Russia selectively liberalizes gas export law for LNG

Jon Hines
Alexander Marchenko
Morgan Lewis, Moscow

Russia has enacted amendments to its Gas Export Law that somewhat loosen Gazprom's monopoly in this area—but in a carefully targeted way applicable just to certain LNG exports from particular sources.

The benefit flows only to Novatek and Rosneft and their project partners (and certain partners of Gazprom) for now. This is all as anticipated per press reports over the past few months, although there was some last-minute, unsuccessful lobbying drama.

The new amendment package also establishes an obligation for reporting by exporters to the Ministry of Energy, still to be fleshed out in regulations. This ministry now will carry out licensing of LNG exporters.

The law

Here are basic features of the law:

First, per Article 1.2, the law will continue to cover all exports of natural gas, gaseous or as LNG.

Second, Article 2.2 retains the preexisting exemption for exports of gas produced pursuant to a production-sharing agreement (PSA) signed before 2006, namely the Sakhalin 1, Sakhalin 2, and Kharyaga projects. The Sakhalin 2 project company, now owned 51% by Gazprom, has been exporting LNG, apparently in its own name, under this exemption, while the Sakhalin 1 consortium evidently has been prevented by Gazprom and the government from doing this as a practical matter to date.

Third, per existing Article 3.1 (and the first subparagraph of new Article 3.1.1), Gazprom and its wholly owned subsidiaries (essentially, Gazprom Export) have and will retain the right to export gas from any source, including onshore gas fields, whether the licensee is Gazprom or anyone else.

Fourth, with regard to the new "first category" of additional permitted LNG exporters (new second subparagraph of Article 3.1.1):

• The only known subsoil licensee whose license as of Jan. 1, 2013, directly calls for construction of an LNG plant is Yamal LNG, owned by Novatek, Total, China National Petroleum Corp., and maybe soon Indian or Japanese consortium partners.

• There apparently are no subsoil licensees whose licenses call for "delivery of produced gas for liquefaction to an LNG plant." The license associated with the proposed Pechora LNG project evidently does not. There were draft-tinkering efforts, reported as being backed by Lukoil, to allow such an LNG splant provision to be added to further licenses in the future. And there was another proposal to restrict the fields from which Yamal LNG could draw gas for its permitted liquefaction and export. Both proposals were rejected in the Duma, the lower house of the Russian parliament.

Fifth, concerning the new "second category" of additional permitted LNG exporters (new third subparagraph of Article 3.1.1):

• Its first part gives the export right to any state-controlled (more than 50% state-owned) company for gas produced from any offshore field for which it is the licensee or from a PSA field. For now this means only Rosneft and Gazprom since, per the Subsoil Law and practice to date, they are the only two state companies holding licenses covering such fields. Of course, the real-life addition and benefit here is just for Rosneft because Gazprom already had and will retain the blanket right to export under surviving Article 3.1. The new language eventually could also give the export right to other state-controlled companies such as Zarubezhneft and Gazprom's subsidiary Gazpromneft. The right might even be extended to some private companies, such as Lukoil, that in the future receive licenses for continental shelf fields or at least for fields in Russian territorial waters, inland seas, or the Caspian/Azov zones, since currently evolving Russian law apparently won't limit licensing of such fields to Gazprom, Rosneft, and other state companies alone.

• Its second part extends the new export right to subsidiaries of the qualifying state companies (where the state company has over 50% shareholding) that produce LNG from gas extracted from offshore fields licensed to qualifying state companies or from gas extracted pursuant to a PSA.

LNG project companies

Here is how we interpret this second part of the new second category of permitted gas exporters, although certainty must await actual practice:

• It should cover Rosneft's new-wave continental shelf projects with ExxonMobil, Eni, Statoil, and others to come. In these projects, Rosneft holds the licenses, and Rosneft will hold more than 50% of the joint-venture operating companies that might build and own an LNG plant and produce LNG there. In such a case, it seems that the JV operator would be able to export the produced LNG.

• It should also cover Rosneft's proposed LNG plant project with ExxonMobil, and maybe other participants, on Sakhalin. Rosneft will own more than 50% of the plant project company. And it would be producing LNG from gas produced at offshore fields licensed to Rosneft or at PSA fields—which here would logically be the Sakhalin 1 project, in which Rosneft has an equity interest.

• Likewise, it should cover Gazprom's proposed Vladivostok LNG project with Japanese consortium partners. Gazprom will own more than 50% of the plant project company. And it most likely would be producing LNG from gas produced at offshore (Sakhalin and perhaps other) fields licensed to Gazprom or conceivably from Gazprom's Sakhalin 2 PSA project—supplied to the plant through the new Sakhalin-Khabarovsk-Vladivostok pipeline system.

Again, per the existing and amended law provisions, related practice to date, and the analysis above, Gazprom, while not as clearly the project company, would have the right to export LNG from the planned Vladivostok plant, regardless of the source of the gas. If such a limiting interpretation were to become "official" and remain decisive, the Japanese 49% consortium-company owner might, for example, still contract with Gazprom (or Gazprom Export) as agent to export "its share" of the Vladivostok gas. Otherwise, back-to-back sale and repurchase arrangements might be put in place. But more liberal interpretation of the role and rights of such LNG plant project companies and their owners is possible.

Furthermore, this new second category of permitted LNG exporters would seem to include any other subsidiary of Gazprom or Rosneft that may be able to build and operate an LNG plant on the basis of gas feedstock from its parent's offshore fields.

International agreements

An exception permitting more liberal gas exports remains in place for possible agreements between Russian and foreign governments.

The law, in unchanged Article 2.1, provides that export of gas can be regulated by an "international agreement" of Russia as well as by Russian domestic law. That is an unremarkable statement: It's always so. And, per related Russian legal doctrine, if a duly ratified international agreement provides something different from or better than domestic law, the international agreement provision prevails.

Interested parties thus might lobby foreign and Russian governments to adopt such a bilateral treaty allowing more liberal provisions for gas export in some circumstances, and the treaty would prevail. This path may seem difficult, but it's not beyond precedent or totally out of the question.

Dynamic area

The authors believe that the content of this article is accurate as of early December 2013. But this is a dynamic area. In general, and for this reason in particular, this article is for general briefing and orientation purposes only. It is not intended and should not be taken as legal advice for any particular project or set of facts. Qualified legal advice should be obtained for any such particular project or set of facts.

The authors