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. Last Updated: 07/27/2016

Duma Vetoes Production-Sharing Agreements

The State Duma on Wednesday rejected 10 oil exploration projects' requests for production sharing agreements striking a blow against foreign and domestic investment in the needy oil and gas sector.

The projects, which would bring Russia tens of billions of dollars in investment, fell 40 votes short of the 226 needed to pass through the Duma, parliament's lower house.

Production sharing agreements, or PSAs, protect investors from Russia's ever-changing legislation by guaranteeing them favorable and stable investment conditions, including tax breaks, needed to tackle capital-intensive oil and gas projects.

The Duma's decision will do little to promote direct investment in Russia's real economy, which has lagged at pathetically low levels partially due to poor legal conditions. Foreign direct investment in Russia last year was a measly $4 billion, while the Chinese city of Shanghai alone received $15 billion.

Conservative Duma deputies have traditionally rejected PSA legislation, believing it enables foreign investors to steal Russia's rich natural resources. But Wednesday's veto was unusual because half of the projects it covered had only Russian participants.

Both foreign and domestic investors expressed disappointment at Wednesday's decision but said they were certain their projects would eventually be approved.

"This is a disappointment," said Yves Merer, chief executive of Salym Petroleum Co., a project half-owned by Royal Dutch/Shell and half by a Russian company called Evikhon. "Like with all PSA legislation, we've learned to be patient - it will come."

Two of the rejected projects involved Shell. In addition to Salym, Shell has joined Rosneft subsidiary Purneftegaz to develop the Komsomolskoye oil and gas field in the Far North.

The two projects together would bring roughly $25 billion in investment to Russia.

Also disappointed by Wednesday's decision was Surgutneftegaz, Russia's third biggest oil company by production. The company is waiting for PSA approval for its Federovskoye field, an enormous but partially exhausted field requiring billions in investment.

"It's disappointing," Surgut spokesman Alexei Sukhadoyev said of the Duma's vote. "The Federovskoye deposit is huge but is badly damaged. ... There have been left behind difficult conditions that under existing tax conditions make the field unprofitable."

Projects that made it to the list have waited several years for their day in the Duma. More than 100 projects are awaiting inclusion on PSA lists, which are presented to legislators only after careful scrutiny by Duma committees.

A legislative analyst working for a petroleum association said the Duma rejected the 10 PSA applications for technical rather than ideological reasons.

Legislators, he said, did not want to approve specific projects before they passed a bill amending existing legislation in line with the tax, customs and other conditions granted in a typical production sharing agreement. Some of the breaks guaranteed in PSAs aren't specifically allowed under existing Russian legislation, which has held up serious investment by many skittish investors.

Some of the seven PSA projects approved by the Duma to date - for instance, two development projects off Sakhalin Island - are also waiting for these amendments before they begin serious investment.

The crucial bill has been hanging in limbo since the Duma passed it in first reading in the summer of 1997. No date is currently set for a second reading.


Vetoed Ventures

PSA projects rejected by the State Duma on Wednesday

Block 15 oil fields, Republic of Komi. Investor: Occidental Oil and Gas, USA.

Federovskoye oil and gas field, Khanti-Mansi region. Investor: Surgutneftegaz.

Kharampurskoye oil and gas field, Yamal-Nenets region. Investors: Rosneft and Purneftegaz.

Komsomolskoye oil and gas fields, Yamal-Nenets region. Investors: Royal Dutch/Shell and Purneftegaz.

Luginetskoye oil and gas field, Tomsk region. Investor: Tomskneft, Russia.

Salym oil fields, Khanti-Mansi region. Investors: Royal Dutch/Shell and Russian company Evikhon.

South Tyumen Area oil and gas fields, Tyumen Oblast. Investor: Uvatneft.

Udmurtskiy oil fields, Republic of Udmurtia. Investor: Samson Intl. Ltd., USA.

Usinskoye oil field, Republic of Komi. Investors: Nobel Oil, KomiTEK, Investnaftia.

Yurubezhenskoye oil field, East Siberia. Investor: East Siberian Oil Co.