Tail Whacks Dog: Few PSAs Can Go Forward in Russia
Jonathan Hines & Alexei Bardin, LeBoeuf, Lamb, Greene & MacRae

Summary

The expression 'the tail is wagging the dog' has been carried to the extreme a few months ago, with Russia's enactment in June of the new Amending Law regarding PSAs. This new law was initially conceived two years ago to inscribe into the Tax Code an elaborated special fiscal regime for PSAs, in order to reassure investors (particularly those involved with the Duma-approved priority 'List Law' fields) and thus spark much-needed real movement forward on these projects. But it turned out otherwise. The intended pro-PSA tax reform focus was in effect 'hijacked' early this year by influential anti-PSA forces outside and inside the government.

As a result, whole new sections were added to the long-simmering draft law in the lead-up to enactment, including some that introduce dramatic negative amendments into the PSA Law (the 'PSAL') itself. These fundamental changes, while leaving the PSAL in place as amended, render it practically- and perhaps intentionally - unusable for any new E&P projects (including even most of the List Law fields) beyond the three 'grandfathered' ones (Sakhalin 1, Sakhalin 2 and Kharyaga), save for a few exceptional new fields on the Barents Sea and Caspian Sea shelf. A convergence of political and economic factors brought on this surprising turn of events. The 'how and why' analysis is beyond the scope of this memorandum; the basics thereof are well known to most of our readers (industry players and their financial advisors) in any event. We limit ourselves to summarizing what the Amending Law says and appears to mean.

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Book review: The Indonesian Production Sharing Contract, an investor's perspective by N. Machmud
by Thomas Wälde

N. Machmud, The Indonesian Production Sharing Contract, an investor's perspective, Kluwer The Hague 2000, ISBN 90-411-1378-8 195 pages, translation of laws, bibliography, index, 53 #

The production-sharing contract has become, over the last 30 years, the probably most dominant form of granting access to oil & gas exploration and development to international petroleum companies in developing countries. Even Russia has adopted a form of production-sharing contract (albeit quite distinct). It has replaced the concessions/licenses as the main form of petroleum-related mining title; its distinct character is that production is shared (reflecting a conceptual root in the sharing of harvest between landowner and tenant) rather than tax/royalties being paid and that the foreign investor (now "contractor") is in a contractual relationship with a state company which holds the original mining title (this is where the new Russian PSC form differs).

The state company may exercise quite loose control or much more close control over management. Functionally and financially, the PSC may not be that different from a concession plus royalty/tax arrangement; its difference in terms of management control, depends on the specific management system established and on the way it is implemented. The PSC originated in the 1960s in Indonesia. It has now spread around the world, though there has been a noticeable shift back towards the "developed country" model of concessions/licensing, in particular in Latin America. This model reflects a much cleaner separation between state (politics, bureaucracy) and the investor.

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EC Commission staff working paper on recent progress in the EU Russia Energy Dialogue
by Andreas Gunst

This working paper provides an update on recent progress within the energy dialogue between the European Union and the Russian Federation. The dialogue was launched at the EU-Russian Summit of 30 October 2000 in Paris to give an impetus to the definition and arrangements for an EU- Russian Energy Partnership to be established within the framework of the Partnership and Co-operation Agreement (PCA). Its remit was defined as providing a framework within which 'to raise all issues of common interest relating to the [energy] sector, including the introduction of co-operation on energy saving, rationalisation of production and transport infrastructures, European investment possibilities, and relations between producer and consumer countries. In the process it is ensured that there is coherence with other legal frameworks such as the Energy Charter Treaty (which is not ratified by Russia) process, as well as regional initiatives such as the energy component of the Northern Dimension.

Another topic high on the Commission's agenda for the discussion was the importance of making rapid progress on the completion of the PSA legal framework. Progress on the aspects relating to PSAs in the Tax Code was apparent towards the end of last year, but has since stalled. It is important that the momentum is re-established and that PSAs do become an attractive vehicle for investments in high-risk projects which would otherwise remain unachievable.

Furthermore, in the framework of the Energy Dialogue, the Commission and Russia have identified the importance of giving mutual access to one another's electricity markets on the basis of fair and equivalent trading and environmental conditions. This is becoming particularly important and urgent as certain accession countries are linked into the CIS-Russia electricity grid and not the continental European UCTE grid. Russia continues to underline the importance of an early discussion on the issue of trade in nuclear materials, where the Commission is awaiting the approval of the Member States on a negotiating mandate.

The paper also suggests that, despite Commission efforts, Russia is not currently attaching sufficient priority to the projects on energy saving and energy efficiency. Russia is following closely the developments surrounding the Commission's proposal on safeguarding the security of oil and gas supplies, and has expressed its interest in participating in the proposed European Observation System. Finally, the Commission is examining ways of enhancing the practical involvement of the EU and Russian energy sector industry in the energy dialogue.

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Oil & Gas Taxation in Azerbaijan
by Alum Bati, Salans

Introduction

The taxation of oil and gas activities in Azerbaijan is largely regulated by a series of exploration, development and production sharing agreements ('PSAs') dealing with specific fields (mostly offshore though some agreements also deal with on-shore fields) and inter-governmental pipeline agreements relating to export pipelines ('EPAs'). Although the PSAs started life as ordinary commercial agreements, most have been passed into law. In addition, the Tax Code (the 'Code') applies to the extent that the PSAs and EPAs permit. This short article gives an overview of the general principles ...