President Putin’s ringing endorsement last Sunday of production-sharing agreements (PSAs) in Russia came as a welcome surprise. Indeed, it may just lead to the final reforms needed to attract the billions of dollars that western companies appear ready to invest in Russia’s energy sector. Speaking in Sakhalin at the well-attended PSA 2000 Conference, Putin also made the unanticipated announcement that PSAs would henceforth be within the purview of German Gref, Russia’s Minister of Economic Development and the chief architect of Putin’s economic programme.
The announcement was very well received by western investors in Russia’s oil and gas/energy sector, who for years have struggled to bring about needed changes to Russian PSA law and practice.
PSAs are the preferred method among western energy companies for carrying out major exploration and extraction projects in most countries throughout the world, including Russia. Typically, a PSA sets out the specific tax regimes for the project, thus offering the certainty and stability required by investors before they commit billions of dollars in long-term investment. Under a PSA, the production from the project is divided, or ‘shared’, between the private investors and the government.
Following the president’s announcement, Gref also spoke at the conference, reiterating Putin’s call for greater foreign investment into Russia, and stating that the current annual level of about $5bn (£3.45bn) falls well short of being satisfactory.
For those who follow PSAs closely, the announcements may not have been a complete surprise, as the government has recently taken various concrete steps to improve its PSA policy and to make it a top priority. In August, Gref circulated a concept paper in which he lamented the low levels of tax revenues that had so far been produced from existing PSAs. At the same time, the paper reiterates the government’s view that PSAs are seen as a key vehicle for attracting major foreign investment. Furthermore, the government itself held a meeting on 31 August this year to discuss PSAs and PSA policy. At the meeting, the government adopted a timetable detailing 16 new regulations and laws, the adoption of which would be top priority for the coming three quarters.
Given the chequered history of PSAs and PSA law in Russia, these developments can only be viewed as positive for western investors. The first PSAs in Russia, which included the projects Sakhalin 1 and Sakhalin 2, were negotiated and signed in the early 1990s. It soon became clear, however, that the legal framework was lacking, and a special law on PSAs was passed in 1995. Although this law was a step forward, it contained gaps, and also failed to repeal a variety of rules in other laws that appeared to contradict each other. A major effort then began to bring about new changes to the PSA law, as well as to amend the contradictory provisions in other laws. After more than two years of debate, the Duma (the lower chamber of the Russian parliament) finally, in early 1999, passed new amendments on the PSA law as well as the so-called ‘enabling law’, which amended the 12 other laws seen to be in conflict with the PSA law. This progress, too, was a major step forward, but the law itself and certain new amendments required more detailed government regulations to spell out the specifics on such matters as Russian sourcing, special accounting rules, tax clarifications and the procedure for negotiating and signing PSAs. Such regulations have been long in coming, with both the Ministry of Fuel and Energy and the Ministry of Natural Resources taking part in the process of proposing and debating new rules.
Given Putin’s no-nonsense approach to most issues, particularly on the economic front, it is reasonable to assume that his remarks reflect his substantive thinking on the subject. Since Russia is still a country where the ‘man at the top’ yields perhaps a disproportionate amount of power and influence, Putin’s endorsement of PSAs can only be viewed as positive.
Daniel Gogek is the managing partner of Lovells’ Moscow office.