Environmental disputes over air pollution charges involving oil and gas companies in Russia

October 2014 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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The oil and gas industry has traditionally been considered one of the main causes of environmental problems in most countries around the globe. At this point, environmental awareness is at an all-time high among the general public, NGOs and governmental authorities in Russia. This article aims to provide an overview of the environmental legal framework applicable to oil and gas upstream companies and purports to briefly discuss legal aspects of environmental oil and gas-related disputes with Russia’s Environmental Surveillance Service (ESS).

The national environmental protection policy of the Russian Federation is premised on the common ‘polluter pays’ principle. Articles 3(1) and 16 of the Federal Law ‘On environmental protection’ 2002 stipulate that human-induced negative impact on the natural environment requires payment of pollution and other charges to the state budget. Provisions of Governmental decree No. 1148 dated 8 November 2012 set up a specific calculation mechanism for pollution charges relating to natural gas combustion emissions. It bears noting that the normative regulation currently in force does not warrant that the revenues accrued shall necessarily be channeled into ecological cleanup and remediation programs. Therefore, some commentators correctly hold that the existing emission fees system is primarily aimed at generating revenue for the state rather than protecting the environment for future generations.

There is, however, an attractive alternative to having to pay the full amount of pollution charges. According to Section 4(a) of Governmental decree No. 632 of 28 August 1992 and item 6.1 of the Methodological Instructions on collection of pollution charges dated 24 March 1993, a polluter (individual or company) is entitled to a 90 percent rebate on pollution charges if he implements certain environmental protection measures at his own expense. It is implied that the economic cost of such ecological measures must be equal to or exceed the sum total of charges in a given time period (e.g., a fiscal year). Otherwise, the discount will be calculated on the basis of the polluter’s actual environment-related outlays rather than the total of pollution charges due.

Territorial departments of the Federal Environmental Surveillance Service quite frequently aver that decree No. 632 is “outdated and does not have legal force” (allegedly because it was issued prior to the enactment of Federal Law ‘On environmental protection’). However, this opinion is without merit as the RF Constitutional Court in its ruling No. 284-O of 10 December 2002 confirmed that decree No. 632 is fully compatible with the Russian Constitution and remains legally binding. Furthermore, the recent jurisprudence of commercial courts also confirms the right to claim a rebate of pollution charges in appropriate instances (e.g., the decision of the Commercial Court of the Republic of Komi in case No. A29-5875/2013).

In practice, asserting the right to a rebate may not be easy for two primary reasons. First, the aforementioned Methodological Instructions prescribe that a detailed list of planned ecological measures (qualifying for pollution charges discount) must be authorised by both the regional executive organs and the ESS. Such authorisation usually requires protracted negotiations with government representatives. Second, item 6.4 of the Methodological Instructions posits that the environmental measures must comply with the roster included in Annex 2 thereto. The Annex 2 list was drafted back in 1993 and does not encompass many modern environmental protection technologies that are currently widely used in the oil and gas industry. This fact prompts an inevitable question: are oil and gas companies entitled to a pollution charges discount for ecological measures that fall outside the Annex 2 list but clearly contribute to the environmental protection policy of the state?

To date, there is no uniform answer to this fundamental question as commercial courts’ jurisprudence is divided. Some courts seem to believe that Annex 2 embeds a numerus clausus list of ecological measures qualifying for a 90 percent pollution fee exemption. Other courts take a more liberal approach and hold that Annex 2 contains an exemplary list that serves simply as a general guidance. In the author’s view, the latter stance is in accord with international law and national environmental policy considerations, whereas the former position of national courts arguably runs counter to the legislator’s main objective to promote green practices rather than enrich the state.

The proponents of the liberal approach often cite Article 15(4) of the RF Constitution which provides that international law rules form an integral part of the Russian legal system; international treaties shall take precedence over national laws in case of conflict. Furthermore, item 6.7 of the Methodological Instructions sets forth that expenses, incurred by a polluter in connection with the implementation of environmental measures aimed at the discharge of international obligations of the Russian Federation, give the first-priority right to a pollution charges rebate.

In 1994 Russia ratified the UN Framework Convention on Climate Change that seeks to ensure “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system”. In addition, under the Kyoto Protocol Russia had assumed an obligation to reduce its carbon dioxide emissions in the first commitment period (2008-2012). Therefore, any measure that effectively contributes to the reduction of greenhouse gas emissions should be deemed to provide a basis for a first-priority discount on pollution fees irrespective of whether such measure is listed in Annex 2 to the Methodological Instructions or not.

Environmental disputes involving oil and gas companies in Russia often unfold in the following manner: the ESS would normally file an action to collect the full amount of pollution charges, while a company would either bring a counterclaim or file a separate lawsuit seeking to obtain a 90 percent exemption (as such rebates are rarely granted by the state authorities voluntarily, i.e., extra-judicially). Pursuant to Article 200(5) of the RF Commercial Procedure Code (CPC) a state organ or official must “prove the lawfulness of its non-normative decision” if such decision is appealed to court. Hence, it is highly recommended to include a claim requesting the court to declare the ESS’ administrative order to pay the sum total of pollution charges unlawful, as this procedural manoeuvre will shift the burden of proving the lack of environmental effect of the company’s projects onto the state organs. Because the latter often skip taking and analysing air, water and soil probes, as well as other reliable scientific methods of assessing the ecological value of implemented measures, territorial organs of the Federal Environmental Surveillance Service may have a hard time trying to persuade the court that such ecological value is non-existent.

However, substantiating the opposite – that environmental protection projects realised by a particular oil and gas company are ‘ecological’ within the meaning of Governmental decree No. 632 – is also by no means easy. Courts regularly appoint expert organisations to carry out the relevant environmental analysis and produce a detailed expert report. According to Article 82(2) CPC parties may proffer expert candidates as well as petition the court to include particular questions in the expert questionnaire. Companies claiming a pollution fee discount are strongly advised to make use of this procedural opportunity and take a proactive approach to selecting an expert organisation. As appears self-evident, a ‘negative’ expert report drastically diminishes the chances of obtaining a fee exemption.

When experts confirm the ‘ecological’ nature of implemented environmental projects, the ESS traditionally attempts to bypass the expert assessment by contending that the implemented measures, despite their ecological effects, are either licence conditions or serve to generate revenue. In practice, some courts are impressed by this reasoning. On closer scrutiny, however, the fact that the implementation of a particular environmental project is necessitated by licence terms should not affect the company’s right to a pollution fee discount, provided that the implemented project actually brings environmental protection benefits. The RF Federal law ‘On environmental protection’, Governmental decree No. 632 and Methodological Instructions do not explicitly stipulate that measures aimed at ensuring compliance with licence conditions are incompatible with emissions fee exemption. In the same vein, notwithstanding their obligatory character, ecological measures falling within the licence terms do contribute to the discharge of international commitments of the Russian Federation within the meaning of item 6.7 of the Methodological Instructions.

Similarly, the existing normative regulation does not expressly require that environmental protection measures qualifying for a pollution charges abatement be economically disadvantageous to a polluter company or individual. While it is understandable that some courts may be averse to the idea that the polluter can potentially derive double financial benefit from such measures (in the form of economic profit and a 90 percent pollution fee discount), certain types of effective green technology do generate additional income or save a company’s financial resources. For example, instead of burning associated petroleum gas (APG) in gas flares it can be used for onsite combined heat and power production. At the same time, the cost of the APG utilisation systems usually substantially outweighs economised energy costs. Therefore, the view that any economic benefit associated with the implementation of environmental protection measures per se eliminates the basis for a pollution fee abatement lacks legal and logical foundation.

To summarise, Russia’s environmental laws and regulations are drafted in very general terms. Even though the possibility of obtaining a 90 percent exemption from pollution discharge fee is unequivocally stated in Section 4(a) of Governmental decree No. 632, national courts enjoy broad leeway in determining whether various extraneous factors preclude (or not) granting a pollution charges abatement in a particular case.

Elvira R. Gadelshina is an associate at Khrenov & Partners. She can be contacted on +7 (495) 927 0707 or by email: e.gadelshina@yklaw.ru.

Elvira R. Gadelshina

Khrenov & Partners