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. Last Updated: 07/27/2016

Duma Clears Way for Oil Investment

The State Duma, parliament's lower house, broke a two-year deadlock Thursday over crucial legislation on production sharing agreements expected to bring billions of dollars in foreign investment to the Russian oil sector.

The house approved on second reading a package of amendments bringing 12 federal laws into compliance with the 1995 law on PSAs. The amendments passed by a vote of 342 to 12, with two abstentions.

When implemented, the amendments will force all government agencies to give priority to terms of specific PSAs - including taxation requirements - over laws governing the rest of the economy.

"In my opinion, this is the only positive signal for foreign investors in several months and even years if you talk about the real production sector," said Deputy Alexei Melnikov, one of the drafters of the legislation.

Glenn Waller, director of the Petroleum Advisory Forum, foreign oil investors' main interest group in Russia, agreed.

"We think it's a significant step towards the creation of a more positive climate for direct investments in the energy sector here," Waller said. "We are encouraged by the priority the government and the Duma give to PSAs."

Yevgeny Primakov's government, desperately searching for new revenue sources now that it cannot borrow heavily anymore, has been pushing the Duma to pass PSA legislation. The current Cabinet is backed by the leftist parliamentary opposition, which has held up PSAs for almost three years. Therefore, the Communists in the Duma are more willing to cooperate with Primakov than with his predecessors.

The amendments will face another reading in the Duma before they go to the upper house and the president for final approval, but their passage is almost assured and their content is unlikely to change significantly.

The Duma's condition for giving the final nod to the package is that President Boris Yeltsin should sign a previous PSA bill, passed earlier this month. Alexander Kotenkov, Yeltsin's representative at the Duma, promised Thursday that the president would sign both that bill and the amendments to the 12 laws.

As approved Thursday, the amendments guarantee all parties to a PSA protection against arbitrary decisions by the authorities, simplify the licensing procedure, and introduce a range of tax breaks.

Under a production sharing agreement, investors will be exempt from customs duties, excise tax and value-added tax. The only taxes applicable to PSA investors are royalty and profit taxes, payable at fixed rates for the duration of a project.

All these provisions have been in the PSA law since its adoption in 1995, but they contradicted other federal laws allowing federal agencies to deny special status to the projects concerned.

"Today's decision removes problems that existing PSAs had run into," drafter Melnikov said, referring to PSAs for Sakhalin-1 and Sakhalin-2 signed over the past three years. "Before the State Tax Service and the State Customs Committee said they follow the national customs and tax laws, but not the PSA law. Now those problems should go."

Despite the overwhelming support in the Duma, the fate of the package had hung in the balance until the Thursday vote. Melnikov, a member of the liberal Yabloko faction, said the left-wing majority in the Duma had made numerous attempts to destroy the law with what he called "monstrous" amendments.

"If they had had their way, the authorities would be free to change the terms of an agreement single-handedly. They also proposed to cancel international arbitration for PSAs," he said. "The final version is satisfactory, but we had to put up a huge fight to get there."

The left-wing majority first made significant concessions to foreign investors last week when the Duma backed raising the proportion of Russia's natural resources open for PSAs to a maximum of 30 percent from the previous 20 percent. It also eased the regulation that said a separate federal law needs to be adopted for each PSA, deleting the requirement for oil fields with reserves of 25 million tons or less.

However, the house has kept some protectionist provisions under which PSA participants must purchase 70 percent of their equipment in Russia and hire a work force that is 80 percent Russian. Both requirements slightly dampen investors' optimism over future PSAs.

"The laws do provide a good basis, although they are not perfect," said Waller of the Petroleum Advisory Forum. "There are restrictions on the work force and they add to the commercial costs of the projects and do influence investors' decisions."

The legislation may potentially facilitate investments totaling hundreds of billions of dollars, but Waller said relatively accurate estimates were hard to make.

"We've done a couple of studies in the past when oil prices were higher and the estimate was $26 billion over 10 years and about $200 billion, say, over a 50-year period," Waller said. "That's the potential, but obviously each company will be looking at their specific project."