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 KAZAKHSTAN International Business Magazine №3, 2002
 Certain Environmental Aspects of the Activities of Subsoil Users
ARCHIVE
Certain Environmental Aspects of the Activities of Subsoil Users
Aigul Kenjebayeva, Partner with the international law firm, SALANS, Director of its Almaty office, PhD in Law, LLM (US) 
Yuliya Mitrofanskaya, Attorney with the international law firm, SALANS, PhD in Law, LLM (US)
 
More than 10 years have passed since the adoption of the first Kazakhstan law “On Environmental Protection” in 1991. Over this time, many regulatory acts in the area of environmental protection have appeared. Kazakhstan has acceded to the main international conventions on protecting the environment from oil pollution, such as the International Convention on Civil Liability for Oil Pollution Damage1 and the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage,2 and participates in international conventions on protecting the environment and sustainable development.3 At present, Kazakhstan environmental legislation is sufficiently developed and includes both general and specific normative legal acts. Specific normative legal acts include many rules regulating the protection of subsoil resources and the environment in the activities of subsoil users and in conducting petroleum operations, both on-shore and offshore.4
1 The International Convention on Civil Liability for Oil Pollution Damage, Brussels, November 29, 1969. Kazakhstan acceded to the Convention by Decree of the Cabinet of Ministers of March 4, 1994.
2 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, Brussels, December 18, 1971. Kazakhstan joined the Convention by Decree of the Cabinet of Ministers of January 16, 1995.3 The Republic of Kazakhstan participated in World Conferences on Sustainable Development in Rio-de-Janeiro in 1992 and in Johannesburg in 2002.
4 Here we have in mind the Unified Rules for Protecting the Subsoil in developing mineral deposits in the Republic of Kazakhstan, as approved by Decree of the RK Government of July 21, 1999, the Instruction for Ensuring Ecological Safety Norms in Designing Petroleum Operations in the Waterways and Coastal Sea Zones and Internal Reservoirs of the Republic of Kazakhstan, as approved by Joint Order of the Ministry for Energy, Industry and Trade of the RK and the Ministry for Natural Resources of July 9, 1999, and the Unified Rules for Developing Oil and Gas Deposits in the Republic of Kazakhstan, as approved by Decree of the RK Government of June 18, 1996.
 
The year 2002 did not bring any significant changes to environmental protection legislation. Regulatory and legal acts regulating the protection of the subsoil and the environment in the activities of subsoil users and in conducting petroleum operations have not been amended since 1999. As a consequence, our attention as lawyers who advise oil and gas companies has been directed, for the most part, towards resolving problems that arise in complying with environmental legislation. We have participated in resolving disputes with territorial environmental protection agencies, both in and outside the courtroom.
 
We have observed that most disputes between subsoil users and environmental protection authorities are of a general nature, and they mainly concern operations conducted without a permit for special nature use or without a positive report from a state environmental expert examination, and failure to pay for polluting the environment. As a result, in this article we highlight the practical problems associated with the imperfect nature of certain environmental protection laws and the failure by subsoil users to comply with them; we also describe draft laws in the area of environmental protection, which have been discussed by experts in 2002 and which may be adopted before the year end.
 
Operations Conducted Without a Permit for Special Nature Use
 
Kazakhstan environmental protection legislation is based on the provisions of the RK Law “On Environmental Protection.”5 The priority of this Law over other legislative acts is established by the Law itself,6 a fact which, as correctly observed by other experts, contradicts the hierarchy of normative legal acts, as determined by the RK Law “On Normative Legal Acts.”75 RK Law of July 15, 1997, “On Environmental Protection” (“Environmental Protection Law”).
6 Id., Article 2.
7 RK Law of March 24, 1998, “On Regulatory Legal Acts,” Article 4.
 
The Environmental Protection Law is full of contradictions, which make understanding and applying it difficult.
 
Especially confusing are the provisions of the Law dealing with special nature use, one type of which is pollution of the environment. The provisions of the Environmental Protection Law provisions dealing with nature use contain many mutually exclusive and contradictory definitions. For example, the Law establishes three grounds for granting the use of natural resources: (i) a license for the use of natural resources and for carrying out specific types of operations in the area of environmental protection; (ii) decisions of local governmental executive bodies and decrees of the Government regarding the granting of natural resources for use; and (iii) agreements for nature use.8
8 Environmental Protection Law, Article 14.
 
According to the article which provides the grounds for granting the use of natural resources, the list of definitions is exhaustive and does not allow for any broad interpretation. However, further in the Law reference is made to one additional document which provides an additional ground for obtaining the right to use nature. This document is called a “permit for nature use,” and it authorizes the “right of a nature user to the use (removal) of natural resources, to emissions and discharges of pollutants into the environment, and the right to dispose of industrial waste and consumer waste products.”9 9 Id., Article 16.
 
Apart from the foregoing documents, the Law contains provisions regarding the issuance of a “permit for pollution of the environment,” the procedure for the issuance of which is to be approved by the RK Government.10
10 Id., Article 7.
 
Even a cursory examination of the definitions raises the issue of how a “permit for nature use,” which the Law states authorizes, in particular, the right to carry out emissions and discharges of pollutants and the disposal of industrial and consumer waste products, differs from a “permit for pollution of the environment” which, based on its name, should also regulate emissions and discharges of pollutants. We have been unable to find a logical answer to this question, nor have we been able to find an answer to the question of whether a permit for pollution is a basis for granting the right to nature use.
 
The provisions in the Environmental Protection Law regarding licensing are just as confusing. The Law lists the types of activities which are subject to licensing, the differences among which are impossible to make out by analyzing the Law’s provisions. For example, the Law provides that the right to nature use arises under a license for the “use of natural resources.”11 However, in listing the types of activities which require a license, the Law refers to licenses for the “utilization of natural resources.”12 It is impossible to understand from the Law whether there is a difference between the “use” and the “utilization” of natural resources. It is also impossible to determine this difference from among the types of licenses in the Law “On Licensing,” since the Law on Licensing is the only document in which all types of activities which require a license13 are to be listed, and it does not contain a single type of activity related to environmental protection. Rather, it only provides that the “special considerations for the licensing of activities related to the use of natural resources and environmental protection ... shall be established by special legislation.”14
11 Id., Article 14.
12 Id., Article 21.1(1).
13 RK Law of April 17, 1995, “On Licensing,” Article 3.5.
14 Id., Article 9.2.
 
All of these uncertainties and contradictions lead to unintentional violations of the Law on Environmental Protection by the environmental protection authorities themselves. For example, instead of a license to carry out emissions (discharges) of pollutants, a permit is granted for pollution, which, under the law, is not a substitute for a license. Licenses are not issued for environmental audits of activities which are subject to licensing,15 with the rare exception of when contracts for nature use are concluded.
15 Id., Article 21.1(4).
 
At the same time, such contradictions in the legislation sometimes help nature users in disputes with environmental protection authorities, since the authorities themselves incorrectly understand and apply the law and, as a consequence, there is a possibility to avoid liability for violations which under certain provisions of the Law are violations and which under other provisions are not.With regard to disputes over nature use, we have observed that in 2002 most disputes have been connected with emissions and disposals into the environment which are made either without a permit for pollution of the environment, or in excess of the norms for the maximum allowed emissions and maximum allowed discharges. One client of ours, an oil company, was sued in mid 2002 for environmental damage from emitting pollutants without a permit for pollution, which occurred in early 2001.
 
The essence of the dispute was as follows:At the end of 2000, the company filed documents to obtain a permit for special nature use for 2001 for the purpose of carrying out emissions (discharges) of pollutants. At this time, the Ministry for Natural Resources and Environmental Protection issued permits for the special nature use in accordance with the procedure established by Rules adopted by the Ministry on January 19, 2000. According to the Law on Regulatory Legal Acts, since the Rules were compulsory and affected the rights, freedoms and obligations of citizens, they were required to be registered with the Ministry of Justice.16
16 RK Law of March 24, 1998, “On Regulatory Legal Acts,” Article 38.1.
 
However, the Rules were not registered. Moreover, the Ministry for Natural Resources and Environmental Protection did not have any authority to approve rules for issuing permits for special nature use.17  17 See Environmental Protection Law, Article 8.
 
As a result, permits for nature use were not issued from January through April 2001.
 
On April 5, 2001, the Ministry for Natural Resources and Environmental Protection approved new Rules for Nature Use and started issuing permits for nature use. However, the environmental protection authorities were unable simultaneously to issue such permits to all that had applied for nature use. As a consequence, on April 10, 2001, the Ministry for Natural Resources and Environmental Protection issued an order, pursuant to which the regional environmental protection departments were not before July 1, 2001, to apply against enterprises the increased payment rates for the absence of a permit for nature use.At the same time, however, in addition to complying with environmental protection legislation, oil companies must also observe the legislation on the use of the subsoil and the legislation on petroleum, as well as to fulfil the conditions of subsoil use contracts and work programs, which establish deadlines for conducting petroleum operations. For this reason, the company involved in this dispute was unable to suspend its activity due to the absence of a permit for nature use. Notwithstanding the absence of a permit for nature use, the company was forced in April 2001 to discharge pollutants into the atmosphere. The permit for nature use, which included this discharge, was obtained by the company at the end of April 2001, with an indication that its validity period started from January 1, 2001. Sometime later, the Ministry for Natural Resources and Environmental Protection sent the company a letter regarding the fact that the validity of the permit should have started not from January 1, 2001, as indicated in the permit, but instead from the date of the issuance of the permit, i.e., from April 2001.
 
The legislation contains an exhaustive list of the grounds for invalidating permits for nature use. The letter from the Ministry did not contain any reasons for changing the validity period of the permit, which could have objectively served as grounds for changing the validity period of the permit that was already issued. It was therefore clear that the letter did not have legal force for the company. Nonetheless, the territorial environmental protection department required that the company pay for “above-normative pollution” of the environment in April 2001, since the company supposedly discharged pollutants “without a permit.” The court brought justice by rejecting the territorial environmental protection department’s lawsuit. In addition, the court indicated that, in fact, under those circumstances the Ministry for Natural Resources and Environmental Protection had the right to issue the permits for nature use, but that it could not reduce the period of their validity; that the issuance of permits for nature use in the second quarter of the year was the prevailing practice of the Ministry; and that therefore the company did not commit any violation by its discharges.
 
Payment for Pollution of the Environment
 
The payment for pollution of the environment is one of the economic methods for its protection.18
18 Environmental Protection Law, Article 26.
 
Prior to 2002, the conditions and the payment amounts for pollution of the environment were established by normative legal acts that were subordinate to law. In 2002, payments for pollution of the environment became one of the forms of compulsory payments to the budget, which are established by tax legislation. Currently, the procedure for the calculation and the making of payments for pollution of the environment, as well as issues concerning the accounting treatment for such payments, are established by Chapter 83 of the Code of the Republic of Kazakhstan “On Taxes and Other Compulsory Payments to the Budget” (the “Tax Code”).
 
In 2002 the mechanism for determining the payment rates for pollution were changed. While the 2001 legislation provided that the rates of payments for the pollution of the environment were to be developed by the central environmental protection agency, agreed with local representative bodies and approved by the RK Government,19 current legislation provides that the rates of payment for pollution of the environment are to be established annually by “local representative bodies on the basis of calculations made by the authorized environmental protection body.”20 19 RK Law of June 4, 2001, “On the Introduction of Amendments and Additions to the RK Law “On Environmental Protection,” Article 1,clause 13.
20 Tax Code, Article 462.
 
As is evident from the quoted provision, the procedure for agreeing to and approving the rates for payments for pollution have been significantly simplified. 
 
In connection with the new procedure for agreeing to and approving the rates for paying for pollution, we would like to draw our readers’ attention to one problem. The Tax Code computations for the payment rates for pollution are to be established on the basis of computations made by the “authorized environmental protection body;” however, it does not indicate which body is to be considered the “authorized” body. The Environmental Protection Law provides a definition of “central executive environmental protection body.” Although it seems obvious that the authorized bodies in the area of environmental protection are bodies of the Ministry for Environmental Protection, it is not clear whether it is possible to consider, for example, a territorial environmental protection department of the Ministry as an “authorized body,” or whether it is necessary that computations be made by the Ministry for Environmental Protection, which is the central executive environmental protection body. Although at first glance this issue seems insignificant, if computations for payment for pollution are made by territorial environmental protection departments, as before, then there may be an issue as to whether the payment rates which are established on the basis of the computations of the territorial departments are invalid. We are aware of judicial cases, based on the previous legislation, where the non-approval by the Government of rates of payments for pollution served as grounds for exempting nature users from liability for not making payments for pollution. Therefore, the issue of which body is to make the computations of payment rates is rather serious.
 
The second, but not the last, issue which is in need of clarification with respect to disputes over payments for pollution is the issue of whether the payment rates have been registered with the territorial justice departments and published, as required by the Law “On Regulatory Legal Acts.”21
21 Law on Regulatory Legal Acts, Article 38.1 and Article 34.
 
In this way a careful reading of the legislation may provide a nature user additional arguments in disputes with the tax authorities on issues related to the making of payments for pollution of the environment.
 
Environmental Expert Examination
 
Along with permits for nature use, permits for pollution of the environment and payments for pollution, environmental protection in the activities of subsoil users is carried out by the mandatory conduct of a state environmental expert examination. Obtaining a positive report from a state environmental expert examination is a necessary step for commencing new types of activities, as well as for modernizing already existing enterprises, and for the construction, reconstruction, technical re-equipping, re-profiling and liquidation of enterprises, since without a positive report from an environmental expert examination, the implementation of a project is prohibited.22 The legislation on environmental expert examination includes in the list of objects which are subject to a mandatory state environmental expert examination, all types of planning, pre-planning, pre-design and design documentation, draft forecasts, ecological and investment programs, conceptions for the main areas of activities, agreements, contracts, and feasibility studies.23
22 RK Law of March 18, 1997, “On the Environmental Expert Examination,” Article 13.
23 Id., Article 14 (1)-(5).
 
Such an extended list of objects for a state environmental expert examination means that practically every enterprise, even if the activity, re-equipping, or reconstruction planned by such enterprise will in no way affect the environment or change an already existing influence on the environment, all the same must obtain a positive report of a state environmental expert examination before commencing such activity /re-equipping/ reconstruction.
 
The requirement for obtaining a state environmental expert examination report leads to additional costs for enterprises for preparing the documents for the environmental expert examination, and delays the timeframes for starting projects. In addition, the legislation has not established strict criteria by which the object of the examination is to be evaluated, and certain provisions are written in such a way that they may serve as grounds for a negative state environmental expert examination report for any type of activity and any project. Therefore, it would be desirable if lawmakers narrowed the range of objects for which it is necessary to obtain a positive environmental expert examination report, which would further the development of the economy and reduce the risk of abuse by bureaucrats. Thereafter, the authorized body should approve a list of projects which do not affect the environment and which do not need an environmental expert examination. It would also be desirable to determine a list of projects which have an insignificant effect on the environment, and which therefore may undergo a reduced environmental study without the requirement of going through a full environmental expert examination.
 
It would also be useful to amend the provision of the law requiring the obtaining of a positive state environmental expert examination report for projects within the norms of maximum allowed discharges and maximum allowed emissions, which currently are included in the documents which are to be submitted by a nature user to environmental protection authorities for the procurement of a permit for pollution of the environment.24
24 Id., Article 14 (6).
 
Since enterprises which apply for a permit for pollution of the environment have already obtained a positive state environmental expert examination report issued for the entire project as a whole, a provision that it is necessary to go through an annual environmental expert examination does not have a significant effect and only complicates the activities of enterprises. As if improving legislation, the Rules for Issuing Permits for Pollution of the Environment require the submission of a state environmental expert examination only for new enterprises or in the case of a change of technological conditions. However, since the Law on the Environmental Expert Examination has priority over the Rules, as approved by the Government, in order for the provision established by the Rules to be valid, the law must be amended.
 
Draft Law on Mandatory Enwironmental Insurance
 
In 2002, the RK Government prepared a draft law “On Mandatory Enwironmental Insurance,” which is currently being considered by various bodies. It cannot be said that this draft law represents anything new in the legislation. The requirement to insure ecologically dangerous activity was stipulated by the Law “On Environmental Protection;” however, the mechanism for implementing this requirement has never existed. In addition, for a short time in 1996, there was a Regulation on the Procedure for Organizing and the Conditions for Carrying Out the Mandatory Insurance of Petroleum Operations, as approved by Decree of the RK Government, but its force was suspended, since several problems were found in the Regulation.25
25 See the Decree of the RK Government of October 1, 1996, “On Suspending the Force of RK Government Decree of July 18, 1996.”
 
It should be noted in general that compulsory ecological insurance exists in many countries, including the United States. Enwironmental insurance facilitates the business activities of enterprises which through ecological insurance lower the risk of spending significant material resources from production activities for covering environmental losses.
 
The draft law on mandatory enwironmental insurance requires insurance against the civil legal liability of enterprises that engage in enwironmentally dangerous types of business. Since the exploration and drilling of oil and gas deposits is an enwironmentally dangerous type of work,26 all oil and gas enterprises fall within this law.
26 See the Unified Rules for protecting the subsoil in developing mineral deposits in the Republic of Kazakhstan, as approved by Decree of the RK Government of July 21, 1999, clause 293; the Unified Rules for developing oil and gas deposits in the Republic of Kazakhstan, as approved by Decree of the RK Government of June 18 21, 1996, clause 6.2.1
 
Compulsory enwironmentally insurance includes insurance against the liability of an enterprise for accidental pollution of the environment in order to ensure compensation of the costs associated with the work for restoring the environment so damaged. However, the draft law does not establish conditions for insurance against the liability of nature users to third parties. An insured event, according to the draft law, would be emergency pollution of the environment, i.e., the sudden, unforeseen, above-average disposal into the environment of potentially dangerous substances and dangerous forces which cause damage. An entity that carries out an enwironmentally dangerous type of business must obtain insurance.
 
Unfortunately, the June 2002 version of the draft law contains a number of shortcomings, which, should the law be adopted in its current form, would lead to problems in implementing the law.For example, one gets the impression reading the draft law that the drafters did not know that Kazakhstan already has sufficiently developed insurance legislation, the main provisions of which are set forth in the Law “On Insurance Activity” and in the Special Part of the Civil Code. With regard to those laws, the law on mandatory enwironmental insurance is special. We believe that exactly this lack of knowledge explains the inclusion in the draft law of the term “enwironmental insurance pools” and the repetition of the norms and provisions which are established by the insurance legislation, e.g., the provisions regarding the grounds for exempting an insurer from making an insurance payment.
 
According to the draft law, “enwironmental insurance pools” are associations of insurers for insuring against liability of the most dangerous objects and enterprises which have the highest risk of having an insurance accident. The draft law provides that the RK National Bank is to establish special requirements for forming insurance pools: Requirements for the minimum total amount of their participants’ own capital and insurance reserves. The RK Government is to establish a list of enterprises which are subject to insurance by enwironmental insurance pools. We believe that it would be more appropriate in this case to not include a new term in legislation, but rather to use the existing definitions and developed mechanisms for “co-insurance,” which would make it possible to insure a specific object by several insurers jointly, or “double insurance,” under which one object is insured by several insurers through independent agreements with each of them. With a more expanded use of these definitions in the law on mandatory enwironmental insurance it would have been possible to limit the requirement for the co-insurance/double insurance of objects which are included in the list of specially dangerous enterprises to insurers that have a specific amount of capitalization. We would also like to note that the list of organizations the activity of which has an increased risk of emergencies has been established by RK Government Decree;27 therefore, it is not necessary to develop a new list especially for the purposes of mandatory enwironmental insurance by “insurance pools” when it is possible to use the already established list.
27 See RK Government Decree of January 20, 2001, “On Approval of the List of Organizations the Activity of Which Has an Increased Risk of Emergencies.”
 
The draft law on mandatory enwironmental insurance provides that, before concluding an agreement for mandatory enwironmental insurance, it is necessary to conduct an enwironmental audit, which is to evaluate whether the insured has observed the requirements for protecting the environment, whether environmental parameters have been established before concluding the insurance agreement and what is the degree of potential danger for the object being insured. According to the draft law, an ecological audit is to be conducted by entities that have a license from a central executive environmental protection body. Although the term “enwironmental audit” is included in the Law on Environmental Protection,28 its inclusion in the area of insurance, we believe, will not work, since current legislation does not stipulate a mechanism for implementing this definition; there are no qualification requirements for the licensing of enwironmental audit activity; and the definition of audit itself is closely associated with its financial meaning.
28 Law on Environmental Protection, Article 81.
 
In addition, the draft law abounds in declarative norms. For example, the draft law contains an article entitled “The Rights and Obligations of Citizens in the Area of Mandatory Enwironmental Insurance.” However, despite the name, the article does not contain the slightest reference to any norm which would establish the obligation of a citizen. The rights of citizens, apart from “other rights which are stipulated by legislative acts” include the right to accurate information “regarding the existence of agreements for mandatory enwironmental insurance” and the right “to make proposals for liquidating historical pollution of the environment.”
 
Consequently, to realize the idea of mandatory enwironmental insurance so that the law on mandatory enwironmental insurance actually brought some good both to the state and to enterprises which carry out especially dangerous types of activities, significant changes must be made to the draft law.
 
Draft Law on Amendments to Legislation on Subsoil Use and On Petroleum
 
A draft law was prepared in 2002 that would make a great number of changes to the legislation on subsoil use and on petroleum. Many of the changes proposed by the draft law are stylistic in nature. The more significant changes include, inter alia, a more detailed procedure for holding tenders for obtaining the right to use the subsoil, the introduction of new types of subsoil use contracts, and a determination of the time period for the entry into force of subsoil use contracts. The draft law on changes to legislation on subsoil use would change the norms of the law with regard to suspending subsoil operations, and the termination and amendment of the conditions for a subsoil use contract.
 
With regard to changes in the regulation of environmental protection, the draft law would establish new provisions for protecting the environment and subsoil and increase the liability of subsoil users. In particular, the draft law would add certain new requirements to the requirements for protecting the subsoil which are established by current legislation, such as a requirement to observe technological plans for processing mineral raw materials, to make more complete use of products and initial waste products, and to use technical resources that meet international standards. The draft law also has new norms determining the purpose of state supervision over protection of the subsoil and establishing the authority of a state body to use and protect the subsoil; a new article “Liability for Violating Requirements in the Area of Protecting the Subsoil” is introduced concerning compensation for damage caused as a result of violating the requirements of legislation in the area of subsoil protection, with the exception of damage caused as a result of force majeure circumstances.
 
An important provision in the draft law is a prohibition on developing oil and gas deposits without with utilization of associated gas and natural gas. Kazakhstan does not have the infrastructure for utilizing associated gas and natural gas, and the establishment of such an infrastructure is not economically feasible. Therefore, the introduction of a prohibition on developing deposits without the utilization of gas will mean the priority of environmental requirements over economic feasibility. We believe that the draft norm does not meet the principles for sustainable development which Kazakhstan has joined, and should most likely be reconsidered.
 
Summarizing the above, it should be noted that the current legislation on protecting the environment, as before, retains the vagueness and contradictions which have led to disputes over its implementation. Since protection of the environment and the subsoil is one of the significant aspects of subsoil use, the absence of clearly-defined rules deprives the subsoil user of confidence that he is acting in accordance with legislation and has a negative effect in his decisions regarding future investments in Kazakhstan.
 


Table of contents
Invest in Astana!  Adilbek Dzhaksybekov 
Helios Means First!  Shukhrat Danbai 
Certain Environmental Aspects of the Activities of Subsoil Users  Aigul Kenjebayeva, Yuliya Mitrofanskaya 
Issiue Deductibility of Interest on Foreign Currency Loans  Bill J. Page, Gaukhar Iskakbayeva 
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