US-Russian summit spotlights need for Russian oil law

Government and industry officials from the US and Russia called for production-sharing agreements (PSAs), a transparent and fair tax regime, and definitive minerals rights laws in Russia during a 2-day US-Russia energy summit in Houston last week.

US representatives reiterated their long-standing request for a dependable legal and financial framework to encourage outside investment in developing Russia's vast resources of oil and natural gas.

Russian representatives repeated their usual reply: The Duma is working on such legislation, which they hope to have in place soon, perhaps by the end of this year.

"This important legislation needs to be passed soon so there can be certainty in Russia's oil and gas investment climate.

"We also need to discuss what additional reforms and policy decisions are required to attract greater investment and to foster new partnerships between our countries' energy companies," said US Commerce Sec. Don Evans, credited as the driving force behind what was described as the first of several proposed energy summits involving government and industry officials from the two countries.

The common interests of Russia and the US in developing and sustaining energy security outweigh any differences over Iraq or other issues, said Daniel Yergin, chairman of Cambridge Energy Research Associates, on the second day of the Houston summit.

A new poll by Deloitte & Touche indicates 60% of the US population favors increased imports of Russian oil as a means of diversifying US supply sources, Yergin said.

Meanwhile, Marathon Oil Co., Houston, and Russian state-owned OAO Rosneft Oil Co. announced last week that they signed a letter of intent to form a joint venture to import and market Urals crude in North America.

Operating in Russia

An "economic case" could be made for investing in oil and gas projects under Russia's existing tax and license regime in relatively mature areas where "the infrastructure already exists, the reserves are accessible, and revenue can be generated relatively quickly," said Peter J. Robertson, vice-chairman of ChevronTexaco Corp., during the summit's plenary session Oct. 1 at the James A. Baker III Institute for Public Policy at Rice University.

"For frontier plays, however, such as Sakhalin and the Arctic shelf, everything is different—complex, high-risk, high-cost, and with huge investment amounts committed up front before there is any meaningful revenue," Robertson said. "To undertake such an investment requires clear terms and conditions, a commitment that the fiscal regime in place during the investment phase remains in place during the revenue phase, (and) that sunk costs can be recovered with confidence."

PSAs can provide such confidence "in the short term," he said. "Though I expect that their application will be limited over the next few years, PSA legislation will provide the necessary early stimulus to opening up the challenging, frontier areas to exploration."

But over the longer term, Robertson said, "I am encouraged by (Russia's) moves to reform the law on the subsoil (mineral rights). If that legislation can be developed successfully, it will be a natural successor to PSA and will eventually make PSA-type contracts redundant."

Russian officials are trying to "guarantee the rights of honest, upright investors" in oil and gas projects and to keep them "independent of the will and power of local authorities," said German O. Gref, Russian minister of economic development and trade. Speaking through an interpreter, Gref said he expects PSA legislation to be passed by the end of this year. He said Russian legislators also are working to provide tax relief and other incentives to attract foreign investors.

Russian, US energy policies

US Sec. of Energy Spencer Abraham and his Russian counterpart, Minister of Energy Igor K. Yusufov, said the separate energy policy legislation now pending before the US Congress and the Russian Duma are remarkable in their similarities.

"And I believe those similarities will provide many opportunities for increased trade, investment, and cooperation between our two countries," Abraham said. "The American and Russian people separately created two of the largest energy sectors in the world in the last century. Imagine what we will be able to achieve working together in this century."

Yusufov said through an interpreter that Russia is committed to increasing oil supplies to American markets. That's a natural development. Russia—already a major energy exporter, primarily to Europe—wants to increase its oil production and exports, but European oil demand growth is not expected to keep pace with Russian oil production capacity growth.

"When it comes to energy, we have many mutual interests. Both our industries are seeking opportunities. Both see the benefit of doing more business together. We want to create jobs for our citizens and improve their standard of living," Evans said.

Future cooperation

As part of that effort, Evans said, "We're recommending the creation of a US-Russia Commercial Energy Working Group. It will be a forum where US and Russian companies can speak to each other directly to identify barriers and to recommend ways to expand energy trade and investment opportunities."

Russian officials suggested that future summits be expanded to include other forms of energy such as electric power generation and nuclear power. And the next one, they said, should be in Russia next year.

Sessions at the 2-day summit encompassed a variety of subjects, including government and commercial financing, investment frameworks, partnering, training, and new technology.

Participants were enthusiastic about the meeting's potential. "Today's dialogue is tomorrow's deal. And the relationships we form at summits like this one are the foundation of successful partnerships for the decades ahead," Robertson said.

Russian 'miracle'

In the opening address at the Oct. 2 sessions, Yergin cited the "miracle" of Russia's accomplishment in increasing its oil production by 25% in 3 years. Some Russian oil companies have increased their production as much as 50%, he said, while slashing production costs to $2/bbl from $3-5/bbl previously.

However, a few skeptics at the second day of sessions privately questioned some of the production figures quoted by both US and Russian representatives.

The 2-day meeting came, Yergin said, at "a crucial moment" in the development of new geopolitical and energy relationships among countries, "to which the US and Russia are central."

Participants appeared optimistic about joining efforts to develop Russia's vast oil and natural gas resources to supply US and world markets. "They've got some of the top government leaders and the industry decision-makers at this meeting. They (industry representatives) are getting the signs from on high as to what (government) energy policies will be," Red Cavaney, president and CEO of the American Petroleum Institute, told OGJ.

Realism

However, Yergin warned, government and industry officials must be realistic and focus on goals that are practical and achievable. Too often, he said, good intentions can be frustrated by the daily details of projects. He also pointed out that the oil and gas industry is governed by the "law of long lead times" necessary to bring projects to fruition.

ConocoPhillips Chairman Archie Dunham "hit one right down our alley" with his call Oct. 1 for stable Russian regulation of foreign-funded projects, an executive of the US Agency for International Development told OGJ.

In recounting the early entry of ConocoPhillips's forerunners into the former Soviet market at the summit's plenary session Oct. 1, Dunham said, "Experience has taught us the necessity of (reliable) production-sharing agreements." Because of post-production changes in the original agreement for its Polar Lights Co. joint venture, he said, that project remains "only marginally profitable and still has outstanding debt."

Polar Lights, a joint venture involving the former Conoco Inc. and Russian partners Arkhangelskgeoldobycha and Rosneft, was the first Russian-American joint venture to develop a new oil field in Russia. Production began in 1994 in Ardalin field, located in the harsh arctic tundra of the Nenets Autonomous Okrug in the Timan Pechora basin, about 1,000 miles northeast of Moscow.

Last year, Ardalin field passed the 75 million bbl production milestone. In the ensuing period, Polar Lights paid $241 million to Russian federal and local governments. Tax payments from Polar Lights provide more than half of the Nenets Autonomous Ok- rug's budget, which as a result was deficit-free in 2000 for the first time. In addition, Polar Lights is the second largest taxpayer in the city of Arkangelsk (OGJ Online, Feb. 7, 2001).

However, Mikhail Khodorkovsky, OAO Yukos CEO, earlier claimed Polar Lights "may have been in far better shape today" if "Conoco (had) agreed to work within the national tax regime instead of seeking preferential treatment (OGJ, Mar. 26, 2001, p. 20)." He claimed that project also was adversely affected by "the ratcheting up of taxes in the oil industry...partly brought on by the insistence of the IMF (International Monetary Fund)."

Marathon-Rosneft JV

The Urals North American Marketing JV is expected to begin operations in the third quarter of 2003, subject to signing of definitive agreements and pending approval of US and Russian government agencies.

The new venture is "intended to help establish the US as a significant long-term marketplace for Urals crude, while providing the US with added diversity of crude oil supply," said officials of the two companies in the joint announcement. Its goal is to "provide an efficient and cost-effective means of moving crude oil from this increasingly important supply region to US markets, utilizing existing Russian and US transportation and market infrastructure."

In early July, Yukos, the largest private Russian oil company, delivered the first direct oil shipment from Russia to the US through Houston's port to ExxonMobil Corp. refineries in Baytown and Beaumont, Tex., in a pilot program aimed at developing new markets for its rapidly increasing oil production (OGJ Online, July 8, 2002). By mid-October, that program will have imported 8 million bbl of Russian oil into the US through the US Gulf Coast.