Kazakhstan: Subsoil User's Liability: Three Case Studies

Last Updated: 1 November 2016
Article by Sofiya Zhylkaidarova and Talgat Sariev

This article concerns several interesting cases from the Signum Law Firm's recent practice. At first glance, they appear to be common cases involving environmental damage compensation, damages from inappropriate mineral resource usage, and income owed from gas production. However, they all have certain common elements. This does not claim to be an objective, comprehensive analysis. We hope that the information on current court practices will be helpful when similar disputes arise.

CASE STUDY 1: Compensation for Environmental Damage from Mineral Resource Production


The client's deposit infrastructure development provides for oil platform construction, as well as for construction of associated access roads. In order to carry out this construction, the client hired contractors.

The work included sub-grade flooring and subsequent soil compaction and graveling. The project documentation stipulated use of either imported soil or "local" soil from side thrusts for the sub-grade compaction. During construction, the land was leveled (any protruding areas were leveled , and any concave areas were filled in, using soil left over from leveling the protrusions).

Based on the results of a survey on subsoil user activities, the Ecology Department (ED, or Claimant) filed a claim against the subsoil user asking for compensation for environmental damage caused by unauthorized production of COMR from 2012–2014. The claim is for .9 bln. tenge.

Claimant's Position

The ED gave the following reasoning for their position:

(1) The contractors used "local" soil for their work, i.e., they produced COMR without a permit.

(2) ED does not deny that the alleged violation of the law, which resulted in environmental damage, was not perpetrated by the subsoil user himself, but by his contractors. Nevertheless, ED concludes that COMR production was carried out by the subsoil user's contractors on the subsoil user's contracted land with the user's knowledge. They further assert that COMR was intended to meet the user's needs. As such, ED believes that the subsoil user is responsible for his contractors' production of COMR.

(3) The unauthorized COMR production resulted in environmental damage.

According to Article 108 of the Environmental Code, an economic assessment of the damage caused by illegal subsoil use has been determined in accordance with the rules for economic assessment of environmental pollution damage (under Resolution №535, 27 June 2007).

In accordance with Paragraph 16 of these rules, an economic assessment of the damages caused by unauthorized COMR production is ten times the COMR's value. The cost of the COMR is officially based on the average market price for commercial product use (over a period not to exceed a quarter) starting from the date of the violation detection.

Subsoil User's Position

The subsoil user stated the following:

(1) The damage should be compensated by the person causing the damage. ED does not deny that the subsoil user did not directly remove the soil, and every activity that ED considers be illegal subsoil use was carried out by a third party.

  • According to Article 917 of the Civil Code, damages caused by illegal actions must be paid for by the person who caused the damage.
  • According to Article 321 of the Environmental Code, the perpetrators of environmental offenses must pay for all the damage they have incurred.

(2) The subsoil user is not liable for actions of a third party, unless those actions were related to subsoil use operations that the subsoil users carried out themselves.

(3) Soil is not COMR. Accordingly, (1) there is no proof of illegal subsoil use; (2) the contractors' use (removal) of the soil cannot be considered COMR production; and (3) ED was not authorized to calculate damages based on the soil price.

Court Findings

Who is liable for damages?

The court supported the subsoil user's position regarding liability for damages.

Is the subsoil user responsible for the third party actions in the area specified in the contract?

The court resolved that soil removal by a third party (in the area specified in the contract) does not serve as grounds to hold the subsoil user materially liable.

Furthermore, the court indicated that, in accordance with Article 1,Paragraph 39 of the law "On Subsoil and Subsoil Use" (the Subsoil Law), the contract area is defined by the mining allotment on which the subsoil user has the right to carry out subsoil operations in accordance with the contracts. Consequently, the subsoil user is only responsible for activities related to subsoil use operations, as stipulated by the contract. Therefore, the court finds that the subsoil user shall not be held responsible for the actions of other subsoil users in his contract-specified area.

Can soil be considered COMR?

The court resolved that soil is not COMR. The court justified its finding as follows:

In accordance with Article 16, Paragraph 8 of the Subsoil Law, the list of substances considered to be COMR is determined by the Kazakhstani government. In the surveyed period (2012-2014), the Common Mineral Resources list was being used (as approved by governmental decree №397, 7 April 2011). This COMR list is exhaustive and does not include soil. Therefore, ED was not able to back up their assertion of illegal COMR production as they were unable to prove that COMR was produced.

The court further indicated that economic assessment of environmental damage caused by unauthorized production of COMR is defined as ten times the value of produced COMR, not soil. The court reasonably rejected ED arguments that soil is a composite of COMR.

It should be noted that there are further bylaws that do not list soil as a COMR, and the courts came to a similar conclusion.

Could soil removal be considered mineral production?

In our opinion, the court indirectly confirmed that soil removal cannot be equated with COMR production.

First, as soil is not a mineral, its removal cannot be regarded as production. In accordance with the Subsoil Law, "production" refers to a whole range of operations connected to the extraction of minerals from the subsoil to the surface. Consequently, "production" in this case only covers minerals.

Second, Kazakhstan's Construction Rules 1.02-19-2007 indicate that building materials used for prospecting should not be subject to the requirements that govern exploration, development, calculation, or assertion of mineral deposit reserves.

It is possible that soil use should, in this case, be considered a construction activity and to some extent a land-use activity, as opposed to being classified as a subsoil use operation.

CASE STUDY 2: Damage Compensation for Excessive Oil Revenue Loss in Situ

For this court case, we would like to briefly describe the arguments of the respondent-subsoil user as presented in a court hearing. This court case was considered from every angle, and the verdict was in favor of the subsoil user.


In 2013, Company А produced 100,000 tons of oil at the Zhol Oilfield. The development provided for the extraction of 140,000 tons of oil for that year. Zhol Oilfield's ORF (Oil Recovery Factor) designed level is 0.25, with approved extractable reserves of 1,500,000 tons.

According to an inspection certificate issued by an authority for studying and using subsoil resources, the ORF performance in 2013 was 0.17 (ORF is calculated as ratio between the produced and projected volumes). Accordingly, divergence from the ORF is subject to compensation, as the extracting company is in breach of subsoil usage rules (calculation: 0.25–0.17=0.08 divergence). Thus, the ORF for the year was 1%=(1,500,000х1)/100=15,000 tons. That leads to a calculation of 15,000 tons х 0.8 = 12,000 tons with an average sale price of 350 US dollars per ton. Accordingly, the damage was tabulated at 5,250,000 US dollars. The authority for studying and using subsoil resources registered a court claim for reimbursement.


To check calculation accuracy, what constitutes damage or harm must be established. In order to do that, are a few questions need to be answered:

1. What is ORF?

2. What are "excessive losses of oil in situ"?

3. Is it feasible to calculate and apply ORF to the volume of oil produced within a calendar year?

4. Will ORF noncompliance within a calendar year result in excessive losses of oil in situ?

Regarding the first question, ORF's definition is described in the introduction; this definition is valid for natural resources found in deposits. Order No. 283 of the Ministry of Energy and Mineral Resources (27 October 2005) specifies that for oil recovery factors (gas and condensate), the portion of the existing reserves may only be extracted from the subsoil if it fits in with the plan to develop those natural deposits up to their economic efficiency limit, often by using approbated technologies and machinery to extract the oil. In other words, ORF means that oil in the approved geological reserves may only be extracted up to the economic efficiency limit— that is, up to the completion of the field's commercial development.

Secondly, there is no definition for "excessive losses of oil in situ" in the legislation; therefore, the definition for normative losses of useful mineral resources in the subsoil will be used. This is understood to mean losses technologically related to methods and systems adopted for developing useful mineral resources at extraction, the level of which is based on technical and economic assessments (Article 1, Paragraph 13) of the Subsoil Law. Considering that technical and economic assessments serve as the basis for calculating ORF and that adopted development methods and systems are approved in the pursuit of reaching ORF at the end of the entire field's economic efficiency, excessive losses of oil in situ mean that parts of the approved oil reserves remain un-extracted at the deadline for the field's development.

Therefore, regarding the third question, as described above and based on the experience of developing oil and gas fields, the ORF should be calculated for the entire extraction period of a given field; ORF may not be applied within the scope of a particular period (one month, one year, two years, et cetera).

Fourth, based on the facts presented, ORF noncompliance over a year may not be used as proof of an excessive loss of oil in situ since: (1) the definition of excessive loss of oil in situ itself can only be used for the period in which the field operation is completed, (2) failure to reach an adequate production output in a given year does mean that this failure results in loss of overall volume because additional oil may be and will be extracted in the future, and (3) there is no option to calculate subsoil damage in legislation or in practice if there is a failure to cover production liabilities as approved by the work program.

In accordance with Article 917 of the Civil Code, damage caused by illegal actions must be reimbursed by the perpetrator. The above proves absence of harm is a legal fact and damage to the subsoil resources is unproven; therefore, an estimation of the damages is not possible, and the court is obliged to dismiss the claims.

CASE STUDY 3: Appropriate Subsoil Usage Breaches and Calculating Damages

Regulations for assessing the damage caused by noncompliance with appropriate subsoil use and resource legislation were approved by Order of the Minister of Investments dated 27 February 2015, No. 207— hereinafter Regulation No. 207— via references to examples of calculations referred to in the Appendix to Regulation No. 207. The absence of any explanation for the calculations and the use of ambiguous terminology has caused some confusion. Consider this example from Regulation No. 207.

Calculation Example:

The subsoil user produced 2,658,000 tons of oil during the accounting period. During this period, actual oil losses were 4,442 tons, including approved normative losses of 1,081 tons of oil.

The average price at the subsoil user's oil realization (London Metal and Oil Exchange) for the accounting period was 50.49 US dollars, ie (4,442–1,081) х 50.49 = 169,696.89 US dollars.

Therefore, the calculation is 169,696.89 х (the official exchange rate of the Kazakhstan tenge for a foreign currency as set by the National Bank of Kazakhstan at the moment the damage was revealed) = amount of damage.

Discussion and Conclusions

As you can see, a formula that multiplies the difference of actual losses over normative losses by the average price at the time of the subsoil user's oil realization (London Metal and Oil Exchange) during a given accounting period is used to estimate damages when a case is filed.

First, using the term "average sale price" is imprecise. Which sale price does this refer to—the subsoil user's average weighted price for the last year, or for the last six months? Or, could it be a more definite period?

Second, to what extent are the applied prices grounded, fair, or objective? A number of subsoil users sell oil on the domestic market where the price is significantly lower than sale prices for exported oil. Obviously, when comparing the overall financial damages suffered from selling oil on the local market versus exporting oil, the exporter will bear less of a financial burden than the one exporting oil.

Third, there is a notation in parenthesis: (London Metal and Oil Exchange), as well as in the text in Paragraph 6 of Regulation No. 207 which states, "For useful mineral resources with official quotation prices, their average cost for the accounting period shall be used." It is uncertain whether the use of quotations is mandatory or stylistic.

Fourth, when using quotations, should the difference in a reduction in price be applied? In other words, are quotations [necessary] for oil subject to their price in a particular world market segment, in which in order to supply oil, a subsoil user or a buyer will incur significant expenses? These costs start from the subsoil user's well to its arrival on the world market, at which point the quotations are fixed. Are the current prices in the region considered?

In order to convert the calculation into the national currency, what date is the date on which the damage was revealed? Some breaches require certain future conditions for the damage to be acknowledged. In practice, the authorities indicate conflicting dates: an inspection certificate date, the year-end during which losses were specified, etc.

In conclusion, we'd like to stress that these examples show only one difference between actual losses and normative losses. They show lack of a specific calculation procedure, diverging in the cases of excessive formation oil losses, excessive gas burning losses, etc. Therefore, the examples disregard the extent and scale of damages caused to subsoil resources. Furthermore, it fails to highlight the environmental importance of these damages.

* * * * *

Subsoil users engage in various disputes and conflicts with government agencies resulting in ambiguous and inconsistent law enforcement practices in different regions. In this article we have presented recent case studies that we believe are the most interesting and topical. We are very pleased by the success rate of rulings in favor of subsoil users.

We hope that the creation of an investment court will allow consideration of cases with the participation of subsoil users whose disputes are mainly within the jurisdiction of the investment court. Moreover, the creation of this court will provide clear conditions for subsoil users' work, taking into account the specifics of their activity and projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions