State regulation of field development

By the start of development, the right has already been given: the contract is signed and the bonus is paid (Licences and contracts for subsoil use). The subsoil user chooses and pays for the development system (the pattern of wells and the methods used to produce the field). It bears the risk and knows the reservoir best. But the owner of the subsoil and the investor have different goals (what the state as owner wants), and in development they part ways for several reasons.

• Different horizons. The investor values a project by the NPV of its own flow at its own rate (Choosing the discount rate). At 10%, a barrel produced in 20 years is worth about 0.15 of a barrel to it today. The contract has a limited term, and the oil left in the ground after it does not belong to the investor. The owner needs the field for its whole life. A non-renewable resource left in the reservoir because of haste is lost to the owner.
• Mistakes that cannot be undone. Development is easy to spoil. If the pressure in an oil reservoir falls below the bubble point pressure (the pressure at which gas starts to come out of the oil), gas is released in the reservoir and the oil becomes less mobile. Fast withdrawal along high-permeability layers brings water to the wells too early. Working only the most productive areas leaves bypassed zones, pillars of oil that no well can reach later (Reservoir drive mechanisms, Why water is injected: pressure maintenance and oil displacement). Fixing this later is costly or no longer possible.
• External effects (economists call them externalities). Emissions from a flare and pollution of water and land are damage that is not in the investor's cash flow. Without rules, nobody counts it.
• A shared reservoir. If an accumulation of oil lies under the areas of two subsoil users, each gains by producing faster than its neighbour, but in the end both lose, and so does the owner (see the advanced part of the lesson).
• Unequal information. The subsoil user knows the most about the reservoir. The state sees the reservoir only through project documents, reports and expert reviews.

The Subsoil Code makes these conditions of hydrocarbon exploration and production mandatory: protection of the subsoil; rational and economically efficient use of the subsoil, based on high technology and on good practice of subsoil use (the Code calls it “positive practice”); and compliance with environmental requirements. Good practice is generally accepted international practice that is rational, safe, necessary and economically efficient (Article 122). The yardstick is how the industry usually works, so the requirements for a project grow with the industry's technology, even though the text of the law does not change. The Unified Rules on rational and integrated subsoil use (below, the Unified Rules) state the aim in the same two-sided way: a well spacing is rational if it gives the largest economic effect together with the fullest possible recovery of reserves (paragraph 121).

Hydrocarbon operations are carried out under base project documents (the exploration project, the trial production project and the field development project) and under technical project documents (projects for well construction, for building the surface facilities of the field, and others; the Unified Rules give the list). A licensed design organisation writes the documents, and the subsoil user approves them (Article 134). Work that the approved document (with positive review conclusions) does not name is banned, and work with no document at all even more so (Articles 135–138). The kinds, methods, technologies, volume or timing of work can be changed only by amending the document. The Unified Rules list the cases where this is not needed (Article 134).

The exploration project covers the whole exploration period. It must include the full volume and timing of the work declared in the work programme of the contract. The appraisal of each discovered accumulation is added to it as an addendum (Article 135). The trial production project is needed to find out more about productivity, fluid properties and the drive of the accumulation (the energy that pushes the oil to the wells). Trial production means temporary operation of wells and production for research purposes, in order to prepare the development project (Article 121). It lasts no more than three years (Article 123). Annual production volumes are not regulated during it, as long as the well operating modes in the project are kept (paragraph 65 of the Unified Rules).

The development project covers the whole period of profitable production (Article 137). It contains these parts: the geological and physical description of the field; a model (a flow simulation model, an analytical model or a material balance model); the technological indicators of each option (the forecast rates, pressures and other figures); a technical and economic analysis; the production equipment and technology; the requirements for well designs; a programme of surveys; further exploration; a mandatory section on processing raw gas; and a section on monitoring the pressure between casing strings (paragraph 101 of the Unified Rules). It justifies the development units (the layers or groups of layers developed by one well pattern), the operating modes and placing of wells, the ways of acting on the reservoir, the bottomhole flowing pressures (the pressure at the bottom of a producing well) and the working agent that is injected (water or gas). For pressures, the producing gas–oil ratio (GOR), production, injection and bringing wells into operation, it gives ranges or maximum allowed values (paragraph 107).

One requirement matters a lot for the economics: the development project must consider at least three options. For a first project, the base option is development on depletion (the reservoir's own energy, with no injection). The second adds pressure maintenance (injecting water or gas to keep the reservoir pressure up). The third and later options use new technologies that raise recovery. The recommended option is chosen by the technical and economic analysis (paragraphs 134–139 of the Unified Rules). This builds the owner's interest in full recovery into the choice itself: the investor must show the options with injection and with new technology, and justify why it chose its own. The advanced part of the lesson shows what such options look like in numbers.

Project documents are checked along three lines. All of them go through the state environmental review under the Environmental Code (Article 139 of the Subsoil Code). The order of the environmental procedures (screening, environmental impact assessment (EIA) and permits) is shown on the MunaiHub page “Field development stages”, in the “Operators” section. The base documents and the development analyses are reviewed by the Central Commission for Exploration and Development of Hydrocarbon Fields (TsKRR). The reports that estimate reserves go through the state subsoil expert review. Until 1 January 2030 it is carried out by the State Reserves Commission (GKZ), under Articles 141 and 277 of the Code (expert review and registration of reserves). Construction projects go to a construction review.

• A negative TsKRR conclusion is given if the document does not comply with the law or the contract, with the requirements for content and format, or with good practice of subsoil use. It is also given if the data on reserves in a development project are unreliable, if the quality of the design decisions cannot be objectively assessed, or if there is no positive conclusion of the subsoil expert review on the reserves (Article 140).
• The GKZ review takes 3 months, and by decision of the commission up to 3 months more. Its positive conclusion is the basis for entering the reserves in the state register (Article 141).
• If the reviews disagree. Sometimes the environmental and construction reviews disagree, and the subsoil user cannot resolve the disagreement without departing from good practice. On its application, the competent authority then arranges, within 10 working days, negotiations between the state bodies, the subsoil user and the design institute (Article 139).

The order of the reviews is what matters most for timing. The trial production project is accepted for review only after a positive conclusion on the operational estimate of reserves, and the development project only after a conclusion on the reserves estimate (Article 139). First the state agrees on how much oil is in the accumulation, and only then on how to produce it. So the reviews stand in a chain, and their terms add up.

Let us follow how much time passes from the first inflow of oil until the production period is fixed in the contract. The subsoil user's own work and the reviews go one after another where the law requires it, and in parallel where it allows. Before the production period, the Code lets the company produce a little. It may operate a drilled well temporarily for more than 90 days in the exploration period (Articles 121, 123). It may carry out trial production for up to three years. And in the preparatory period, which also lasts up to three years, it may produce under the approved development project, within the designed average daily volumes of trial production, and it must supply all the oil to the domestic market (Article 118). All the steps, together with environmental permits, land and construction, are shown in the diagram on the MunaiHub page “Field development stages” in the “Operators” section. Here we look only at the chain of project documents and reviews.

The Code lists the requirements of rational and integrated use of the subsoil directly: full advance geological study, rational and economically efficient use of resources at all stages, full recovery (taking out as much of the reserves as is practical), reliable accounting of reserves and production, and the greatest possible use of raw gas by processing it (Article 122). Production is allowed only under approved documents with positive review conclusions: the development project or the development analysis, and before the production period the trial production project or the exploration project (for temporary operation of wells). It must use methods that exclude losses not provided for by the base project document, and drill only the wells that these documents provide for (Article 125). The subsoil user takes onto its books all the wells previously drilled in the area, and organises monitoring of the subsoil and control of development (Article 122).

Some indicators of the project documents become obligations under the contract directly. In the text that applies until 1 January 2030 (Article 143 as set out in Article 277), there are nine such indicators. Their values are not written into the contract but taken from the project documents:

1. the density of the pattern of production wells (well spacing)
2. the ratio of producing wells to injection wells for each development unit
3. the voidage replacement ratio for each accumulation
4. the ratio of reservoir pressure and of bottomhole pressure to the bubble point pressure or to the dew point pressure (the pressure at which liquid starts to drop out of a gas)
5. the ratio of reservoir pressure to bottomhole pressure
6. the maximum allowed gas–oil ratio for each well
7. the volumes of hydrocarbon production
8. the volumes of working agent injected back to raise the reservoir pressure
9. the indicators of bringing production wells on stream

• Pressure and gas. Producing wells may not be operated with a bottomhole pressure below the designed one. The bottomhole pressure may be held below the bubble point pressure only if special studies of the operating mode of the wells justify it. Until they exist, the bottomhole pressure is kept at or above the current bubble point pressure (paragraphs 126–128 of the Unified Rules). Gas must not be released from a gas cap (a layer of free gas above the oil), and oil must not be degassed (made to lose its dissolved gas) in the reservoir, unless the project justifies it (paragraph 113).
• No selective working. To raise production, a company may not drill selectively, or tighten the well pattern, in the most productive areas and in the zones of greatest thickness (paragraph 372).
• Adjustment within the system (changing the modes of producing and injection wells, redistributing injection, near-wellbore treatments, drilling reserve wells) is done in agreement with the author of the project. A change of the system (adding wells to the pattern, splitting a development unit into smaller ones, changing the method of acting on the reservoir) is made by an addendum to the project or by a new project with an assessment of its effectiveness (paragraphs 370–374).

How does the state learn that development goes by the project? Through two monitoring tools (Article 142). Author supervision means that the design organisation, the authors of the project, follows how the project is carried out. It compares the actual results with the project, explains the differences and gives recommendations, and its report goes to the ministry by notification. Within it, and without changing the project, the company can move the schedule of bringing wells on stream while keeping the total designed number of wells. It can move drilling points where this is justified, and change the volume of surveys and the zones to be tested (paragraph 149 of the Unified Rules). When the actual results differ from the project by a small amount, less than 10%, the supervision gives recommendations without changing the project (paragraph 152). The development analysis is a comprehensive study of how the reserves are being produced. It is done at least once every three years and is also sent by notification. If the actual results differ from the project by more than 10%, and the analysis justifiably shows that the project must be changed, the analysis goes to the TsKRR for review. After a positive conclusion, its decisions and indicators apply in place of the designed ones while the changes to the project are prepared and reviewed, but for no more than three years (Article 142). With each analysis, the amount of the security for eliminating the consequences of operations (abandonment) is also recalculated (paragraph 161).

Oil can be stored in tanks, but associated gas has to go somewhere at the moment it is produced (gas in the development concept). To send it into a gas pipeline or to a plant, to burn it in the company's own power station, or to inject it into the reservoir costs money. A flare (a stack where the gas is burned) costs the subsoil user almost nothing, but it does cost society. So in Kazakhstan flaring raw gas is banned, except in four cases (Article 146 of the Code):

• An accident or the threat of one, or a threat to the lives of staff, to public health or to the environment. No permit is needed. Within ten days, the subsoil user notifies in writing the bodies responsible for hydrocarbons and for environmental protection of the causes and volumes.
• Testing of well zones (the intervals of a well that are tested for inflow), under a project document with positive review conclusions, for the time in the test plan but no more than 90 days per zone.
• Trial production, for no more than three years in total.
• Technologically unavoidable flaring, during start-up and commissioning, operation, maintenance and repair of equipment, and during upsets and failures, so that production can continue without a break. It must stay within the norms. The subsoil user investigates every upset, failure or deviation in the work of equipment that involves flaring. Each quarter, no later than the 25th day of the month after the quarter, it reports the time, volumes and causes.

For testing, trial production and technologically unavoidable flaring, a permit of the Ministry of Energy is needed. It is issued only if the subsoil user complies with the project documents and the gas processing development programme, and only within the norms and volumes calculated by the approved methodology (Article 146). The application is filed through the e-government portal. It is considered in 8 working days for well testing and in 2 working days in the other cases. The flaring period cannot go beyond the exploration or production period, the term of the project document and the term of the gas processing programme (the Rules for issuing permits for flaring of raw gas). Under the methodology, the calculated volume of flaring is the whole production of raw gas minus the gas for the company's own technological needs, technological losses, generation of electricity, injection back into the reservoir and processing.

The other side of the regime is the raw gas processing development programme (Article 147). The subsoil user draws it up on the basis of a base project document or a development analysis. The authorised body for hydrocarbons approves it, taking into account the recommendations of a working group. It is updated every three years, and progress on it is reported every year. A section on processing raw gas is mandatory in the development project. Producing hydrocarbons without processing all the raw gas is banned, except for gas flared under Article 146, gas used for own needs under the programme, and gas sold to other persons for processing or utilisation. Where processing is not economically justified, the project and the programme may provide for injecting all the gas, except for own needs, into the reservoir, for storage or for pressure maintenance. Gas injection for pressure maintenance is allowed if other methods are ineffective on this field and the injection is safe (Article 147). Under the Unified Rules, oil fields are not put into development without utilisation of the associated gas (paragraph 82), and an approved programme is one of the conditions for starting (paragraph 81).

Flaring above the norms is more than a breach of the terms of a permit. The authorised body determines the damage from a breach of the requirements of rational use of the subsoil (Article 122). Under its rules, normative losses (the losses that the rules allow) are the technological losses justified in the project documents and the volumes of flaring in the permit. The damage is the actual losses above these, valued at the average official price quotations for the reporting period. Reserves left in the subsoil or written off too early also count as above-norm losses, as do losses from watering out or from flows between layers when the development regime is broken (the Rules for determining the amount of damage, hydrocarbons).

The state wants the money of development to work in its own economy (the goals of the state as owner). The tool is in-country value, which used to be called local content: the share of the goods, works, services and staff that come from Kazakhstan. Subsoil users must give preference to Kazakhstani personnel, and executives, managers and specialists who work under an intra-company transfer (a move of staff within a company group) may be no more than half in each category (Article 28). The share of in-country value in works and services must be at least 70% of the total volume of works and services bought in a calendar year. This rule does not apply to complex projects in the Kazakhstan sector of the Caspian Sea (same article).

The share is calculated by the unified methodology for in-country value in procurement. Contracts to supply goods and contracts for works and services are treated separately, and the calculation takes into account the share of the wage bill that goes to Kazakhstani personnel at the supplier and its subcontractors. The share in a good is taken from an extract from the register of Kazakhstani producers of goods or from a “CT-KZ” certificate (the certificates were valid until 1 January 2026). Without such a document it is zero, unless the methodology says otherwise. The share in personnel is calculated by a separate methodology, in four categories: managers and their deputies, heads of units, specialists, and skilled workers.

Goods, works and services are bought by an open tender, from a single source, by an open tender with falling prices (electronic bidding), on commodity exchanges, or without these methods for the items on an approved list. The first three methods must go through the register of goods, works and services, a state information system for control of procurement, or through electronic procurement systems that are synchronised with it (Article 131). The organiser of a tender conditionally reduces by 20% the price of the bid of a Kazakhstani producer of works and services. This is an organisation or an entrepreneur of Kazakhstan in which citizens of Kazakhstan are at least 95% of the workers, not counting intra-company transfers. Under the Rules for procurement by subsoil users, the price of a Kazakhstani producer of goods is reduced in the same way in an open tender and in electronic bidding. The subsoil user submits annual and five-year procurement programmes, and is responsible under the contract for breaches of the procurement procedure, including by contractors. These requirements on procurement methods do not apply to those who buy under the legislation on state procurement, or to companies in which the national managing holding owns half or more of the voting shares. For complex projects, the subsoil user buys under its own procedure, with programmes for developing local suppliers and with open access to procurement (Article 131).

The state sees development through reports and metering data. Reports are periodic or one-off. On a written request of the competent authority, the subsoil user submits, within 20 working days, the documents that confirm its work and expenses (Article 76).

Contract monitoring. The competent authority follows the performance of the contract through the subsoil user's reports, through satellite monitoring data that show signs of breaches, and through information from other sources. It also visits the subsoil user and its facilities (Article 66). Under the monitoring rules, the annual report is analysed within six months, and a request for additional information is answered within 10 working days. Information that is not submitted is treated as failure to perform the obligation. A physical volume of work (geophysics, drilling, production) counts only if it is confirmed by acts of completed work, invoices and payment orders. If there is a breach, the subsoil user receives a notice of breach of the terms of the contract.

State control of compliance with the subsoil legislation takes the forms of inspection and preventive control, with and without a visit to the controlled party. Inspections and preventive control with a visit follow the Entrepreneurial Code (Article 67). Who is visited is decided by risk assessment criteria. Subsoil users are placed in a high, medium or low risk group, and among the subjective criteria are breaches in the reports on gas processing programmes, in the terms of well testing, in the operating modes and in the procurement procedure. There are separate checklists for exploration and production onshore and offshore. At the same time, the Code says directly that in state control, the good faith of the subsoil user's actions is presumed (Article 9).

Sanctions come in steps: first a notice and a time to put things right, then money, and in the last resort termination of the right. The rules on penalties and on termination of the contract are covered in detail in the lesson on the subsoil user's obligations. Here we cover what concerns development.

• A penalty is charged in the cases, in the manner and in the amount set by the contract, and paying it does not release the user from the obligation. The time to fix a breach is up to six months for physical volumes of work, three months if the financial obligations of the year are less than 30% fulfilled or the schedule of security for abandonment is breached, and one month for all others. The subsoil user may ask for an extension, and the answer comes within 10 working days (Article 133).
• Early termination of the contract applies, among other things, to operations without project documents that were approved by the subsoil user and received positive review conclusions (Article 106). For breaches that are not fixed, namely financial obligations less than 30% fulfilled, a breach of the security for abandonment, or more than two other breaches, the ministry may terminate the contract. The contract ends two months after the notice, and the termination can be challenged in court within the same two months.
• Compensation for damage to the subsoil. Whoever damages the resources of the subsoil in breach of the subsoil legislation must compensate for it (Article 79). The authorised body determines the amount of damage from irrational use of the subsoil in hydrocarbon exploration and production: the above-norm losses valued at the average official price quotations (Article 122).
• Administrative and criminal liability follows the laws. Being held liable does not release the user from the duty to fix the breach (Article 79).
• Limitation period. A subsoil user can be held liable for breach of its obligations under the contract within three years of the day on which the controlling body learned, or should have learned, of the breach. A transfer of the subsoil use right does not change this period (Article 80).