LEGAL UPDATE: E&P Legislation in 2010

Presentation to the Energy Committee of the Association of European Businesses

4 February 2011

Natalia Kozyrenko, PartnerCMS Russia

2010: Overview by MNRE and Minenergo

• Reserves increase achieved: oil - 750 million ton; gas - 810 bcm

• 45 new deposits discovered

• Exploration financing: RUR20 bln - state; RUR169 bln – licence holders

• Interest in new licences remains low: 288 auctions held, 84% failed (against 78% in 2009)

• Oil production remains stable due to growth in regions with special tax benefits (including PSA); production in traditional provinces falling

Source: MNRE; Minenergo; RBC-Daily

2010: Key Topics

• Support for continental shelf and other mega projects (Yamal; East Siberia)

• Taxation and tax incentives for the industry

• Ecology, energy efficiency and energy saving

• Use of innovative technologies

• Incentives for exploration

Exploration Incentives (1)

• Strategy for development of geological industry until 2030 passed in June 2010

• Main legal issues remain: access to data; access to new licences; securing of E&P rights in case of discovery; tax incentives

• Free use of state-owned data introduced from 1 January 2011

• Bigger issues: state secrecy; export - unresolved

• MNRE proposed amendments in respect of privately-owned data: become publicly available in 4 years

Exploration Incentives (2): Grant of E&P rights

• Right to refuse grant of E&P licence/right to terminate in case of discovery of strategic field remain

• No much progress on cost recovery regulations

• MNRE proposed amendments:

• Cost recovery by next licence holder (not state)

• RFG confirmation of E&P right before discovery in “exceptional cases”

• Applies to entities under “control” of foreign investor only

• Special rules for offshore areas

New Incentives for Offshore Projects

• MNRE Proposal (Dec 2010) :

• Prospecting licences to be available to any investor

• In case of discovery, private investor may form JV with state-owned company or recover cost from next licence holder

• For “combined licences”, same requirements apply (RLE; 5-year experience of any offshore projects; more than 50% RF participation)

• 50% increase of royalties under prospecting licence

• PSA revival?

Strategic Industries Law Developments

• 56% of requests under SIL relate to natural resources

• “First package” of SIL amendments approved by Govt on 2 Feb 2011

• No fundamental changes - some activities to be excluded from “strategic” list; procedural amendments

• For natural resources – exemption for transactions where percentage remains the same

• More expected of “second package”

“Environmental Revolution”

• Basics of Environmental Policy until 2030 developed by MNRE and submitted to Govt; approved by Duma NR Committee in December

• Six draft laws prepared by MNRE:

• On improvement of system of establishment of emission limit values

• On economic incentives in waste management

• On organization of state environmental monitoring, auditing and control

• On environmental audit

• On specially preserved territories

• On protection of sea waters and facilities against oil pollution

Draft Law on Protection against Oil Pollution

– Alternative drafts developed by MNRE/Duma

– Special requirements to design, construction, commissioning and decommissioning of facilities; plan for prevention or mitigation of damage and liquidation of oil spills; emergency response measures

– Financial security

• Bank guarantee; insurance policies; special fund; list of assets available for sale to be provided by “exploiting organization”

• Alternative draft: Fund for compensation of damage caused by oil spills to be created by owners of oil production facilities

– Liability issues (including distribution of liability between licence holder and operator)

Tax Incentives

– Minenergo: under current tax system, production is uneconomic for 90% of newly discovered reserves and 30% of currently producing fields

– Changes to current tax system (including tax on additional income) still discussed; Minenergo propose to reduce tax burden on oil producers to 65% by 2020 from current 73%

– Mineral extraction tax benefits already in place for certain territories

– Tax benefits to be granted for mega projects (e.g. Yamal: MET at 0%; 0% custom duties for gas condensate and LNG; VAT exemptions)

– Tax benefits to enhance production on small or deplenished fields

Conclusions – E&P legislation in 2010

– No much progress achieved in 2010 in terms of actual amendments/passing new legislation although proposals are promising

– Liberalization of access to licences of foreign/private investors not priority; special attention to mega projects & partnering with state-owned giants

– Incentives on tax front viewed more important than stability of legal rights

– Special arrangements for particular projects (including tax) – return to PSA concept?

– Greater emphasis on environmental issues

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