The Russian government is considering liberalizing national legislation in the field of subsoils with the aim to attract foreign investors in the domestic oil and gas industry.

Through the adoption of a set of amendments to the existing federal law on subsoils, legislators hope to make it easier for foreign investors to gain access to E&P activities in Russia. The amendments are expected to eliminate the existing bureaucratic hurdles foreigners face in gaining access to those fields that have the status of “strategic importance.” According to Russian legislation, the fields are given this status if the volume of reserves exceeds 70 million tons (500 MMbbl) in the case of oil fields and 50 Bcm (1.8 Tcf) in the case of gas fields.

Currently, all companies with foreign equity in which the stake exceeds 10% do not have a right to develop local oil and gas fields that have the status of strategic importance. The same rules apply to fields considered to be of federal importance, where reserves are not as large as those of strategic importance but are significant. The development of such fields currently requires foreign companies to obtain an approval of special state commission for foreign investments, which may take as long as four months.

Cooperative Agreements

Due to these restrictions, many foreign investors have not considered the possibility of independent expansion in the Russian oil and gas industry. Instead, they have preferred to cooperate with local companies that develop such fields.

Cooperation usually takes place through the provision of necessary technologies as well as drilling and other services that are associated with exploration and development. However, times are changing. With the new amendments on the table, foreign oil and gas companies may soon be allowed to conduct full-fledged operations within the large Russian oil and gas fields. Among the most important of the changes being considered is the raising of the existing threshold of foreign interest – up to 25% – in addition to the abolishment of the special state commission approval requirements for development.

The Russian Ministry of Natural Resources was the main initiator of the proposed amendments. A spokesperson with the ministry said investors have repeatedly called on the Russian government to abolish restrictions placed on their operations in the country’s oil and gas industry, all to no effect. As a result, foreign investment in the Russian oil and gas industry has declined in recent years.

“We put forward an initiative to make amendments in the current Russian legislation in the field of development of the country’s subsoils because we are aware that it currently restricts operations of foreign investors in this field,” said Sergey Donskoy, Russia’s minister of natural resources.

According to a proposal from the ministry, there also is a need to allow companies with foreign participation to automatically convert their exploration licenses into production licenses in the case of discovery in oil and gas fields considered of strategic importance. The ministry also proposes to restrict the current right of the state to terminate E&P licenses without any solid reasons for the action.

If the development of the field could pose a threat to Russia’s security, a foreign investor will be given a year to sell its rights to the state or to one of the local companies. The state also will have the opportunity to buy the rights or shares from foreign investors at market price if the sale of shares to a third local party cannot be completed within a year.

Presently, foreign investors could lose their rights for the development of the strategic oil and gas fields – even in the case of their discovery and completion of exploratory works – because the state has the right to refuse the conversion of their licenses from exploratory to production if the reserves of the field exceed the existing limit.

In the future, foreign investors will be allowed to bid in auctions for the development and production rights of strategic fields. This measure, according to the Ministry of Natural Resources, will reduce the risk of corruption while also providing special competition for oil and gas fields of strategic importance. Foreign investors could, however, still lose their oil and gas field development rights, including those of strategic importance, if a court decides:

  • They are in violation of the terms of the development of the field;
  • They default on the mandatory payments for the exploitation of the field; or
  • They are carrying out activities that are contrary to the agreed-upon conditions of the contract.

In other cases, including environmental violations, foreign investors could incur economic sanctions.

Some Russian analysts believe the initiative of the Ministry of Natural Resources will facilitate the inflow of foreign direct investments into the country’s oil and gas industry.

“The 10% stake foreign investors had in Russian companies to develop strategic oil and gas resources was not enough to sell their stakes at a premium or when it came to the distribution of profits from the development of such fields,” said Ilya Rachkov, a partner with King and Spalding Russia.

That is why other Russian analysts believe foreign investors should demand a further increase of the threshold – to at least 49% – because the 25% limit will still not allow them to make key decisions regarding the development of their strategic oil and gas field investments.

If the changes are adopted, foreign investors will likely be attracted to the development of the Trebs and Titov strategic oil fields located in the Timan-Pechora basin in Nenets Autonomous Okrug, Russia. These fields have 1.1 Bbbl of estimated oil reserves. Oil and gas investors could likely be interested in the Chayandinskoe oil and gas field in Siberia as well. It has gas reserves of more than 1 Tcm (35 Tcf).

In addition to attracting foreign investors, Russian analysts believe one of the reasons the state is considering easing legislation is its desire to make it more attractive for leading domestic oil and gas companies to keep their business local. In recent years, many of these companies have changed their residency from domestic to foreign due to taxation issues.

Representatives of some leading foreign companies like BP already have welcomed the new state plans, hoping they can now accelerate their Russian expansion. According to analysts at the Russian Ministry of Natural Resources, this influx of interest from foreign companies could solve an acute need for the development of some of the country’s strategic oil and gas fields. For example, through partnerships domestic companies can gain access to the modern technologies they need to develop the fields.