Unconventionals in Russia: Legal Aspects

By Jennifer Josefson and Alexandra Rotar, December 23, 2013

never been put into use for an unconventional reservoir development, all production sharing agreements currently in operation in Russia were granted for conventional reserves prior to the PSA Law’s entrance into force. 

Furthermore, in many cases, these “difficult” reserves have not been recognized as recoverable reserves and, therefore, are not included in the States’ official calculation of national reserves and in such case they are not included as “discovered” reserves in the individual subsoil licenses for blocks in which the unconventional reserves are located.  This means that the respective subsoil license holders formally do not have the right to develop such reserves until they go through the process of exploration and discovery. In order to develop unconventional reserves that are not included in the State’s calculation of reserves, the subsoil user must provide detailed evidence of the reserves’ existence to the State authorities and apply for their registration in the State balance of reserves which requires an expert opinion of a special commission within the Federal Agency for Subsoil Use and a formal decision of the Federal Agency for Subsoil Use on inclusion of reserves in the State balance of reserves. 

In addition, as unconventional reserves are not legally differentiated from conventional reserves, it makes it difficult to split the rights for the development of conventional reserves from the development of unconventional reserves during the licensing process or after a subsoil license is issued if the company holding the subsoil license would like to diversify the cost and risk of developing the unconventional  reserves by partnering with other companies for the development of the unconventional reserves, while maintaining its sole right to develop the conventional reserves in the license area.

July 2013 Tax Amendments

In 2012, the Ministry of Finance produced a draft law that establishes tax breaks for development of fields with tight oil. The tax breaks have been elaborated in pursuance of the order issued by then-Prime Minister Vladimir Putin in May 2012, that ordered the development of a package of stimulus measures for unconventional oil. The provision of tax breaks for fields with tight oil was the centerpiece of the package. In July 2013, the federal law that was developed on the basis of the 2012 draft of the Ministry of Finance, was adopted and brought the tax breaks for tight oil to life on Sept. 1, 2013. 

The tax breaks reduce the subsoil use rates for the mineral extraction tax for fields that are located in specific geological formations listed in the law, being the Bazhenov, Abalak, Khadum, Domanic and Tyumen formations, or meet certain criteria with respect to the level of rock permeability and effective oil formation thickness as determined on the basis of data from the State balance of reserves. These lower tax rates can only be applied after the respective reserves are registered with the State balance of reserves which requires an expert opinion and a formal decision of the state authorities as discussed above.  

The tax breaks can be applied starting