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Kazakhstan > Legal Developments > Law firm and leading lawyer rankings

Editorial

Liability for Irrational Subsoil Use

Liability for Irrational Subsoil Use

Sofiya Sailauovna Zhylkaidarova,

Managing Partner, SIGNUM Law Firm

The export of crude oil and other natural resources is one of the basic sources of income of our country. However, the active development of the oil and gas industry is related to the increased risk in the environment. Because of this, special legislation is actively being developed; new tendencies of the recent years include resolving actual issues of preservation and the rational use of subsoil resources. In pursuance of preservation and the rational and multiple use of subsoil resources, the legislator pays close attention to responsibility issues as the major “tool” and legal remedy to support rule of law in the subsoil use area.

The responsibility in the subsoil use area, just as any other responsibility in the environment, may arise in several cases and according to the procedure established by the legislation.

The Law on Subsoil and Subsoil Use dated 24 June 2010 (further “Subsoil Use Law”) foresees that any infringement of the legislation of the Republic of Kazakhstan on mineral resources and subsoil use involves liability prescribed by the laws of the Republic of Kazakhstan (Article 126). Furthermore, Article 127 provides that persons causing damage through the violation of provisions of ecological legislation of the Republic of Kazakhstan shall reimburse the caused damage unless proven that the damage arose because of insuperable force circumstances or wilful intent of the aggrieved to the extent and in the manner established by the legislation of the Republic of Kazakhstan. Herewith, the extent of damage caused by breaching requirements in the area of rational use of subsoil resources shall be defined by the authorised agency for studying and using subsoil resources.

Thus, Subsoil Use Law contains reference rule to special legislation. Moreover, the latest developments implemented by the laws “on introducing changes and additions to certain statutory acts of the Republic of Kazakhstan regarding issues of cardinal improvement of favourable conditions for entrepreneurial activity in the Republic of Kazakhstan” of 29 December 2014, the Criminal Code of the Republic of Kazakhstan of 3 July 2014, and the Administrative Violations Code of the Republic of Kazakhstan of 5 July 2014 include specification and division of responsibility for certain breaches of law, introduction of new elements of legal offence, specification of elements of legal offence and breaches of law, as well as identification of authorities who have control over particular issues.

Within limits of this article, we would like to briefly touch upon issues of corporate, administrative, criminal, and civil responsibility for breaching rules in the area of rational use of subsoil resources.

Corporate Responsibility

Talking about corporate responsibility, we’d like to group such responsibility types among subsoil users of companies as financial (material) and disciplinary responsibility of the employees and responsible managers. This responsibility by its legal nature is based on employment and labour regulations. As a rule, responsibility extent is regulated by internal corporate documents, acts of the employer (policies, procedures), and financial liability contracts. At present, the principles of corporate social responsibility are increasing, internal control services are enforced, and company standards for ensuring safety, environment preservation, and health care are increasing on a voluntary basis. These principles become the ground for honest business and increasing trust to subsoil users on the part of the community and the state authorities. Within the framework of analysing voluntary responsibility for damage, it’s also required to use insurance institution to a wider range.

Administrative Liability

 

Administrative liability plays an important role in ensuring the rational use of subsoil resources. The Administrative Violations Code of 5 July 2014 (Administrative Code) regulates 13 elements of administrative offences in the area of rational use of subsoil resources. New legal developments provide for inclusion of administrative liability for “non-compliance with the rules for rational and multiple use of subsoil resources” and “performing production without state appraisal of reserves of commercial minerals,” as well as correction of the article on the “infringement of rules for petroleum operations and works for subsoil resources management.” Twelve parts detailing the description of legal offence, such as flaring associated and (or) natural gas, divergence from design documentation, operations of wells in violation of requirements established by the legislation, etc., are additionally included in Article 365, “Infringement of rules for petroleum operations and works for subsoil resources management.” Also, the sizes of administrative charges are specified and reduced in majority of the cases.

 

Criminal Liability

In pursuance of ensuring rational management of subsoil resources, the Criminal Code of the Republic of Kazakhstan of 16 July 1997 provided for one element of crime with regard to issues of rational management of subsoil resources—Article 286 (infringement of rules for protection and use of subsoil resources).

A new element—unauthorised subsoil use (Article 334)—is introduced along with liability for infringing rules for protection and use of subsoil resources (Article 333) in the existing Criminal Code of 3 July 2014, and also, additional and alternative sanctions are established. The Criminal Code contains articles that may likewise be related to the issues under question, such as, Article 330 (offshore pollution) and Article 329 (atmosphere contamination).

In addition to the existing Criminal Code, definitions for damage types are reviewed: a definition of considerable damage was used before and used to be punished with a fine and disqualification to hold certain positions or practice certain professions or corrective labour for a period of up to two years; the new code provides only liability for large-scale and very heavy damage. Also, punishment for committing acts is reviewed in the form of changing the size of penalties and terms of deprivation of freedom.

As to the criminal liability for crimes in the area of rational management of subsoil resources, we’d like to highlight major issues that have arisen in law enforcement practice:

- Complications in qualifying a legal offence and identifying the dividing line between administrative and criminal liability.

- Considering specificity and demand for highly qualified specialists nowadays who could have done criminal and legal evaluation of infringements in the area of rational management of subsoil resources.

- Bringing a certain party to criminal liability is problematic since it’s often impossible to identify the subject and the subjective aspect because of the continuous nature of business processes and team involvement in all processes by stages of activity in companies and users of subsoil resources leading to a unified result.

At present, there are various speculations with respect to bringing to criminal liability for irrational use of subsoil resources. Some people think that the number of elements shall be increased in view of importance of the subsoil resources as an object of the environment, its specificity. Others believe in the need for humanisation of penalties for committing this type of legal offences “in exchange” for increasing the size of compensation for damage.

We believe that in Kazakhstan, the issue for introduction institution of corporate criminal liability following the pattern of Western countries is already escalated. Of course, this proposal requires long time of studying and involvement of academicians and practitioners, local and foreign, because it’s going to fundamentally change the concept of criminal law. However, this initiative will correspond to specificity of this crime since in most cases, it’s practically not possible to identify the subject of offence as well as evaluate extent of involvement of particular parties into the process. Moreover, the introduction of this institution will enable to considerably raise corporate legal consciousness and legal consciousness.

Recovery of Damages as a Remedy of Civil and Legal Liability

The most effective remedy of responsibility for violating requirements of ecological legislation and legislation on subsoil use throughout the world is civil and legal liability. The most common forms of claims of civil and legal liability in the area of subsoil use and environment protection are claims for compensating damages filed by ecology authorities and/or agencies for studying and using subsoil mineral resources. Also, such claims are often put forward by prosecutors on behalf of the state for violations in the area of rational use of subsoil recourses.

There are some issues related to regulating these affairs in civil and legal space because of the specifics of subsoil resources as an object of civil law relations, the impossibility to compensate the damages in the form of bringing the subsoil resources into the initial condition, and the condition approach in estimating the damage extent and difficulties (in some cases impossibility) in estimating lost profit.

Considering that in most cases it’s impossible to identify the scales of caused damage and consequently estimate damage to the fullest extent, the state authorities shall use a fair approach to the assessment and estimation of the damage based on economic efficiency, specificity of subsoil operator’s activity, and compensating nature in recovering damages.

Thus, actual damage to the subsoil resources from the state viewpoint as the owner of subsoil resources may be caused by reducing the quantity of natural resources lying in subsoil that in itself serves the purpose of subsoil use as lawful use of subsoil resources.

The ground for imposing remedies of civil liability may be a breach of requirements for rational use of subsoil resources.

Earlier, Subsoil Use Law expressly divided responsibility for violating requirements for rational use of subsoil resources and requirements for protection of subsoil resources, attributing the first type of responsibility to the scope of Subsoil Use Law, whereas issues of protection of subsoil resources to environmental legislation. Introducing recent changes in Subsoil Use Law, the legislator highlighted the definition of damage caused by breaching the requirements for rational use of subsoil resources falling in competence of the authority for studying and using subsoil resources. The specification of any other damage as a result of breaching environmental legislation requirements was attributed to agencies of corresponding competence, depending on a particular environmental object that has been damaged.

Estimating the extent of the damage caused by noncompliance with the requirements for rational use of subsoil resources

 

The extent of the damage in the area of rational use of subsoil resources shall be estimated in accordance with the rules for assessing damage caused by noncompliance with the requirements in the area of rational use of subsoil resources approved by the Regulation No. 139 of the Government of the Republic of Kazakhstan of 15 February 2011 (Rules No. 139), substituting previously existing rules for calculating damage caused by noncompliance with the requirements in the area of rational use of subsoil resources approved by the Regulation No. 796 of the Government of the Republic of Kazakhstan of 22 August 2006.

The major change was cancelling probable “doubling” responsibility for one and the same offence simultaneously for irrational use of subsoil resources and breaching requirements for protection of subsoil resources by corresponding requests from agencies for studying and using subsoil resources and environment preservation authorities. In other words, damage caused by violation of requirements for rational use of subsoil resources shall be estimated by authority for studying and using subsoil resources, whereas damage arisen through noncompliance with requirements of environmental legislation and requirements for protection of subsoil resources shall be estimated by agencies in accordance with their competence foreseen under Environmental Code.

The rules specify list of requirements for estimating and calculating extent of excessive losses to raise claims for compensating damage caused by breach of requirements in the area of rational use of subsoil resources. However, we’d like to draw your attention to the following aspects and probable problems in the interpretation of these rules:

  • Rules No. 139 introduce new important definitions without explaining their meaning and content; for example, Paragraph 9 says “excessive losses of oil in situ.” There is no such definition in other statutory provisions.

  • In addition, Rules No. 139 establish estimation of damage in the form of paying difference between actual and normative losses in value terms. Herewith, these rules also establish excessive losses as index to estimate the damage extent though this index is not counted at direct estimation as indicated in the example.

  • Rules No. 139 give references to uncertain data; for example, Paragraph 11 describes estimation of design data for gas content in the extracted useful mineral resources, the so-called gas factor. Thus, this is a changeable value and may not be fixed.

  • Also, it is important to note that Rules No. 139 go beyond the limits of its purpose. Thus, Rules No. 139 shall contain methods to estimate damage extent but not the damage itself. In other words, the fact of incurred damage shall be proved by competent authorities, and the presence of proven damage fact may serve as the basis for calculating the damage extent. The estimation of damage in this case (in the absence of its direct estimation) is regulated by the Environmental Code where the damage caused to the environment is established—pollution of the environment or extraction of natural resources in excess of the prescribed norms that resulted in the degradation or exhaustion of natural resources or death of live organisms. Thereby, the following conditions shall be in place for proving damage: (1) pollution or extraction in excess of prescribed norms and (2) causing degradation, depletion of resources, or demise. Thereby, the authority for studying and using subsoil resources shall identify availability of the mentioned conditions to estimate the damage as it is.

     

  • Calculation of damage caused by breaching requirements in the area of rational use of subsoil

     

    The procedure for calculating damage caused by breaching requirements in the area of rational use of subsoil also foreseen in Rules No. 139 via references to examples of calculation set forth in the Appendix to Rules No. 139. Absence of explanations to calculations and ambiguity in applied terminology result in arising few points at issue. Let’s consider an example in Rules No. 139.

Subsoil user produced 2,658,000 tons of oil for the accounting period.

During this period, actual oil losses were 4,442 tons, including approved normative losses 1,081 tons of oil.

Average price at realizing oil by the subsoil user (London Metal and Oil Exchange) in the accounting period was 50.49 U.S. dollars,

(4442 - 1081) Ń… 50.49 = 169,696.89 U.S. dollars.

169,696.89 Ń… official exchange rate of national currency of the Republic of Kazakhstan against a foreign currency fixed by the National Bank of the Republic of Kazakhstan as of the moment of revealing the damage = amount of damage.

As you can see, a formula of multiplying difference of actual losses over normative losses by average price at realising oil by the subsoil user (London Metal and Oil Exchange) in the accounting period is used to estimate the damage.

 

Firstly, the question that has to be answered is about the accounting period, and what period is the accounting period: Last calendar (fiscal) year? The period within which difference between actual losses and normative losses has been fixed? Or the period of carrying out state control (inspection)?

 

Secondly, using the term “average price for sales” is uncertain. What sale price is used: Average weighted sale price of the subsoil user for the last year or for six months? Or other definite period?

 

Thirdly, to what extent the applied prices are grounded, fair, and objective? As it’s known, a number of subsoil users sell oil at the domestic market where the price is significantly less than sale prices of oil for export. Obviously, the subsoil user selling oil at the local market with the same extent of damage caused to the subsoil resources in comparison with the subsoil user, exporter will bear less financial burden than that selling oil for export.

 

Fourthly, the note in the brackets (London Metal and Oil Exchange) as well as the text in the Paragraph 6 of Rules No. 139 saying, “For useful mineral resources with official quotation prices their average cost for the accounting period shall be applied.” It’s uncertain whether the use of quotations is mandatory or alternative.

 

Fifthly, in case of applying the mentioned quotations, should reduction in price (difference) be applied? In other words, quotations for oil are used subject to their price in a particular point of the world market, whereas in order to supply oil, a subsoil user or a buyer will incur significant expenses starting from the subsoil user’s well to the world market at which the mentioned quotations are fixed. Are the current prices in the region considered?

 

In pursuance of converting into the national currency, what date will be the date of revealing the damage? The thing is that some breaches require occurrence of certain conditions in the future to acknowledge the damage. In actual practice, controlling authorities indicate various dates—inspection certificate date, year-end during which losses are specified, etc.

 

In conclusion, we’d like to point out that in the bottom line of the shown examples, there is only one difference between actual losses and normative losses. The examples lack a calculation procedure at diverging from excessive formation oil losses, excessive losses for gas burning, etc. Herewith, the shown examples disregard the extent and scale of the damage caused to subsoil resources and its criticality for the environment on the whole.

 

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Despite the active and timely development of our legislation, some aspects of subsoil user’s liability haven’t obtained proper legislative recognition or need to be reviewed to a considerable extent. Resuming the aforesaid, we’d like to draw your attention to the fact that the analysed problems in law application practice regarding issues of compensating damage caused by noncompliance with requirements in the area of rational use of subsoil and environment preservation in many respects defy the fair liability principle and convert liability that should have a preventive and “compensating” nature to punitive measures absolutely not supporting creation of certain and understandable rules and interrelations between subsoil users and state authorities. As a result, we come to a situation when (1) a subsoil user may be brought to “multiple” responsibility for one same noncompliance with the rules; (2) a legislation on rational use of subsoil fundamentals of legal drafting methodology is not complied with the absence or inconsistency of definitions in various regulatory acts; (3) there is absence of understanding economic indicators in projects as well as establishment of an unfair system for calculating the damage and not necessarily with respect to the subsoil user; (4) there is absence of a system for recording specificity of subsoil user’s activity and the project as a whole.

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