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Zh.S.Yelyubayev Ж.С.Елюбаев
Specifics of Legal Regulation of Subsoil Use Dear facilitators and participants of the Conference! Ladies and Gentlemen! Declaration of the Republic of Kazakhstan as a democratic, secular, law-governed and social state by the Constitution of the Republic of Kazakhstan adopted on August 30, 1995 at a Republic’s referendum, predetermines the necessity of formation of democratic state institutions, new market relations and development of international economic cooperation. Legal foundation for formation of progressive state institutions and the economy of a new type is laid by the provisions of the Constitution that proclaim recognition and protection of private property and freedom of enterprise. Proceeding from the above, the conclusion is that the legal regulation in our country, including the legal regulation in oil and gas industry, should be exercised within the framework of constitutional principles and provisions. Development and perfection of the country’s legal basis should also be carried out in the light of the above-mentioned constitutional provisions. To be true, the Republic of Kazakhstan with its rich natural resources, attractive investment climate, certain stability of national economic legislation is a kind of a center of new Eurasia business. In the recent years, a certain legal basis was formed in the country to ensure the improvement of the system of public administration, growth of the economy, development of market relations, attraction and protection of foreign capital, development of science and introduction of new technology. Of a special importance is the formation of so-called block of economic legislation, a part of which is the legislation regulating the relations in the sphere of the oil and gas industry. The issues of legal support for this sector of economy will be the subject of discussion at this Conference. In my presentation, I would like to briefly analyze the laws and regulations governing subsoil use, existing problems, as well as touch on the issues of further improvement of this field of legislation. In the block of economic laws, a special place is held by Decrees of the President of the Republic of Kazakhstan having the force of laws «On Oil» and «On Subsoil and Subsoil Use». Adoption by the President of these acts contributed to a regulation of new relations arising in such a promising sphere of economy as oil and gas sector. They facilitated attraction of investment, conclusion of truly historic subsoil use contracts with well-known international corporations like Chevron. As you know, later these acts were significantly amended by the ROK Law #467 dated August 11, 1999. These Presidential Decrees together with other economic laws provided a foundation for a onward development of the country’s oil and gas industry, increase in oil and gas production, hydrocarbon export, which, in its turn, promoted the country’s currency revenue and the growth of national economy. It should be noted that the relations in oil and gas industry are also regulated by a whole complex of other laws and regulations (more than 100), the most important of which, in my opinion, are the following Resolutions of Government of the Republic of Kazakhstan: q #745 dated June 18, 1996 «On Approval of Uniform Regulations for Development of Oil and gas Fields of the Republic of Kazakhstan»; q #1019 dated July 21, 1999 «On Approval of Uniform Regulations for Protection of Subsoil in the Course of Development of Fields of Minerals, Oil, Gas and Underground Water of the Republic of Kazakhstan»; q #108 dated January 21, 2000 «On Approval of Regulations for Granting Subsoil Use Rights»; q #1015 dated July 31, 2001 «On Approval of Model Contract for Conducting Subsoil Use Operations in the Republic of Kazakhstan»; q #1705 dated December 26, 2001 «On Approval of Regulations for Conducting Tax Expert Examination of Subsoil Use Contracts»; q #612 of June 7, 2002 «On Approval of Regulations for Acquisition of Goods, Works and Services in the Course of Conducting of Oil Operations» and a number or others. Besides, there are a lot of departmental acts that regulate certain aspects of subsoil use relations, various Regulations, Instructions etc., which, unfortunately, sometimes contradict to legislative provisions or interpret them too broadly infringing on rights and legitimate interests of subsoil users. I will elaborate on this a little bit later. Certain issues of subsoil use are regulated by other important acts of the Republic of Kazakhstan, for example, by the Tax Code, ROK Laws «On Customs», «On Foreign Investment», «On State Support of Direct Investment», ROK Presidential Decrees «On Licensing», «On Currency Regulations», «On Insurance», etc. The referred laws and regulations are the evidence of existence of a serious legal basis for a successful development of oil and gas industry. Today, however, I would like to dwell on a constructive criticism of these acts, on the ways of improvement of the legislation regulating this important sphere of the country’s economy and advance specific proposals in this connection. Under Decree of the ROK President having the force of law «On Subsoil and Subsoil Use» (article 13) and «On Oil» (article 8-2), subsoil use rights, including the right to oil operations, are granted by contracts for exploration, production, combined exploration and production, and, finally, construction of underground facilities not related to exploration and/or production. This very important legislative subsoil user right provision sometimes comes nothing as a result of erroneous or deliberately wrong interpretation by the competent body or other state control agencies. To support this statement by evidence, I’ll give an example from the practice of application of subsoil use legislation. Item 3 of article 1 of Decree «On Subsoil and Subsoil Use» defines Production as a «complex of works (operations) associated with extraction of minerals from subsoil to the surface». Article 1 of Decree «On Oil» broadens the concept of Production and defines this type of subsoil use as «any operations that are associated with recovery of oil to the surface and include: · construction and operation of underground and surface industrial equipment and facilities; · recovery of oil to the surface, organization and maintenance of work process in operation wells; · oil processing and refining; · separation of associated components from oil, utilization and liquefaction of natural and petroleum gas». Quite a clear and exact provision. But what happens in practice? Let us assume that an oil producing company performs, on the basis of a Production Contract, the works on recovery of oil to the surface, separates associated components, processes and refines oil, utilizes associated gas, and a part of the components produced as a result of these operations, for example, industrial waste water, injects back to subsoil, i.e. performs the activities on «operation of underground natural facilities». Under the above-cited legislative provisions, if a subsoil user has a Production Contract, it will not have to make a separate contract for industrial waste water injection to subsoil (natural underground facilities), because, in this case, the injection of the industrial waste water is an integral part of oil operations, the right to which has been given to him. However, the ROK Competent State Bodies in the field of subsoil protection request the economic entities, which carry out oil production on the basis of a Production Contract executed in accordance with the established procedure, to make a separate contract for construction and operation of underground facilities, which is an obvious infringement on these entities’ subsoil use rights. In case of a refusal to make such a contract, the subsoil user becomes subject to the whole range of administrative procedures, up to imposition of certain sanctions. Another example. The provisions referred before include the utilization of petroleum gas into the scope of oil operations. One of the types of gas utilization is it flaring. As it follows from the sense of the above-mentioned legislative provisions, if a subsoil user has a Production Contract, it should also have the right to the gas utilization, because this is a part of the technological chain of the oil recovery operation. However, new article 30-5 was added to the Decree «On Oil» by Law #467 of August 11, 1999, which provides that the gas can be flared only on the basis of «a written permit from the state body in charge for subsoil use and protection». Here the contradiction between two provisions of the same law is quite evident, it leads to serious conflicts between subsoil users and competent state bodies. Yet another example. When a Contract for Production or Exploration is made, the subsoil user is allotted a parcel of surface land with specific coordinates. So, the subsoil user actually obtains the right to land use, which is subject to a formal legal registration in accordance with the ROK Law «On Land». It should be assumed that if the subsoil user entered into a Contract for, for example, Production, the land under and around the operation well or other production facilities should be undoubtedly legally allotted to (secured for) the subsoil user in accordance with the provisions of the ROK Law «On Land». But what happens in practice? When a subsoil user submits an application for legalization of the land plot under the existing production facilities or under future production facilities, for example, in the case of our company, under a sulfur pad, the competent state body in charge of the land use can either grant such a right, i.e. to legalize the land use, or put obstacles before the subsoil user in every way possible on various pretexts. Here again is an obvious infringement of the economic entity’s right to subsoil use granted by the Contract, which causes conflicts, litigations, costs, undermining of the authority and business reputation of the subsoil user, etc. Apparently, with the transfer to contractual relations in the sphere of subsoil use, it is necessary to get rid of the permits system for specific types of subsoil and nature use. It is quite obvious, because the Subsoil Use Contract entered into with the Competent State Body, includes or should include the whole spectrum of subsoil and nature use that is subject to permits. The Subsoil Use Contract should be regarded as the aggregate of the permits for subsoil and nature use. The issues relating to protection of the environment and observance of the environmental legislation are especially painful. This field is extremely sensitive both for subsoil users and the bodies of state control. Indeed, the subsoil use, as a type of economic activities, is environmentally hazardous. This type of activities affects the environment, and that is why the relations in the field of environmental protection are regulated in details by the ROK Law «On Environmental Protection» and other regulations. Both sides, subsoil user and authorized state bodies, should be mutually tactful and demanding in these issues, as the rights and obligations of both parties are specified in details in laws and regulations. We admit the fact that sometimes subsoil users commit breaches of environmental regulations and requirements of environmental legislation. Naturally, they should be held responsible for that as provided by the law. However, I would like to elaborate on the existing problems in relations between subsoil users and state bodies, as well as on the imperfection of legislation regulating this sphere, which also seriously affects the rights and legitimate interests of subsoil users. A wide range of relations in the field of ecology and environmental protection is currently regulated by bylaws, which sometimes are inconsistent with the legislative provisions. For example, article 29 of the ROK Law «On Environmental Protection» provides that the payment for environmental pollution is collected from entities and individuals for «emission and discharge of pollutants, placement of the wastes of production and consumption». Similar provisions are contained in article 461 of the ROK Tax Code. This payment comes within other payments (deductions) to the state and are governed by tax legislation. These two legislative provisions establish an exhaustive list of types of special nature use, inevitably relating to the environmental pollution; these are: emission and discharge of pollutants, as well as placement of the production and consumption wastes, which the subsoil user (nature user) has to make obligatory payment for in accordance with the Tax Code (article 461). This list of special nature use can not be broadened by bylaws. Besides, the ROK Law «On Environmental Protection» gives a legal interpretation of the notion «wastes of production and consumption», which mean «the substances and materials in any state of aggregation formed as a result of anthropogenic activities and not subject to further use». It follows from this provision that the main sign of «wastes of production and consumption» is the impossibility of their use for reasonable purposes. The opinion that the subsoil user, or the nature user, should not make any payments for environmental impact, except for the those provided by the law, is confirmed by the Supreme Court of the Republic of Kazakhstan. Item 21 of Resolution of the Plenum of the ROK Supreme Court #16 of December 22, 2000 «On Practice of Application by Courts of Environmental Protection Legislation» provides a clarification that «collection of additional payments for the use of natural resources, environmental pollution, placement of production and other types of hazardous impact not provided by the Law «On Environmental Protection» and legislative acts in force shall not be allowed». Please note that under item 8 of article 1 of the ROK Law «On Laws and Regulations» «legislative acts» mean «constitutional law; decree of the ROK President having the force of constitutional law; code; law; decree of the ROK President having the force of law; resolution of the ROK Parliament; resolutions of the Senate and Mazhilis». It follows from here that ROK Government Resolutions and other legal acts of a lower level can not be referred to the category of legislative acts, and therefore they can not introduce any payments for environmental impact, all the more broaden the list of types of special nature use subject to obligatory payments. In this connection, I would like to give one example. On September 6, 2001, the ROK Government adopted Resolution #1154 «On Approval of Regulations for Issuance of Permits for Environmental Pollution». In general, these Regulations are necessary, because they provide for a standard procedure for obtaining by nature user of Permits for a rated environmental pollution. However, these Regulations (items 3 and 4) expanded the list of types of special nature use, which are subject to obligatory payments by the nature user. According to the mentioned items of the Regulations, the nature user is currently obliged to make payments for «placement of products and materials in the environment for more than 3 months», which automatically are considered similarly to «production and consumption wastes» upon the expiry of the 3-month term. Such an analogy is not admissible, because a special ROK Law that regulates the relations in the sphere of environmental protection has already given a legal interpretation of the concept of «production and consumption wastes». This term, which was introduced and interpreted by the Law, can not be broadly interpreted by a departmental act, although approved by the Resolution of the ROK Government. It should also be noted that the principle of analogy can be used in law enforcement but not law making activities. In this case no new legal norms are created, but the lack of provisions for solution of specific cases is filled up. Application of legislative provisions by analogy is admissible only in the cases that are directly provided by the law (for example, article 5 of the Civil Code of the Republic of Kazakhstan, article 6 of the Code of Civil Procedure of the Republic of Kazakhstan). At that, the analogy is only admissible if there is no provisions regulating the relations in question. In the case under consideration, however, the required provision already exists. And it is absolutely inadmissible to apply analogy in public relations, if such an application deteriorates the position of citizens and legal entities, establishes or increases responsibility for any violations, determines or additionally increases payments or other sanctions, introduces additional obligations not provided by the law, etc. A number of economic entities are currently challenging the lawfulness of these Regulations and the ROK Government Resolution, but unsuccessfully so far. Let us hope that the Ministry of Justice and the ROK General Prosecutor’s Office take appropriate measures to bring these acts into accord with the requirements of the country’s laws. I would also like to dwell on guarantees of the subsoil user’s rights. Article 71 of Decree «On Subsoil and Subsoil Use» and article 57 of Decree «On Oil» provide that the protection of subsoil user’s rights is guaranteed in accordance with the legislation. Amendments and additions to the legislation that deteriorate the position of the subsoil user shall not be applicable to the Contracts awarded and concluded before such amendments and additions. As you know, most of foreign investors work in the oil and gas industry, and similar guarantees are given to subsoil user investors in the ROK Law «On Foreign Investment» (article 6). However, competent state bodies from time to time make attempts to apply to subsoil users working on the basis of contracts the provisions of new legislative acts, for example, on the issues of taxes and other governmental exactions, currency operations, customs regulations, use of foreign workforce, while all these issues are regulated in the Subsoil Use Contract entered into. Correction of Contracts for Oil Operations and making amendments thereto is quite a natural process from the point of view of restoration of the balance of the parties interests. It is provided for by both the legislation and the provisions of the Contracts themselves. However, the Government of the Republic of Kazakhstan and its authorized bodies should not raise nor support the issue of «total» revision of the Contracts, which some mass media and some «hotheads» from executive and legislative bodies, political parties and public organizations call for pledging that they proceed only from the «interests of the state and society». All issues, including the issue of loading the domestic oil refineries, should continue to be resolved within the framework of the law, including through negotiations with oil companies, which is widely used in practice and conforms both to the legislation and the provisions of the Contracts. We should also focus on the relationship of the notions of «guarantees to subsoil using investor» and the «ecological security». According to part 2 of article 71 of the Decree «On Subsoil and Subsoil Use», the guarantees of inadmissibility of deterioration of contractual position of the investor provided for by this article are not applicable to the changes in legislation in the sphere of ecological security. In the legislation, the relationship of the terms «ecological security» and «ensuring of ecological security» is not disclosed, there are no any attempts to substantiate these concepts either. And a broad interpretation of the «ecological security» by its identification with the term «environmental protection» seems not correct. The lack of the definition of the term «ecological security» in the legislation causes a situation, where the question is, most probably, the emerging and development, along with the environmental protection, of such independent «direction of activities» of the state as the ensuring of ecological security. Inclusion of the relations on ensuring the ecological security into the subject of environmental legislation needs a serious substantiation and serious legal analysis. Anyhow, performance of a consistent and planned activities within the framework of agreed and established limits and standards of adverse environmental impact can not be viewed as a threat to the environmental security. Therefore, there are sufficient reasons to state that the subsoil user guarantees stipulated by Article 71 of the Decree «On Subsoil and Subsoil Use» are applicable to the changes of legislation relating to the rates of the environmental fees. Anyhow, we need to have a legislative clearness and not be guided by assumptions in this issue. And if the state still collects from the subsoil user environmental fees, it has to pay to the subsoil user a compensation for deterioration of its economic position, because of the breach of the balance of initial economic interests guaranteed both by the legislation and the Contract. Let us recollect another fresh example of the rule-making, which directly affects the rights and interests of subsoil users. This is Resolution of the ROK Government #612 of June 7, 2002 «On Approval of Regulations for Acquisition of Goods, Works and Services in Oil Operations», the adoption of which alarmed all petroleum companies and foreign investors, because this legal act grossly breaches the right of economic entities to freedom of enterprise. A special presentation of one of the Conference participants will be devoted to this topic today. That is why I will just briefly express my position on this problem not intruding deeply into the substance of the problem. Item 6 of section 2 of this Regulations specifies that the authorized state body is entitled to: · approve the terms and conditions of holding bids (tender); · approve the results of bids (tender); · consider subsoil users applications for granting them permits for the purchase of goods and services without holding bids (tender). Besides, the participation of representative of the authorized state body in the commission responsible for holding bids (tender) became obligatory. So, you can see an unprecedented and unacceptably high level of involvement of the state in activities of non-governmental (private) economic entities. None of the existing legislative acts applicable to the issues of supply for oil and gas operations, allows the possibility of vesting a state body with such rights in respect of the subjects of private enterprise by issuance of the acts of a level lower than law. I do not want to analyze in details the laws and regulations governing minor relations in the sphere of subsoil use. However, I would like to briefly outline the list of problems in the sphere of subsoil use, which are not regulated or are insufficiently regulated by the national legislation. These are issues connected with: · well ownership right; · determination of the boundaries of sanitary protection zones around the fields and industrial facilities; · regulation of the system of monitoring over the activities of the subsoil user; · establishment of the standards and limits of emission, discharge and environmental impact of other kind; · carrying out depreciation of the subsoil user assets; · regulation of the system of monitoring on the issues of payment of taxes, royalties, bonuses and other obligatory government exactions; · regulation of the system of monitoring over subsoil user’s export and import operations; · improvement of the system of participation of Kazakhstan economic entities in implementation of projects in the sphere of subsoil use on the basis of competitiveness and compliance with the constitutional principle of freedom of enterprise. This list can be continued endlessly, and the discussion of these topics would take many hours. I would like to note that the authorized state bodies have to pay their attention to these problem and make attempts to resolve them on the basis of balance of interests of both parties. In conclusion of my presentation, I would like to express a number of proposals, implementation of which would help, I believe, to ensure law and order in this important branch of the country’s economy, oil and gas industry. Firstly, the Government of the Republic of Kazakhstan should be interested in a full scale revision and systematization of legislative and regulatory acts governing the relations in the oil and gas industry. A special group of experts should be formed for this purpose, consisting of eminent legal scholars studying the issues of subsoil and nature use and practical specialists working in oil and gas industry, including corporate lawyers. Secondly, a substantial part of relations in the sphere of oil and gas industry should be regulated by legislative acts, and not by bylaws and departmental acts. We should, at last, ensure that the country’s Laws, and not Instructions and Regulations of various agencies, dictate the rules of the game, especially in this promising and important branch of the economy. The role of bylaws and departmental acts should be reduced to regulation of minor procedural issues, they must not affect the rights and obligations of subsoil users and other important issues. Thirdly, it is necessary to develop the «Code on Subsoil and Subsoil Use», which can absorb various laws regulating the relations in the sphere of oil and gas industry. The lawyers understand very well that the Code is a more appropriate kind of legislative act, it can encompass all relations in this sphere. This codification work should start immediately to ensure that the existing legal problems in the industry are resolved in the near years or, at least, their amount is reduced. Fourthly, the Government of the Republic of Kazakhstan should work out and approve the system of monitoring over the activities of subsoil user based on constitutional principles of inviolability and protection of private property and freedom of enterprise. The existing system of state monitoring is mainly oriented at the intervention in financial and economic activities of subsoil users, it infringes upon the rights and legitimate interests of the subsoil user, sometimes undermines its authority and business reputation. I have to note that currently subsoil users become subject to dozens inspections by numerous state control bodies. This is a negative practice, which contradicts to strict requirements on the procedure for execution of inspections, which are contained in the ROK Presidential Decrees of June 14, 1996 #3036 «On Additional Measures Towards Implementation of State Guarantees of Freedom of Enterprise « and of April 27, 1998 #3927 «On Protection of the Rights of Individuals and Legal Entities to Freedom of Enterprise». And, finally, while accomplishing these recommendations, the following goals should be achieved, in our opinion: 1. legislative and regulatory basis should be rested on the constitutional principles; 2. a substantial part of relations in the sphere of economy under discussion should be regulated directly by laws; 3. bylaws and departmental acts must not contradict to laws nor expand the legislative provisions; 4. legal acts that deteriorate he position of the subsoil user or establish new obligations must not have retroactive effect; 5. legal acts should not allow the overlapping of functions and responsibilities of state control bodies; 6. legal acts should not be aimed at a unilateral revenue or achieving other unilateral benefits.
I would like to hope that adoption of new progressive laws and other legal acts regulating the relations in the sphere of oil and gas industry, their codification and systematization, support of subsoil users from the side of the Government of the Republic of Kazakhstan and its authorized bodies would promote a successful development of the oil and gas industry, which, in its turn, would contribute to the growth of the country’s economy and well being of the people of Kazakhstan.
Thank you for your attention.
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