annual exploration work report by 15th

February of the following year; and

– submit a mining plan with production estimates by 1st

December of each year.

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• Sanctions for Non-Compliance

- A daily late fee equal to 0.3 per cent of the original licence

fee for failure to pay licence fees on time

- A licence will be revoked if licence holders are more than

30 days late with payment

- Fines are expressed in terms of the minimum monthly

wage allowing for indexation. The fines are now between

MNT 960,000 to 9,600,000 (approximately US$ 500 -

5,000)

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Pending regulations:

- procedure for acceptance of mines for operation;

- operational procedures of concentrating plants;

- restoration and closing procedures;

- accreditation of geology and mining sector technical

experts and specialists; and

- public disclosure of mineral resources, deposit

reserves and the results of prospecting work.

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Repeal of Prohibition Law

• The Law on Prohibition of Granting Exploration

Licences ("Prohibition Law") imposed a moratorium

on the issuance of exploration licences

• The Prohibition Law had been in effect since June

2010

• The Law on the Repeal of the Prohibition Law was

adopted on 1 July 2014

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In summary:

– no major changes significantly altering the existing

regulatory regime

– new stakeholders but MRAM remains the main

regulator of the sector

– the repeal of the moratorium on granting exploration

licences

– extension of the exploration licence term

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- clarifies the role and responsibility of government

agencies and licence holders

- some uncertainties include:

- the impact of the preferential treatment to Mongolian entities;

- the determination of market price of goods to be sold to

Mongolian concentrator plants; and

- whether the reduction of exploration licence area affects

existing licence holders

- many regulations to be adopted at a later stage

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Government Resolution #216

• The Regulation on Tendering of 106 Exploration

and Mining Areas for which Licences were Annulled

by Court Decision was adopted on 4 July 2014

• 106 licences will be re-issued by a competitive

tender process organised by MRAM

• The threshold value is to be determined based on

the cost of geological and exploration work

conducted and other expenses incurred

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Government Resolution #216

- Bidders must place a deposit equal to 30% of the threshold value

- No preferential treatment in the tender process for previous licence holders

- No specific mechanism for redress or compensation to previous licence holders

- Tenders for 14 licences have been announced

- Government officials state that previous licence holders are not required to deposit 30% and they will be fully compensated based on the amount paid by the winning bidder

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Topics for Autumn Session of Parliament

– Law on Security Interests over Movable Properties and

Intangible Assets

– Revised Law on State Registration of Legal Entities

– Amendment to the Law on Prohibition of Exploration and

Mining in Headwater Areas, Protected Zones for Water

Reserves and Forest Lands (i.e. "Long-name Law")

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