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 KAZAKHSTAN International Business Magazine №1, 2006
 Associated Gas: One Problem, Different Approaches
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Associated Gas: One Problem, Different Approaches
 
Gulzhan Nurakhmet, Lawyer, GRATA Law Firm
 
Every year when crude oil is brought to the surface, most oil-producing countries flare and vent large volumes of gas, which is equivalent to the combined annual natural gas consumption of Central and South America or Germany and France. According to the World Bank estimation the annual volume of this associated gas (AG) that is being flared and vented is about 110 BCM. There is also a basis to make a statement that 10-13 BCF is flared daily. This is more than enough to meet the gas needs in the UK. Flaring of gas in Africa alone would be sufficient to produce twice more electricity that the Norwegian hydroelectric power system supplies annually. It is widely recognized that flaring and venting of "valueless by-product" and "unwelcome stepchild" of oil, leads to the pollution of environment by contributing to greenhouse effect (GHE).
 
However this product that was historically disposed and wasted could potentially bring economic benefits, especially for the developing countries. Utilization of AG could be considered as a solution for different problems: it reduces the greenhouse emissions and simultaneously improves country's economic condition due to the tendency of increase of the natural gas prices. 
 
Recently Kazakhstan has enacted amendments to its petroleum legislation that prohibits gas flaring and venting into the atmosphere by 1 July 2006. This article reveals the gaps in the national legislation, lack of efficient and effective regulatory procedures of flaring and venting as well as overlapping responsibilities of the State authorities. Kazakhstan that became aware of changing its policy towards utilization of the gas flaring is facing ineffective regulatory and non-regulatory measures that could be barriers towards meeting the country's objective for sustainable utilization of AG. This article intends to highlight the salient points of the current gas utilization policy in Kazakhstan and discuss some problematic areas which require further legislative clarity. Nowadays Kazakhstan faces challenges in bringing and developing the effective AG utilization policy by stipulating vague provisions both for regulatory authorities of the energy sector and oil-producers that could discourage investments to the country's petroleum sector.
 
We will also evaluate the various aspects of the successful implementation of AG utilization program in Norway, a country that has considerably reduced flaring through effective regulatory measures. This country is distinguished by the steep increase in oil production with low gas flaring volumes. By applying comparative methodology, this article is proposed analysis of the main provisions of the gas flaring and venting in the hope of answering on how the Norwegian experience could be of benefit to Kazakhstan.
 
The choice of Norway as a model is informed by several reasons:
· Currently the World Bank has introduced voluntary global standards for restricting gas flaring during oil production. In 2001 this project was initiated by the Norwegian authorities and is led by the World Bank;
· The Norwegian Petroleum Directorate (NPD) is working closely with the World Bank and has contributed its experience with the Norwegian system to the different projects, by assisting the several developing countries in their work to limit the gas flaring;
· Norway is generally highly regarded for the way in which it carries out its gas resource management and several countries have already expressed an interest in learning from its system.
 
Kazakhstan could learn a lot from Norway's vast success in this area. This article intends to bring recommendations from the 'first hands' that will contribute to the improving associated gas utilization policy in Kazakhstan.
 
I would like to reveal the main obstacles of realization of gas utilization policy in Kazakhstan and sketch the frame of such policy which is based on the Norwegian experience, to make it clear for both Kazakh Government and oil-producers. 
 
Nature of Gas Flaring and Venturing
 
 
In this article we will proceed with some definitions of the important phrases:
 
Gas flaring – the burning of gas in the field as a means of disposal when there is no market for the gas and the operator does not elect (or cannot) use the gas for a non-wasteful purpose.
 
Venting – the release (vent) of natural gas that can't be processed for sale or use because of technical or economic reasons.
 
Associated gas - the natural gas found as part of or in conjunction with other constituents of crude oil, as opposed to such gas found on its own. The expression has come to include natural gas necessarily produced along with crude oil.
 
Associated gas should be utilized rather than disposed by simply flaring and venting for the following reasons:
1. It causes the potential health risks. Gas flaring creates toxic airborne pollutants. Many very dangerous toxic and detrimental petroleum compounds can be absorbed by plants and quickly enter to the food chain. Dangerous metals can cause cancer, birth defects, blood disorders, and damage the central nervous system;
2. It is an environmental concern with regards to global warming, acid deposition and climate change. Carbon dioxide emissions and gas from flares contributes to GHE and global warming. Primarily flaring contributes to emissions of sulphur dioxide and greenhouse gases, while venting contributes to emissions of methane, also a greenhouse gas;
3. It wastes valuable non-renewable resources.
 
 However we could observe an interesting tendency that countries have started to implement the gas utilization policy not because of environmental aspects, but with a purpose to increase its oil revenues. For instance: since the beginning of oil production in Norway in 1970, government was not allowed to flare the gas from a resource point of view to avoid wasting valuable energy sources. It was subsequently that environmental issues were recognized. Saudi Aramco was not undertaking any utilization projects until the first oil shock, when in 1975 it was ordered to construct gas gathering system.
 
There are several available options for AG development:
1.Application of the small gas-fired mini turbine generators to produce electricity from AG for furthersale in downstream energy market. AG is natural gas that is dissolved in the crude oil within the reservoir. When the oil is produced and gas is recovered it could be further sent to a processing plant for marketing. In this case the gas is used to power micro-turbine generators for electricity production. Several countries are currently working under adapting this new technology in their respective countries. For example: the province of Alberta (Canada) for heartening this practice, has exempted such operations from provincial royalties, Cameroon is evaluating the financial feasibility of this mechanism to reduce flaring and venting and Russia is carrying out research on implementing such generators in petroleum industry.
2.Gas conservation. Conserving the waste gas for processing at natural gas facilities. One of the available options of the gas conservation is under commercialization studies and includes Gas-to-Liquids (GTL). This project is currently under way in Qatar, utilizing the county's North Gas field reserves. GTL technology provides wide range products as substitutes to the traditional petroleum alternatives: clean diesel and jet fuel, middle distillates, lubricants, olefins and methanol.
3.Re-injection to improved oil. The option deals with re-injecting the waste gas underground to maintain reservoir pressure during production. Re-injection of extracted gas is used as secondary mechanism with necessity to purify the gas and compression. This leads to additional cost and increase of production. As re-injection of the AG prolongs the productive life of the oil field. After separation from the oil at the wellhead and then pumped back into the field it promotes greater amount of the remaining oil to be recovered. In this case gas could be recycled several times without being wasted, as it may still be recovered and used towards the end of the active life of the field. This positive experience with re-injection of gas to improved oil recovery brought along Norwegian gas utilization policy. However depending on geological characteristics of the individual field, re-injected gas may actually have negative effect on oil production by unfavorably affecting its flow.
 
Associated Gas Utilization Policies: Case Studies
 
Norway
Norway is one of the significant oil producers with offshore oilfields in the Norwegian Continental Shelf (NCS). The petroleum activities in Norway have an enormous income potential. In 2002 oil accounted approximately 44 per cent of country's export and 24 per cent of government revenue. Norway brings one of the best examples of successful oil production policies as well as environment protection. Gas flaring volumes as a percentage of oil production has decreased substantially over the last two decades in a time when production of the crude oil has almost doubled since 1990 and increased sixfold since 1981. The Norwegian Energy Policy has been able to amalgamate its role of a large energy producer with pioneering position on environmental issues.
 
The Norwegian Petroleum Directorate (NPD) is a part of the Ministry of Petroleum and Energy (MPE) supervises air emissions, petroleum activities and is responsible for energy efficiency and safety on installations and for gas flaring and venting operations within Norway.
 
Petroleum companies, operating in the NCS are entitled:
· To lift, process, and use AG in operations (re-injection). Until 2005 some BCM gas have been re-injected into a total of 27 fields on the NCS which have produces an improved oil recovery of 270-310 million cubic meters;
· To flare gas. In 2004 only 0.16 per cent of the total annual petroleum production was flared. None of the development plans has yet been approved without any gas injection, gas export solution and et al.
· To market AG downstream. Nowadays this issue is regulated by individual sales contracts.
 
All of these options have to be stipulated into the development plan while obtaining relevant consents and approvals.
 
Petroleum Activities Act of Norway1 does not stipulate specific gas flaring and venting targets, it could be "unavoidable technical reasons", "emergencies", and "safety reasons". However it provides with very strict permission procedure. In accordance with Section 4-4 of the above mentioned act: "Flaring of petroleum in excess of the quantities needed for normal operational safety shall not be allowed unless approved by the Ministry. Upon application from the licensee, the Ministry shall stipulate, for fixed periods of time, the quantity which may be produced, injected or cold vented at all times". With a reference to the World Bank Report applications for obtaining gas flaring permits are evaluated directly by the NDP and permits are issued by MPE. As a part of the approval procedure, NPD and MPE evaluate the flaring equipment and operating procedures. Application for obtaining permit must identify the type and level of the atmospheric emissions and technology applied to avoid or reduce environmental pollution. Emissions limits are established on case-by-case basis taking into consideration applicable national and regional standards.
 
Measuring and Reporting
Norway has acknowledged that environmental objects that were set by Government can be achieved only if emissions are measured and monitored. These procedures are carried both by Government and company-oil producer and are illustrated in the table below.
 
Kazakhstan
Kazakhstan is among the top ten countries in the world in terms of hydrocarbon reserves. Nowadays there are for about 214 oil and gas fields on the state balance, 81 of them are developing by Petroleum companies. Extracted resources are about 3 billion tonnes of oil, 2 trillion cubic meters of gas, and more than 300 million tonnes of condensate.
 
Recent Law3 has introduced following amendments to article 30-5 of the Law On Petroleum4:
1. It is prohibited to develop oil and gas fields without utilization of AG;
2. Flaring of AG is prohibited with exception of cases of emergency situations and causing threat to the health of population and the environment.
3. Law On introducing modifications and amendments in some legislative acts of the Republic of Kazakhstan concerning subsoil use and carrying out petroleum operations in the Republic of Kazakhstan,  No 79-III of 10 October 2005
4.Law On Petroleum, No 2350, dated 28 June 1995
 
However the above mentioned provisions are not extended to the contractors that are carrying out petroleum operations, based on subsoil agreements by 1 December 2004, until the end of the terms of realization AG programs, if they:
· Were agreed (approved) with the State authorities before 1 December 2004;
·  Will be developed and approved in the competent authority (In Kazakhstan the competent authority in petroleum operations is the Ministry of the Energy and Mineral Resources – MEMR) and environmental agency (The Ministry of Environment Protection – MEP and its Territorial Sub-Divisions) before 1 July 2006.
 
AG flaring is permitted:
· In a case of emergency situations and existing threat to the health of population and the environment;
· In exceptional cases during well and AG testing throughout trial exploitation of the field with total term of not exceeding three years.
 
In a case of flaring and venting of AG without permit, Contractor is obliged within ten days to notify the State authority in a written form of the gas flaring and (or) venting. This notification should contain reasons that lead to the flaring and (or) venting of the AG and data on volumes of the flared gas.
 
Introducing of this norm leads that almost all oil-producers were announced "out of law" and law-breakers of the above mentioned law, because in compliance with this law development of oilfields without utilization of the AG is prohibited. This imperative norm was enacted without taking into consideration the current situation of the oil and gas industry in Kazakhstan, when none of the production of oil and gas is carried out without gas flaring and venting. It reveals contradiction and inconsistency in governmental actions as the petroleum companies have been flaring and venting AG on a basis of already approved projects, technical and other technological documents, where the gas flaring and venting was indicated as a part of the process.
 
With respect to the governmental policy towards reducing associated gas flaring, however we need to highlight the main constraints that could not contribute to the realization of this policy as the state wishes so. They are: regulatory procedures and technological process.
 
Regulatory Procedure
In Kazakhstan gas flaring was prohibited by Law5 in 2004. Abandonment of the gas flaring is long-term process which requires scrutiny investigation of this area and comprehensive legislative base for avoiding any misunderstandings and makes things clear by setting detailed procedure. Even so, government decided that it could reduce the gas flaring and venting volumes by including this provision into law without preparing corresponding gas utilization policy, without analyzing other countries' experience and enacting required amendments and modifications to the primarily and secondary legislation.
5. Law0No 2-III, dated 1 December 2004On introducing modifications and amendments in some legislative acts of the Republic of Kazakhstan concerning subsoil use and carrying out petroleum operations in the Republic of Kazakhstan,
 
After several months this "chaotic policy" has started to bring results. Petroleum companies had received notifications, issued by the MEMR and MEP where they were required to start immediately full utilization of the AG or reduce the volumes of production or company (-ies) would be bring into account: previously concluded subsoil use contracts terminated and (or) penalties would be imposed. Creating grounds for gas utilization process is time consuming procedure and could not be carried out "in a day". Only after joint active actions that were taken by petroleum companies or when Government eventually understood its mistake of "not setting transition deadline" for companies: to reduce flaring, to prepare internal procedures, to attract sufficient financing and create all required conditions which could not damage already established and approved development plans. Most of the companies who received such notification already had obtained gas flaring permits and have been working on approved (agreed) documentary basis, where gas flaring was one of the provisions of extracting crude oil. As a result, only after ten months government has set the transition criteria which on its opinion could reduce gas flaring and venting by establishing deadline as 1 July 2006.
 
Technical Provisions
There are two dimensions of the technical constraints. Firstly, the process of gas utilization is a complicated and high costly process, which requires purchase of the specific equipment. In accordance with Order of the Agency on Emergency Situations of Kazakhstan, No 256, dated 29 November 1999, equipment that is used in oil and gas industry requires corresponding certification and permits, which in it term requires time to be: purchased, delivered by following customs regulations procedures, permits and certificates should be obtained as required, equipment be installed, etc. For this reason, Company which is flaring gas could not terminate the gas flaring and venting in such short term. Secondly, some oil fields could not allow implementation of the gas utilization projects due to the geological characteristics of the field. If a company favors gas utilization projects and could attract sufficient funds, it could not implement the project, as low gas stream may not provide sufficient feed for utilization undertakings and will be flared or vented. Also, gas may be too sour, with high contents of H2S or too high in liquids, thus presenting problems for equipment operations and maintenance. Thirdly, due to companies' lack of expertise in dealing with associated gas and lack of ability to developing them it is impossible to start AG utilization and prohibit gas flaring and venting in such short term.
 
Conclusion
Regulatory and technical constraints make it very doubtful for Kazakhstan to abandon AG flaring by July 2006. In Kazakhstan procedure of issuing gas flaring permit is set up in the secondary legislation, particularly in Instruction On Issuing Permits for Associated and Natural Gas Flaring, approved by Head of the Geology and subsoil protection Committee of the MEMR, No 115-?,dated 27 July 2004. Para 2 of article 2 in Chapter 2 states: "to the application, document confirming impossibility or economic inexpediency of the gas utilization on this stage of the field development should be submitted for obtaining gas flaring permit". This means that this instruction as well as legislation does not exclude issuance of the gas flaring permit in a case if the gas utilization is economically inexpedient. In addition the term "impossibility" is not defined and open to various interpretations. There is strong contradiction between this instruction and modified Article 30-5 of the Law On Petroleum, where gas flaring permit is required for "emergencies", "safety reasons", and "AG testing throughout trial exploitation of the field with total term of not exceeding three years". Whereas theoretically and hence practically (legally) gas flaring permit in accordance with the above mentioned instruction could be obtained because of impossibility or economic inexpediency of the gas utilization.
From the Norwegian experience we could make conclusion that clear and detailed gas flaring and venting policy, scrutinize evaluation and careful examination of the development plan, as well as collaboration of the Norwegian Government with petroleum companies have been contributing factors to the successful Norwegian Gas Utilization Policy. Gas flaring and venting in this European country not only endow with positive environment protection policy, drives the development of the gas transportation infrastructure, but contributes to the development of many oil fields, which became commercially viable due to the associated gas utilization.
 
In the light of the Norwegian experience and the gas flaring and venting policies both in Norway and Kazakhstan studied, the following recommendations that are introduced in the following table could be produced.
 
Table 2
 
Prohibition of the gas flaring in Kazakhstan by 1 July 2006 means re-structuring petroleum companies towards new technologies that exclude AG flaring and venting. It is more complicated and time consuming process rather than that terms in which country expects to achieve its objectives: it takes several years for the governments to create sufficient regulatory procedures and for companies to bring and establish new technologies and attract solid investments in amount of several hundreds million of US dollars.
 
There is even no governmental support provided to the Petroleum companies, neither any clarification regarding new policy, nor tax incentives, which could substantially reduce AG flaring and venting, as the Norwegian experience reveals.
 
For these reasons Kazakh Government should not expect total reduction of the gas flaring and venting and creation of the AG utilization facilities in all existing Petroleum companies. So after 1 July 2006 Petroleum companies should expect to obtain new notifications or new regulatory provisions that will come into existence by that time. But this is a different theme that is outside the scope of this paper. In order not to loose the country's reputation and discourage investments Government should announce moratorium to article 30-5 of the Law On Petroleum up to three years until it eliminates all contradictions and set up detailed regulatory procedure. This time could help companies to establish new AG utilization technologies, not be announced "out of law" and be involved into unjustified court proceedings with respect of AG flaring and venting.
 


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