Mar. 11, 2005
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Italy's ERG and Shell to Develop LNG Terminal
Construction of the 8 bcm capacity LNG regasification terminal in Sicily is scheduled to begin in 2007 and be operational in 2010.

02.03.2005, 18:56

Roxar, TNK-BP Sign Deal
TNK-BP buys Roxar reservoir management and production optimization software for engineering R&D.;

02.03.2005, 18:45

ChevronTexaco Announces First Condensate
ChevronTexaco Corp. has announced first condensate production from the Sanha Field in Angola.

02.03.2005, 18:33

ExxonMobil Sells Sinopec Stake
ExxonMobil has completed the sale of its 3.7 percent stake in China Petroleum and Chemical Corporation(Sinopec.)

02.03.2005, 18:25

BJ Services Wins Cementing Contract
Marathon Petrolum Company has contracted with BJ Services for cementing services for a number of its wells offshore Norway.

02.03.2005, 18:19
2 March 2005 BJ Services

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What’s happening with new subsoil-use legislation

Viktor Nesterenko

The end of November saw the second weekimg of RusEnergyLawWeek-2004, during which lawyers, oil and gas companies and government representatives had the opportunity to exchange opinions on some of the most urgent questions regarding natural resources use. Both the executive and the legislative were harshly criticised at the forum, the grounds for criticism being that they had not done enough to create conditions for effective and rational use of natural resources. Emotional reactions were mixed with constructive proposals, but the atmosphere at the forum was nonetheless friendly: business contacts were made, working groups formed, and the legislative establishment had the opportunity to draw the necessary conclusions.

According to Daria Vasilevskaya, the head of the Bills Preparation Department of the PSA-Subsoil Center at Russia’s Natural Resources Ministry, concentration of authorities at the federal level will make possible effective management in the period when the strategy for medium as well as for long-range programs of geological study and renewal of mineral raw materials is being developed.

Through changes and amendments to Russia’s Subsoil Law, which came into effect on Aug. 31, 2004, federal executive authority for regulating subsoil use was strengthened, particularly through significant broadening of the scope of the federal authority that manages the national mineral fund. The previously effective “two keys” principle, in which decision-making was shared by regional and federal authorities, has been replaced with a model stripping the regions of their authority and the decision-making power being transferred to federal level. In accordance with Article 4 of the existing Subsoil Law, Russia’s federal units will be endowed with mineral use privileges on their own territories jointly with Russia’s unified State Subsoil Fund. They will also be able to participate in the development of government programs for the geological study and development of the mineral resources base. Federal authorities will also task the regions with establishing procedures for subsoil use with a view toward developing fossil fuels fields and endow them with authority over various other matters of lesser significance. Vasilevskaya stressed the importance of the new edition of the Subsoil Law, which sets out the basis upon which rights for subsoil use are determined. This basis will be the decision of a commission created by a federal management authority. Plans are that a given commission would include representatives from the executive authority of the federal subject in question. The commission would be able to determine rights to resource usage given that geological studies had been performed, except in the case of fields located on marine territory/interior waters, in territorial waters and on the Russian continental shelf. The decisions of the commission would stand even if a fossil fuel field is registered by a lessee who has carried out geological exploration work at its own expense (or by attracting investment) – but with one catch. The lessee has first to refund the government’s expenses incurred during exploration and evaluation of reserves on a specific prospect before definitely assuming the rights to develop the resources.

From Inertia to Innovation
The transition to a civil law framework is a priority for the new edition of Russia’s Subsoil Law, which will be available soon. The document apparently determines preference (amongst those seeking usage rights) on an auction basis. According to Natural Resources Minister Yuri Trutnev, the system will be one of less corruption and more competition. But not all forum participants agreed. According to Anatoly Chebunin, head of the Finance and Economics Directorate of the Federal Energy Agency (who delivered a speech on behalf of FEA chief Sergei Oganesyan), it would make sense to return to a system of competitions for licensing, as turning away from these in favour of auctions significantly weakens the regulatory role of hydrocarbon exploration and production licenses. The use of new technologies in the exploration and development process of new fields involves serious expense. For this reason, in order to make exploration work profitable, production companies require a flexible, differentiated taxation system and partial exemption from taxes on funds directed toward the creation of new technologies and equipment.

Chebunin sees a solution to the situation in a system whereby charges would be levied for the replenishment of the minerals base. “It is necessary to stimulate the use of new field development technologies and also to consider a return to the renewal of the minerals base,” says Chebunin. “But we’ll get there only by constantly improving our system of subsoil use. It is specifically through licensing agreements that project documentation for the development of oil and gas fields can today most effectively handle technical policy questions in the sector and by doing so regulate relationships between the government and lessees.”

No one argues about the question of whether the government should promote the development of the fuel and energy sector – but the million-dollar question is how it should do this. In any case, State Duma’s Natural Resources and Subsoil Use Committee Chairwoman Natalya Komarova thinks that it is necessary to have an adequate legal basis.

In her opinion, regardless of the fact that Russia’s resources are thoroughly explored and that the reserves of the easy-to-recover, unique, giant fields have been significantly depleted, the blame for failed replenishment of hydrocarbon reserves lies on the imperfection of laws currently in place. “It is obvious that with the maintenance of flat taxation on the production of mineral resources, which is administratively convenient but totally insensitive to a given field’s stage of development or to its individual features determining the rent fee the lessee should pay for developing it, the goal of maximally complete resource development cannot be reached. Experts estimate that the non-recoverable losses of mineral resources caused by the flat tax on subsoil extraction are several times larger than the current tax receipts.”

The presenting delegate also found the obvious export-orientation of the oil sector and the fact that current
legislation will in no way stimulate the development of the refining sector to be further causes for concern.

According to Komarova, the proportion of raw materials exported is 2.5 times what it was in Soviet times, while the depth of primary refining in Russia is significantly behind the same indicator in countries with developed refining industries. And the complexity of refining in Russia lags 2.5 to 3.5 that in western countries.
Practically the only way to preserve competitive advantage is to move toward using new technologies. Current Russian legislation does not adequately stimulate innovation or contain norms forbidding the inefficient use of primary energy resources. According to Komarova, it wouldn’t be difficult to make the qualitative leap if the country takes the advice of Yuri Malyshev, a correspondent member of the Russia Academy of Sciences.

Quoting Malyshev, Komarova explained the academician’s views: “At present innovation in Russia proceeds according to the following formula: Russian resources, Russian capital + foreign technologies, equipment, and service arrangements. That formula needs to change to: Russian resources, technology, equipment, servicing and specialists + foreign capital.”

The problems of legislative regulation of subsoil use are multifaceted and their successful solution is integrally tied to the future of Russia’s economy. The search for an optimal solution will continue, because only an open discussion can help all parties reach useful compromise that will both protect government interests and provide adequate economic stimuli to lessees. To achieve this goal there are but a few things that need to be done: domestic legislation has to be brought up to date and then, perhaps, calls for rights and access will finally be heard amongst calls for care and expediency.

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