Russia’s extensive oil and gas reserves have attracted energy companies from all over the world. This guide describes the most important Russian oil and gas legislation and summarizes a number of its most important provisions. Russia’s oil and gas sector is overseen by the Ministry of Industry and Energy of the Russian Federation.
Legislation
Russian oil and gas legislation is based on the Constitution of the Russian Federation and the following three laws constitute the basic legal framework for oil and gas exploration and production:
- Law On Underground Resources of 21 February 1992 (as amended) (Sub-soil Law);
- Law On Production Sharing Agreements of 30 December 1995 (as amended) (PSA Law);
- Law On Gas Supply in the Russian Federation of 31 March 1999 (as amended).
Russian legislation provides two distinct regimes for oil and gas exploration and production. First, the Sub-soil Law establishes a general licensing and administrative law regime under which federal authorities issue, amend and terminate rights granted by licence. Second, the PSA Law establishes a quasi-contractual regime for production sharing agreements (PSAs) between the investor and federal and local government.
The Sub-soil Law
The general principles of the oil and gas legislation are set out in the Sub-soil Law, which establishes the administrative system for the exploration and production of mineral resources and defines the state as the owner of all mineral resources in the earth. The Sub-soil Law also defines the scope of authority of the federal and local governments in the mineral resources sphere. Every ‘subject’ of the Russian Federation may adopt its own legislation on the use of natural resources within the scope of authority granted to it by the federal legislation.
Since amendments to the Sub-soil Law passed in 2004, the principle of "joint" authority of federal and local government over underground resources, also known as the "rule of two keys", has been re-defined so that the federal authorities are only obliged to consult with their regional counter-parts prior to taking a final decision. Although the regional authorities are still entitled to participate in the process, they no longer have the right of veto over a federal decision (the then called "second key").
The Sub-soil Law states as a general principle that a licence to use subsoil resources may be issued to Russian or foreign legal entities. The Ministry of Natural Resources of the Russian Federation and its territorial agencies issue the licences to use subsoil resources. The issuance of the licence may also be subject to approval by federal mining safety and environmental agencies. A subsoil licence will be issued in most cases only after a an auction or a tender and on the basis of a decision by a special commission comprised of representatives of the federal authorities. The tender/auction commission includes representatives of the regional authorities but their role becomes unclear – the law does not prescribe that the regional members be given equal representation with the federal members of the commission. Similar commissions using regional participation will decide whether or not to issue geological study licences which can be granted without a tender/auction.
A licence confirms the right of the licence-holder to use subsoil resources according to the terms and conditions defined in the licence. The terms and conditions stipulated in the licence remain in effect for the period stipulated or for the whole term of validity of the licence. The terms and conditions may be changed only with the consent of the licensee and the authorities which granted the licence, or in certain other cases defined by law.
The basic criteria applied by the relevant authorities when deciding a tender are the scientific and technical level of the proposed programmes for geological study and use of subsoil, the extent of mineral extraction proposed, the contribution to the social and economic development of the territory, and the effectiveness of the environmental protection measures proposed and national security interests of the Russian Federation. Usually however, the winner of an auction for a subsoil licence is determined on the basis of the total amount offered to be paid for the right to use that subsoil block.
All information on forthcoming tenders for subsoil user rights is published in the Russian national media and local media for the different subjects of the Russian Federation.
The PSA Law
The PSA Law establishes a special regime for production sharing agreements. Russia has had a law on PSAs in place since 1996, but due to delays in adopting additional legislation, few projects have gone forward on production sharing terms. PSAs according to Russian legislation should be treated as civil law contracts subject to a special statutory regime and entered into between the Russian Federation and an investor or investors.
Amendments introduced in 2003 to the PSA Law and to the Tax Code, severely limited the possibility of concluding PSAs. According to such amendments, now a PSA may be concluded only with respect to those subsoil blocks which were first offered for an open auction or tender under regular rules and regular tax regime; if there were no participants willing to develop the subsoil block under regular regime, then subsoil block can be offered for a PSA auction or tender.
In general, a PSA is implemented as a result of an open tender conducted by the Russian Federation. The winner of the tender negotiates the terms and conditions of the PSA with the federal government. The PSA defines the rights and obligations of the investor and the Russian government – for example, the PSA will set out a formula for calculating how the winner of the tender and the Russian government will share the hydrocarbons produced. Production is split into ‘cost production’ and ‘profit production’ (though such “distribution” may be changed in accordance with a PSA). The ‘cost production’ belongs to the investor to pay off the costs of the project, while ‘profit production’ is divided between the investor and the Russian government.
The PSA Law does not eliminate the requirement to obtain a licence for the use of mineral resources under the Sub-soil Law, but the government is obliged to issue the licence within 30 days from the date the PSA is signed. The PSA law prohibits the government from revoking the licence once the PSA is concluded. For a field to be developed on a PSA basis, it must first be approved by a Federal Law, often referred to as a ‘List Law’.
Tax
The tax burden is one of the most significant issues for those oil and gas producers in Russia that operate under the Sub-soil Law regime. Among the numerous taxes that producers are required to pay are excise tax, property tax, tax on production of mineral resources, transportation tax, unified social tax, profit tax, and value added tax. In addition, the Sub-soil Law requires producers to make regular payments for the use of sub-soil as well as one-off payments upon the occurrence of certain events stipulated by the licence, and, payments for geological information on sub-soil. A fee is also charged for participation in a tender (auction) and for the issuance of licences.
Producers involved in projects developed on production sharing terms under the PSA Law are also required to pay the following taxes: excise tax, mineral production tax, tax for use of mineral resources, transportation tax, land, water and environmental taxes, unified social tax, profit tax, and value added tax.
The PSA Law provides that parties to the PSA may elect international arbitration for dispute resolution. For the purpose of a PSA the Russian Federation may waive its sovereign immunity.
The PSA Law still contains some disincentives to foreign investment. Each PSA is required to have at least 70 per cent of equipment, materials and technical assets used in the PSA project (measured by cost) produced by Russian companies or by foreign companies carrying on business and registered for tax in Russia. At least 80 per cent of employees must be Russian citizens with foreign employees restricted to the first stages of the project or when no appropriately qualified Russians are available.
The Sakhalin I and Sakhalin II projects, each being developed by consortia that include Western companies, currently operate under PSAs. Those PSAs, however, were signed in 1995 before the PSA Law came into effect. The Sakhalin II project produced its first oil in July 1999.
Gas
Russia’s gas sector is dominated by the joint-stock company Gazprom (RAO Gazprom), which is 38 per cent owned by the government of the Russian Federation. RAO Gazprom was established by the decision of the government of the Russian Federation of 17 February 1993. It has a dominant position in the gas production and distribution market owning almost all gas production, transportation and distribution facilities on the territory of the Russian Federation.
Transport Issues
The company Transneft has a monopoly over crude oil transportation, while the company Transnefteprodukt transports petroleum products. Tariffs are generally established by the state. Oil companies and joint ventures are constrained in their ability to export crude oil by two factors:
- there is only limited capacity in Russia’s oil pipeline system for transporting oil to points outside Russia;
- the Russian government limits exports to ensure domestic supplies.
For a variety of reasons, the price of crude oil is significantly lower in Russia than abroad, which makes it unprofitable to sell oil domestically.
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