US-Russian energy summit spotlights need for favorable Russian oil legislation

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 1 -- 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 the opening sessions Tuesday of a 2-day US-Russia energy summit in Houston.

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.

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 Tuesday 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; 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 to 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 European markets—wants to increase its oil production and exports, but European oil demand growth is not expected to keep pace with Russian 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.

As part of that effort, he 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 current 2-day summit encompass a variety of subjects, including government and commercial financing, investment frameworks, partnering, training, and new technology.

Participants were enthusiastic Tuesday 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.

Contact Sam Fletcher at [email protected]