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. Last Updated: 07/27/2016

Foreign Firms Criticize New Oil Law

The new oil production-sharing law signed by President Boris Yeltsin drew fire Wednesday from foreign oil companies, which contend that it needs substantial revisions if the ailing Russian oil industry is to attract potentially massive foreign investment.

Firms contacted said the production-sharing agreement, signed Saturday, is flawed and significant amendments must be made if billions of dollars in foreign investments are to be made in oil exploration and production.

"The PSA legislation adopted is not adequate. It is not acceptable," said Greg Clock, a spokesman for U.S.-based Amoco Corp. in Houston, Texas, in a telephone interview. "It doesn't provide the vital guarantees necessary for massive investment over several years."

Those sentiments were echoed by another U.S.-based firm, Mobil Corp.

"Regrettably the major revisions made recently to the PSA will make it much more difficult [for Russia] to attract investment," said Gail Campbell-Woolley, spokeswoman for Mobil in Arlington, Virginia.

The compromise law, worked out between the State Duma and the Federation Council over the better part of 1995, has been portrayed by backers as being critical to several high-profile oil deals with foreign companies, said to be worth $60 billion to $70 billion.

Fuel and Energy Minister Yury Shafranik told Interfax before the signing that without the law, 60 percent of Russian oil fields would suffer losses in 1996.

Opponents of the law, however, say conservative members of parliament were able to make the law more protectionist. First Deputy Prime Minister Anatoly Chubais and Alexei Melnikov, the bill's original author, have spoken pub happened in the December elections and thought the parliament might send back an even more conservative measure."

The most immediate effect, however, will be on an agreement with the French company Total to spend $1 billion to develop the Kharyaga field in the Timan Pechora basin north of the Arctic Circle. Passage of the oil-production agreement was made a pre-condition of the contract reached last month.

Michel Lebedeff, Total's Moscow director, said at the time that the draft production-sharing agreement was "not 100 percent perfect" but Total intends to proceed with the investment. Lebedeff could not be reached for comment Wednesday.

Among its provisions, the law allows the Russian government to change agreements with foreign investors if "conditions," such as world prices or changing legislation, merit it. The law does not, however, define which conditions would call for a review. Opponents of the revised bill said they are worried the legislation will create a new level of bureaucracy as government employees periodically monitor the contract.

The law also requires parliament to approve every investment in "strategic" zones, but leaves the term undefined.

Foreign oil officials have repeatedly tied a favorable production-sharing agreement to billions of dollars worth of investments in Russia.

Investments still on hold include a $10 billion to $15 billion agreement among the Russian Federation, U.S.-based Exxon and Japanese Sodeco to develop an offshore gas project called Sakhalin-1, near Sakhalin Island in Russia's Far East.

Amoco, with offices in Moscow and Nefteyuganzk, estimates it has sunk $300 million in Russia in the last five years but no major projects have materialized. The head of Amoco in Moscow, Dan Westbrook, has said the firm is waiting for a "stable investment environment" before investing in the Priobsky project in western Siberia.

The area is a potential oil bonanza, with estimated reserves of 4 billion barrels, Amoco officials say. The firm plans to spend up to $25 billion over several decades on the region. Within 16 years of approval, the company plans to be pumping up to 400,000 barrels a day, according to an Amoco spokesman.

The firm also is waiting in the wings in the Timan Pechora region, where a consortium including U.S.-based Texaco, Exxon and Norwegian-Norsk-Hydro has been stalled for almost two years. Reserves there are estimated at 2 billion barrels, according to Amoco.

Mobil's moves to develop an offshore facility near Sakhalin Island have been on hold since 1993. Efforts to explore on 95 million acres in eastern Siberia also are stalled.

Investment by BHP of Australia and Gazprom in an offshore field in the Kara Sea in the Arctic, analysts said, also would benefit from stronger legal and tax protections.

"I don't see the major oil companies pulling out because of this law, they'll probably just delay their investments," said Steven Sandweiss, a partner at Arthur Andersen in Moscow.

Proponents say the bill provides a starting point.

"Before it was just all talk, talk, talk from the big Western oil companies," said Riar Simonyan, director of the Center for Foreign Investment and Privatization. "Now they have a framework to go ahead. So it is a moment of truth."