RUSSIA - The PSA

The early E&P projects in Russia took the form of joint ventures, in which foreign companies owned at least 30%. But once the JVs got underway, the Russian authorities came up with new taxes and excises and imposed higher pipeline fees, which raised costs and drove away new foreign investors.

Determined to avoid such problems, the Western oil majors insisted on production sharing agreements (PSAs) to get drilling rights and an assurance that taxes and other fees would be stable. Under the PSA, Russia was to receive a share of oil production, a royalty and taxes on profits. But the Russian side had tough terms.

An amended interim law on PSAs was adopted by the Communist/nationalist dominated Duma in July 1995. It was then passed on to the Federation Council

(upper house), which threw it out in October because the amendments were not acceptable to the foreign companies. Subsequently, a reconciliation committee was set up to create a more acceptable draft. This version was approved in December. On Dec. 30, 1995, President Yeltsin ratified it by decree, but with some amendments he had to accept after pressure from hardline Communists and nationalists. The law was put into effect on Jan. 11, 1996, but was only to apply on a case-by-case basis.

The law turned out to be a clumsy document. Apart from the fact that Russian laws changed after they had been passed, this was not the comprehensive PSA law that was long awaited by foreign companies and had four main problems: (1) It conflicted with other legislation, making it inoperative, and there have been no rules for tax and customs to follow. Fields eligible for PSAs must be specified and the list must be approved by the Duma. (2) It contained clauses allowing the Russian side to renegotiate individual PSAs in the event of "significant changes in circumstances", such as changes in oil prices. In other countries, host governments benefit from an increased tax when PSAs reap higher profits, and do not fiddle with PSA terms. (3) It upheld Russian arbitration, whereas foreign companies insisted on the traditional recourse to international arbitration as they feared Russian courts may not protect them. (4) It had a section requiring parliament to ratify PSAs covering offshore regions, or areas where Russia had "strategic interests". This left companies that had negotiated PSAs in limbo until the Duma approved their projects and the list of fields eligible for development.

Another problem was a complex red tape under decentralised government. The PSA must be approved by the local government as well as Moscow, with the foreign company having to secure a Russian partner eager to develop the oil or gas. Then it must be passed by the Duma, the Federal Council and the president.

These and other problems were to be resolved by end-1996, as President Yeltsin had promised. He had also promised a new tax code to alleviate the heavy fiscal burden on the oil and gas sector, the tax rate in Russia then already having risen to four times the one levied in Norway. But not much has happened since then and only a few PSAs have been put into effect (see detailed study of the PSA law and the Russian investment climate by Dr. Andrei Konoplyanik in OMT and Gas Market Trends, Vol. 4. See also chronology of events in Russia in OMT, Vol. 47).

Originally, Moscow wanted the Duma to authorise almost 250 blocks for PSAs covering very rich areas in the north and the far east, western Siberia and other parts of the Russian federation. In a presentation to the APS Annual Conference in 1996, Dr. Alexander Arbatov of the Russian Academy of Sciences calculated the macro-economic results of the six biggest PSAs under negotiations for areas in the Arctic north, western Siberia and the far east (Sakhalin) as follows: Russia's GDP would expand by $450 bn, creating 550,000 jobs and adding $257 bn to state revenues - during the proposed main oil production period of 2000 to 2040.

To improve the situation, the federal government in September 1997 established an inter-ministerial Commission on PSAs. Headed by 1st Deputy Premier Boris Nemtsov, this helps clarify the interim PSA law, delineate the interests of the federal and local governments, implement presidential decrees encouraging PSAs, speed up implementation of PSAs signed but not yet fully approved by the

hierarchy of Russian institutions, speed up PSA negotiations between foreign and Russian companies, and facilitate approvals through the hierarchy. The commission hopes that a final and comprehensive PSA law would be passed before end-1998, but independent experts say this may not happen before 2000.

The Duma has a Committee on Natural Resources and Subsurface Use, which steers the list of fields eligible for development under PSAs, steers issues relating to ownership, management and use of Russia's natural resources including the continental shelf and to taxation, eliminates "opportunities for breaking the law" on the management of and rights to natural resources, and so forth. This committee makes sure the PSA law applies on a case-by-case basis.

Supervision of the PSAs was in June 1998 given to the natural resources ministry, according to a government resolution signed by Premier Kiriyenko. This ended the ministry's long struggle with that of fuels and energy for control over hydrocar-bon resources, with the energy ministry having set up a PSA department in September 1997 depriving Rosneft of this key role.