Commentary to Article 126. Elimination of consequences of subsurface use of hydrocarbons to the Code of the Republic of Kazakhstan “On Subsurface and Subsurface Use”  

1. The elimination of the consequences of subsurface use of hydrocarbons is carried out in accordance with the project for the elimination of the consequences of subsurface use approved by the subsurface user and having received positive conclusions provided for by this Code and other laws of the Republic of Kazakhstan examinations.

The requirements for carrying out work to eliminate the consequences of subsurface use of hydrocarbons are established in the rules of conservation and liquidation during exploration and production of hydrocarbons, approved by the authorized body in the field of hydrocarbons.

2. The consequences of subsurface use are eliminated:

1) in a subsurface area, the right of subsurface use for which has been terminated, except for the cases provided for in subparagraphs 2) and 3) of paragraph 4 of Article 107 of this Code;

2) on a subsurface area (part of it), which the subsurface user intends to return to the state in accordance with the procedure provided for in Article 114 of this Code.

3. In the case provided for in subparagraph 1) According to paragraph 2 of this article, a person whose right of subsurface use in respect of such a subsurface area has been terminated is obliged to:

1) no later than two months from the date of termination of the right of subsurface use, approve and submit for the examination provided for by this Code and other laws of the Republic of Kazakhstan a project to eliminate the consequences of subsurface use of hydrocarbons;

2) complete the elimination of the consequences of subsurface use in the subsurface area within the time limits set in the draft for the elimination of the consequences of subsurface use of hydrocarbons.

4. The elimination of the consequences of subsurface use of hydrocarbons is considered completed from the date of signing the act of liquidation.:

1) a subsurface user (a person whose right of subsurface use has been terminated unconditionally);

2) a representative of the competent authority;

3) representatives of authorized bodies in the field of environmental protection, the sphere of sanitary and epidemiological welfare of the population and local executive bodies of the region, the city of republican significance, the capital;

4) in the case of liquidation on a land plot in private ownership or long–term land use, by the owner of the land plot or the land user.

5. If, after signing the liquidation act, it is established that the person whose right of subsurface use has been terminated in the relevant subsurface area has carried out liquidation work in violation of the liquidation project, or a leak-tightness of the mouth of the liquidated (mothballed) well has been detected, the competent authority shall notify such person in writing of the detected violation, as well as of his duties are to eliminate such a violation at his own expense within the prescribed period.

The provision of the first part of this paragraph does not apply to cases of violations in subsurface areas transferred to a new subsurface user.

6. The fulfillment by subsurface users of the obligation to eliminate the consequences of subsurface use of hydrocarbons is secured by a bank deposit, with the exception of subsurface users conducting exploration of hydrocarbons at sea.

7. A bank deposit, which is the subject of a pledge securing the fulfillment of an obligation to eliminate the consequences of exploration, is formed by depositing money in the amount of the amount determined in the exploration project based on the market value of the work to eliminate the consequences of hydrocarbon exploration, prior to the commencement of operations provided for in such a project document.

If an addendum to the exploration project is approved, providing for an increase in the cost of work to eliminate the consequences of exploration, or a trial operation project, the corresponding additional amount must be paid before the start of work provided for in such a project.

8. A bank deposit, which is the subject of a pledge ensuring the fulfillment of an obligation to eliminate the consequences of production, is formed by depositing money in the amount of the amount determined in the field development project in proportion to the planned volumes of hydrocarbon production.

9. The amount of security for the fulfillment of the obligation to eliminate the consequences of production is determined in the field development project based on the market value of the work to eliminate the consequences of hydrocarbon production and is subject to recalculation at least once every three years as part of the development analysis.

Based on the results of recalculation or in the process of carrying out work to eliminate the consequences of hydrocarbon production, the amount of collateral can be adjusted in proportion to a decrease in the market value of work to eliminate the consequences of hydrocarbon production or the cost of liquidation work actually performed at the subsurface site.

10. The transfer of the right of subsurface use is an unconditional basis for the re-registration (transfer) of rights to a pledged bank deposit formed under the terms of the contract.

11. The liquidation of the consequences of subsurface use of hydrocarbons does not include the liquidation of wells carried out in accordance with Article 128 of this Code.

__________________________________________________________________________________________

(Mukhamedov R.N.)

1. The commented article establishes the procedure for eliminating the consequences of subsurface use of hydrocarbons, which (as noted above) was introduced to replace the procedure for eliminating subsurface use facilities provided for by the 2010 Law (see Article 111 of the 2010 Law) (for more information, see the commentary to Chapter 8 of the Subsoil Code).

2. Paragraph 1 of the commented article establishes that the elimination of the consequences of subsurface use is carried out in accordance with the technical design document — the project for the elimination of the consequences of subsurface use. Such a project should receive positive expert opinions provided for by the Code on Subsoil and other laws of the Republic of Kazakhstan.

3. According to paragraph 2 of the commented article, two cases of liquidation are provided for.:

1) carried out within a clearly defined time frame – after the termination of the right of subsurface use, if the competent authority has made a decision

eliminate the consequences of subsurface use. In this case, the subsurface user has two months to develop the project, and the liquidation itself must be carried out after passing an environmental assessment within the time limits set by such a project. Violation of these requirements provided for in paragraph 3 of the commented article entails administrative liability under Article 353 of the Administrative Code.;

2) carried out when a subsurface user has an obligation to return a subsurface area or part of it – before such a return is made.

In both cases, the liquidation is considered completed from the moment the interested state bodies and persons sign the liquidation act, and the investor is subject to indefinite liability for possible cases of "outpouring" of liquidated wells. As already discussed in the commentary to Article 122 of the Subsoil Code, such an obligation ceases only with the provision of a subsoil plot to a new subsoil user and is clearly excessive.

4. As noted in the commentary to Chapter 8 of the Subsoil Code, with its adoption in the Republic of Kazakhstan, a new model of financing the elimination of the consequences of subsoil use was introduced, providing for the provision of liquidation. At the same time, according to the provisions of paragraph 3 of Article 277 of the Subsoil Code, this model is also implemented under previously concluded contracts after three years from the date of entry into force of the Subsoil Code, which will require appropriate amendments to contracts (when they establish a different procedure for financing liquidation) and project documents.

Despite the wide variety of types of liquidation support, the most reliable (in the opinion of the competent authority) deposit is allowed for hydrocarbons. However, paragraph 6 of the commented article provides for an exception to this rule for offshore exploration. Despite the fact that this exception is not formulated precisely enough, it can be argued that for such expensive projects, the legislator made a relaxation in the form of the possibility of using other forms of security specified in Chapter 8 of the Subsoil Code.

5. One of the main drawbacks of the new mechanism, which was already mentioned in the commentary in Chapter 8 of the Subsoil Code, is the need for subsoil users to find double the cost of liquidation – in the process of forming a bank deposit, which is the subject of collateral, as well as in direct financing of liquidation (after completion of which the encumbrance must be lifted).

At the same time, with regard to exploration work, the full cost of mitigation work must be paid before they begin, and with regard to production work (due to the high cost of liquidation and significant costs for the field development itself) – in accordance with the schedules provided for by the field development project, in proportion to the volume of hydrocarbon production.

The possibility of adjusting the size of the bank deposit for the cost of liquidation work actually performed on the subsurface site somewhat reduces the specified financial burden. Thus, the subsurface user can perform a certain part of the liquidation work, then reduce the amount of collateral, and use the released funds to continue financing the liquidation work.

In addition, according to paragraph 11 of the commented article, the elimination of the consequences of subsurface use of hydrocarbons does not include the elimination of wells, which was also provided for in order to reduce the excessive financial burden on subsurface users.

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  Kazakh Association of Organizations of the Oil and Gas and Energy Complex KAZENERGY

Nur Sultan 2022

The Kazenergy Association expresses its sincere gratitude for the support in preparing the commentary to the following companies: North Caspian Operating Company NV, NC KazMunayGas JSC, Mangistaumunaygas JSC, Karachaganak Petroleum Operating BV, White & Case Kazakhstan LLP, Haller Lomax LLP)", "Erlicon CG" LLP, "Signum Law Firm" LLP. © Kazenergy Association, 2022 © team of authors, 2022 © authors, 2022

Dear readers!

We offer you a scientific and practical commentary prepared by a group of Russian specialists with extensive practical experience in legislation on subsoil and subsoil use and who participated in the preparation of the Code on Subsoil and Subsoil Use.

Subsurface use is a very complex and specific area of public relations, the regulation of which has its own historical background and takes into account the technological specifics of the process of subsurface development, as well as environmental, commercial, legal and other features of exploration and development of deposits.

Kazakhstan's legislation on subsoil and subsurface use has passed through several stages in its development, and has always been based on a balance of interests between the state and subsurface users, transparency, striving for the maximum possible degree of protection of the rights and legitimate interests of investors, ensuring sustainable social, economic and environmental development of the country.

The Code "On Subsoil and Subsoil Use", adopted at the end of 2017, was developed taking into account many years of accumulated experience and law enforcement practice, as well as the results of extensive discussions with experts working in the industry.

It reflects specific, important measures on the part of the state to increase the investment attractiveness of exploration and further reduce administrative barriers.

Nevertheless, practice and legislation do not stand still, constantly evolving, taking into account new challenges facing both the subsurface use industry and the economy as a whole.

In this regard, this commentary is intended to serve as an aid for a wide range of interested persons – specialists working in the industry, in

understanding the meaning of the norms, their historical context, the interrelationship and mutual influence of the various provisions of the Code.

We also hope that studying the commentary will serve as an incentive for new generations of young domestic specialists to work scientifically and practically in this important industry, for the benefit of the development of our country, current and future generations of Kazakhstanis.

Sincerely, U. Karabalin, Deputy Chairman of the Kazenergy Association, Hero of Labor of Kazakhstan