Environmental Due Diligence as an Instrument Minimising the Risks Imposed by Environmental Inspections

Environmental Due Diligence as an Instrument Minimising the Risks Imposed by Environmental Inspections

Today it is very hard to imagine the acquisition of a participatory interest in a subsoil use company without carrying out a due diligence, which includes an environmental due diligence. The purpose of an environmental due diligence is to identify breaches committed by a subsoil use company of the environmental requirements, which leads or may lead to various economic losses (such as fines, payments to third parties, additional tax charges). The scale of such losses might be very significant. Meanwhile, the breaches are not publicly known and the company may not even guess that there is a risk of liability even up to the moment of the controlling state bodies revealing the breaches. Environmental due diligence may prevent such situations because it includes an examination of the entire company’s activities for compliance with the environmental requirements stipulated not only in the legislation on environmental protection, but in the legal provisions on the sanitarian-epidemiological welfare of the nation, architecture, urban development and industrial safety.

In the course of an environmental due diligence, one may discover various shortages on the part of a subsoil user’s activity. Some of them however are very typical. The most common breach committed by the acquired company is the absence of permits for emissions into the environment. The absence of a permit does not necessarily result in the disregard of the environmental requirements. Sometimes some types of emissions remain unseen in the course of an assessment of the impact on the environment and environmental expertise due to ignorance of the fact that certain impacts on the environment are emissions which are allowed only on the basis of an environmental permit and payment of a specific sum to the budget. In such situations, the absence of permits for emissions is discovered during environmental inspections, the result of which is a fine on the subsoil user, depending on the volume of unpermitted emissions into the environment. The negative consequences for a subsoil user emitting without a permit do not however end at this point. In addition to the imposition of a fine, the following sanctions are used:

1)  Firstly, the subsoil user pays damages inflicted on the environment, calculated on the basis of the Rules on Economic Calculation of the Damages Resulting from Environmental Pollutions to calculate the damage to the state resulting from emissions produced without an environmental permit or produced over the permitted level. These rules stipulate the calculation of the damage for the period arising from the time that a previous inspection was carried out according to the procedure for the state or industrial control (industrial control  is an internal control carried out by a specialised divisions within the company or its separate responsible entities). If the absence of a permit for emissions or excess of the permitted norms stipulated by the permit are discovered in the course of environmental inspections, the sum of the damage is calculated in accordance with these Rules.

2)  The payment for emissions into the environment is a compulsory tax payment to the budget, which is why the tax authorities also control the payments. In the course of their inspections, the bodies rely on the provisions of the Tax Code, which allow for levying the payments for the entire period within which the emissions were produced without a permit or in excess of the permitted level as stipulated by the permit. Furthermore, the Tax Code provides for a penalty for a delay in discharging the tax obligations.

Eventually the amount of the payment depends on what the inspection (environmental or tax) reveals about the absence of permits or excess of the permitted levels of emission.

Another shortage on the part of the subsoil user’s activity, which can be found in the course of an environmental due diligence, is unreliable contractual relations. For instance, one of the companies prepared a programme on recycling associated gas, under which it was expected that the company would sell the gas to another party. The party breached its contractual obligations and the programme nearly collapsed. It is important to remember that breaching the terms of the programme on recycling gas is a ground for the recall of the permit to burn the gas, where burning the gas without a permit would result in claim for the damage from irrational use of mineral resources (the associated gas). Furthermore, in such situations, the subsoil user usually does not have permits for the emission of burned gas products. He therefore bears a responsibility for the illegal emissions into the environment. In addition, the payment rates for illegal emissions of burned associated gas products are very high. As a result, subsoil users are required to pay ten and sometimes even hundreds of millions of Tenge. Obligations that impact on the financial position of the company should therefore be carefully monitored. 

Serious problems, such as a failure to perform a programme protecting the environment, may arise from what may seem at first to be an insignificant breach.

The performance of these plans is a condition of subsoil use included into the permits for emissions into the environment. A breach of the conditions of subsoil use is a ground for suspending the permit for emissions, resulting in certain situations in the suspension of the manufacturing process producing the emissions. This may result in serious economic consequences for the company. If the subsoil user does not remedy the breach which acts as the ground for the suspension of the permit, the permit might be voided.

It is important to add that in cases where the local executive body for some reason or other fails to suspend or void a permit, this can be done by the Ministry on Environmental Protection of Kazakhstan.

In the course of an environmental due diligence, it is first necessary to ascertain what phase the subsoil user is in (i.e. experiments of the wells, tests examining the use of the field, its development, etc), what industrial objects the company is using and exploiting, what works it is performing with its own means and what works are being performed by contractors. Using the documents submitted by the company, we consider its technological processes and identify the aspects subject to the most serious environmental requirements (i.e. provisions, the breach of which may result in serious sanctions, additional tax payments, and other negative consequences for the company). For instance, our environmental due diligences of oil companies usually reveal:

• What company activities are subject to the compulsory state environmental expertise? Do they show positive results and are they still valid?
• What sources of emissions into the environment do the company exploit? Does the company have permits for all of its emission sources?
• Does the company carry out special water use? If yes, does it have permission to do so?
• Does the company exploit the objects for allocation of waste? If yes, does it have a permit for its construction and exploitation?
• Does the company (or its contractors) have all of the licences required for specific works done within the framework of subsoil use operations? Are these licences valid as of the date of the due diligence?
• Does the company need to have other authorisation documents obtained from the state bodies on environmental protection, sanitarian-epidemiological welfare and industrial safety (including conclusions, consents, registrations, etc)? Does the company have these documents? Are they in compliance with the legislation and are they valid as of the date of the due diligence?
• Are there any risks of disputes arising with the state bodies or other entities?

This is not an exhaustive list of questions that are answered in the course of a due diligence.

On the basis of the conclusions of the due diligence, we prepare a detailed report describing the discovered risks and recommendations on removing them. Further, we advise the client, if necessary, on the course of removing the shortages revealed by our due diligence.

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In the course of an environmental due diligence, many problems may be revealed which can, if ignored, result in negative consequences for the company’s business. Revealing such unseen risks on time may play a positive role in preventing economic losses, as well as improving your relationships with the state bodies, non-state bodies and population interested in improving the quality of life generally, including achieving a favourable environmental situation.

Best Regards,

Environmental Law Department

Tel.: +7 (727) 2445-777
Fax: +7 (727) 2445-776
info@gratanet.com
ecology@gratanet.com