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  #5 October 2011


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Law of the Republic of Kazakhstan "On Subsoil and Subsoil Use": a head for the processing of associated and natural gas

Leila Makhmetova, Senior Lawyer (Almaty)

One of the most serious environmental and economic problems connected with oil operations in Kazakhstan is the refusal to flare associated and natural gas in fields and the transition to its processing. Even in the recent past, gas flaring has been a part of the process of oil companies in Kazakhstan and occurred in almost all fields.

With the introduction in 1999, and then in 2004 and 2005, of amendments to the Law "On Oil", dated 28 June 1995, associated gas flaring was prohibited, except for a few cases mentioned in the Law.

This restriction as well as strict sanctions for gas flaring without permit led to the fact that many oil companies really solved the problem of gas flaring in their fields. However, with the adoption of the Law "On Subsoil and Subsoil Use", dated 24 June 2010 (hereinafter - the "Subsoil Law" or "Law"), legal conditions for flaring and disposition of associated and natural gas changed.

On the one hand, the Law considers the need of technologically unavoidable gas flaring, and under certain conditions the Law recognises it acceptable. At the meantime, the Law severely tightened the requirements to subsoil users, even those, which have already completed the programs of associated gas disposition.

Under the Subsoil Law, as a general rule associated and natural gas flaring is only permitted upon obtaining the relevant permit from the Ministry of Oil and Gas. Gas flaring without a permit is only allowed in one case in case of emergency situations or a threat thereof, danger to lives of personnel or health of population and environment. The Law directly stipulates that gas flaring is permitted without a permit, if emergency situation or danger to personnel, population or environment was associated with "any failure of technical equipment throughout the technical complex of operations connected with extraction, collection, preparation, processing and transportation of oil and gas provided for by the approved technical regulations, or damage of mechanisms, equipment and facilities." In this case, a subsoil user within ten days shall notify the Ministry of Oil and Gas, geology and subsoil use and environmental authorities of the fact of flaring, its causes and amount of gas flared.

In all other cases, gas flaring is only allowed with the permission of the Ministry of Oil and Gas agreed with the geology and subsoil use and environmental authorities. The permit is issued in the following cases:

  • In case of well facility testing, gas flaring is permitted in accordance with the approve project for the period of not more than three months for each well facility. Earlier, before the Law came into force, the territorial departments of geology and subsoil use that issued the permit could only rely on Item 63 of the Uniform Subsoil Protection Rules [1], which provided for a three-month period to test a well without considering that the well can be drilled for several facilities and, in this case, well testing may require more than three months.
  • In case of test operation of a field, gas flaring may be permitted for the total period of not more than three years.
  • In case of technologically unavoidable gas flaring when commissioning, operating, maintaining and repairing process equipment. Thereat, gas flaring in the course of commissioning the process equipment is allowed during the period associated with the commissioning. Gas flaring in the course of maintenance and repair work is performed in controlled volumes in excess of the amounts of technologically unavoidable fas flaring in operating equipment.
The Subsoil Law first introduced the obligation of subsoil users to process associated gas as opposite to the old Law "On Oil", which required the disposition of gas. In this case, the processing of associated gas means a complex of activities for bringing associated gas up to a market product. In general, subsoil users shall perform exactly the associated gas processing. However, in some fields where associated gas processing is impractical, according to the decision of the Ministry of Oil and Gas and approval of the government authorities of geology and subsoil use and environmental protection, the following forms of gas disposition are allowed:

  • gas usage for technical needs;
  • gas injection for increasing a pore pressure;
  • gas re-injection for conservation.
The Law requires that obligations to process associated gas under contracts entered into prior to its enactment, are to be in the form of separate agreements between a subsoil user and competent authority, which will be an appendix to the contract for production, contract for combined exploration and production of hydrocarbons. The obligation of a subsoil user to process associated gas emerges, therefore, after signing such an agreement. Thus, we believe that the refusal to issue a permit for gas flaring on the grounds that the subsoil user has submitted a program of gas disposition (rather than gas processing) is illegal, if no additional agreement to the subsoil use contract providing the gas processing obligation has been signed.

Besides, the Subsoil Law impose an obligation on subsoil users to develop programs for associated gas processing, which are to be approved by the Ministry of Oil and Gas and agreed with the authorities on geology and subsoil use and environmental protection. The purpose of those programs is to reduce the amounts of gas flaring and gas re-injection into the reservoir (disposition). Development programs for associated gas processing should be updated every three years, reports on their implementation each year should be submitted by subsoil users to the Ministry of Oil and Gas, environmental authorities, as well as geology and subsoil use authorities.

Please note that according to Article 85.6 of the Law, the prohibition to flare gas does not apply to "subsoil users that perform oil operations under the contracts signed before December 2004, until the completion of programs for the disposition of associated and (or) natural gas, if those programs were:

  • approved (agreed) with a state authority for environmental protection before 1 December 2004, or
  • agreed with a competent authority for environmental protection before 1 July 2006.
In addition, the specified category of subsoil users are also not subject to the prohibition on commercial development of fields without disposition or processing of associated gas provided for by Article 86.1 of the Law. Both these exceptions are, however, valid only until the expiry of implementation by subsoil users of their gas disposition programs agreed before 1 December 2004 or 1 July 2006. Consequently, upon the expiry of the specified periods, as well as in cases of replacement of such programs with new disposition program or development programs for gas processing, a subsoil user can only flare gas subject to the permit from the Ministry of Oil and Gas obtained under conditions established by existing Subsoil Law.

Now, the latter circumstance is strongly used by the Ministry of Oil and Gas in practice: According to the information available, in the present, the Ministry requires from all subsoil users (regardless of when they entered into a contract and when their gas disposition program were approved) to develop and submit for approval the development programs for the associated gas processing. For gas flaring unavoidable before its processing within those programs, the Ministry of Oil and Gas issues permits in accordance with the current Subsoil Law. In this case, if the permit is issued for the gas flaring in the course of commercial development of a field, such flaring is regarded as technically unavoidable. Illegal gas flaring and consequences thereof

Violations of laws, which are allowed when flaring gas, can be divided into two groups:

  • lack of a permit to gas flaring or excess of limits for gas flaring indicated in a permit;
  • lack of a permit to emissions of combustion products or excess of limits indicated in a permit.
Each of these groups could lead to very serious negative consequences for subsoil users.

Thus, the lack of a permit to gas flaring or excess of limits for gas flaring indicated in a permit may entail civil law liability for the damage from irrational subsoil use. The amount of damage is determined in accordance with the Rules for determining the damage caused by violation of the requirements for the efficient management of subsoil approved by the Resolution of the Government of Kazakhstan No. 139, dated 15 February 2011. According to those Rules, the amount of damage depends on the volume or mass of components of flared associated gas (ethane, propane, butane, methane) and an average price, at which they were sold by subsoil user in the reporting period. If a subsoil user has not sold the products in the reporting period, then the value of the product is determined based on the average selling price in the previous period when such sale took place. As to minerals, for which there is an official price quotes, their average value for the reporting period in accordance with those quotes is used.

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