Flaring, Disposition and Processing of Associated Gas in the Course of Oil Operations: Legal Provisions



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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. 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 recognizes 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 gas 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.

Please note that in addition to the general rule on the title to mineral raw materials (Article 10.2), the Subsoil Law provides for the special provision on the title to associated gas: associated gas is state property, unless otherwise established by the contract (Article 86.3). Thus, if the contract expressly provides that associated gas is the property of the subsoil user, then gas flaring without permit or in excess of the limit established by the permit is a violation of state property rights to the gas.

Nevertheless, regardless of who owns associated gas, the subsoil user can not flare it without a permit. The prohibition to flare gas as well as the obligation to perform its disposition or processing is provided for all subsoil users, regardless of who owns the gas. We believe that if associated gas is the property of a subsoil user, such subsoil user being an owner of the gas has a liability stipulated by Article 188.4 of the Civil Code: to take actions to prevent harm to public health and environment, which may be caused by exercising the title. We think that the refusal to flare associated or natural gas can be regarded as one of those actions.

Moreover, gas flaring without the permit of the Ministry of Oil and Gas or in excess of the limit established by the permit may be classified according to Article 275.2 of the Administrative Code as a breach of environmental requirements and conditions of the subsoil use contract in terms of the environmental protection. For this breach, large business entities are imposed a fine in the amount from 120 to 150 monthly calculation indexes (MCI).

In addition to the permit for gas flaring, a subsoil user under Article 69 of the Environmental Code must obtain from the environmental authorities an emission permit for pollutants emitted during the gas flaring: hydrocarbons, methane, carbon oxides, mercaptans, etc. Lack of a permit to emissions of combustion products or excess of limits indicated in a permit may entail:

- charging for emissions of combustion products at the increased rate;
- compensation for environmental pollution; and
- administrative sanction in the form of a fine amounted up to hundreds million Tenge.

Fee for environmental emissions of combustion products is charged with subsoil users at the rate established by the Tax Code. These rates, in accordance with Article 495.9 of the Tax Code, may be significantly increased by Maslikhats - up to 20 times. In addition, if the emission of combustion products is made without emission permit or in excess of the limits specified in the permit, the fee rates are further increases by 10 times.

Besides, in cases of emission of combustion products into the environment, subsoil users shall pay the damage caused by the environmental pollution. The procedure for calculating the amount of such damage is defined by the Rules of the economic assessment of damage from environmental pollution, approved by the Resolution of the Government of Kazakhstan, dated 27 June 2007. Pursuant to the Rules, the amount of damage depends on the volume of emissions multiplied by the rate equal to 52 MCI and further multiplied by 10, and if there are appropriate grounds - by additionally multiplying coefficients. The amount of damage sometimes exceeds several billion Tenge.

It should be noted that the Subsoil Law and the old Law 'On Oil' allowed the gas flaring in an emergency, threat to life or health or the environment without obtaining gas flaring permits[2]. Accordingly, in such cases, gas flaring without the permit is a lawful act. Pursuant to Article 917.3 of the Civil Code, the harm caused by lawful actions shall be compensated in cases specified by the Civil Code and other legislative acts. Both the Subsoil Laws (both the old[3] and current version) provide for civil liability in cases of violations of the requirements for the efficient management of subsoil, i.e. misconduct.

Meantime, gas flaring is always accompanied by environmental emission of combustion products. The Environmental Code also mentions the liability for violations of environmental laws, but recognizes any emissions made without environmental permits as the violation of the environmental laws[4]. Therefore, the environmental emissions caused by gas flaring performed in emergency situations or threat to life or health or the environment can still lead to recovery from the subsoil user of the amounts of damage to the environment, if the emissions were made without the environmental permits or in excess of the limit established by the environmental permit.

In practice, there was a case where a specialized environmental prosecutor filed a claim against a subsoil user for compensation of damages from pollution by associated gas combustion products. The court found that the gas flaring was performed in order to prevent an emergency situation (plant that acquires this gas was stopped for repair). The court in its decision indicated that emissions from the emergency gas flaring in this case were legitimate, because they do not exceed limits established by the environmental permit. The claimant objected to this argument referring to the fact that according to standard maximum allowable concentrations (MAC), the gas was intended for disposition not for flaring. However, the court rejected this argument, stating that:

- the document determining the legality of the emissions was the emission permit (not MAC);
- the permit does not indicate for what gas the limits were established;
- those limits were not exceeded.

Administrative liability for emissions of combustion products without the permit. The emission of gas combustion products without the permit or in excess of the limits specified in the permit entails an administrative fine according to Article 243 of the Administrative Code. For large business entities (which include oil companies) the fine is calculated in the amount of "one thousand percent of the rate of fee for the exceeded amount of emissions." The ambiguity of this wording in different time led to its different interpretations, but then in practice the following approach was established: rates of emissions fee under the Tax Code are multiplied by the volume of the emissions (or, rather, by the mass of substance emitted without the permit or in excess of standard) and then you should find 1000% of the result. Since the fee rates specified by the Tax Code, as a rule, are much increased by Maslikhats, the amounts of fines are usually sufficient.

Strengthening of the requirements to subsoil operations in terms of flaring, disposition and processing of associated gas is a logical step of the government, which should not only prevent environmental pollution from gas flaring, but also create conditions for the use of this most valuable natural raw material. However, for subsoil users this step creates additional legal risks that may represent the inability to implement gas processing programs, failure or delay in obtaining permits for gas flaring, etc. Therefore, continuous and thorough analysis of the requirements on flaring, disposition and processing of associated gas is required for each oil company, not only to reduce the risk of adverse effects, but also to improve the relations with government agencies, as well as maintain its positive image in the society.

[1] The Uniform Subsoil Protection Rules for the Development of Deposits of Solid Minerals, Oil, Gas, Underground Waters in the Republic of Kazakhstan. Approved by the Resolution of the Government of Kazakhstan No. 1019, dated 21 July.

[2] Now, according to Article 18.6 of the Subsoil Law, gas flaring permit is issued by the Ministry of Oil and Gas. Earlier, pursuant to the Instruction for the issue of associated and natural gas flaring permits approved by the Ministry of Energy and Mineral Resources of Kazakhstan (hereinafter - the 'MEMR'), dated 2 February 2006, gas flaring permits were issued by territorial departments of the Committee on Geology and Subsoil Use of the MEMR.

[3] Law of the Republic of Kazakhstan 'On Subsoil and Subsoil Use' No. 2828, dated: 27 January 1996.

[4] According to Article 1.1.62 of the Environmental Code of Kazakhstan, environmental permit is a document that certifies the right of individuals and legal entities to make environmental emissions. Environmental emissions include, in particular, emissions of combustion products into air.

AUTHOR: Leila Makhmetova, Counsel (Almaty), GRATA Law Firm

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.



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