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. Last Updated: 07/27/2016

Oil Investors Greet Duma Vote for PSAs




The State Duma on Wednesday overwhelmingly approved the first of a series of long-awaited amendments to Russia's law on production sharing agreements, or PSAs.


Analysts hailed the move as a sign that legislators were now ready to speed up implementation of PSAs, which could bring tens of billions of dollars of oil investment into Russia.


The bill, passed on third reading by a vote of 347-6 with three abstentions, was aimed at reducing red tape in obtaining PSAs for small oil fields and mineral deposits. It also requires PSA participants to buy 70 percent of their equipment in Russia and hire an 80 percent Russian work force.


Production sharing agreements protect investors in long-term resource projects from changes in Russian law, guaranteeing them a tax and legal regime which suits their project.


By themselves, the amendments passed Wednesday are of minor importance. But the overwhelming support for them in the Duma, which has in the past opposed PSA bills, encourages major oil companies that have spent years waiting for the coveted agreements.


Now that Russia is cut off from most foreign financing, even left-wingers like First Deputy Prime Minister Yuri Maslyukov have been backing PSAs as a quick way to bring investment.


"I never expected this to happen, what with the Duma turning down all the previous bills," said Abzal Nurgaziyev, an oil analyst with Troika Dialog. "But the new government seems to be pushing hard for PSAs and the Duma does not want a conflict with the government."


The bill still needs the approval of the Federation Council and Boris Yeltsin, but all the differences with the upper house of parliament and the executive had been ironed out in advance, drafters told the Duma Wednesday.


The Duma passed a basic law on PSAs in 1995 but investors said it was inadequate. Before they go any further, they want the Duma to add more safeguards and amend other laws to comply with it. Under the 1995 law, the Duma must approve each PSA but so far it has approved PSAs for a handful of projects.


One oil industry lobbyist said that the passage of the new bill on Wednesday opens the door for the Duma to pass the other bills needed to convince investors to proceed.


"The leftist majority [in the Duma] insisted on passing this bill before considering amendments to 12 laws to bring them into line with PSA legislation," the lobbyist said. "Now that obstacle has been removed."The lobbyist said, however, that foreign investors might have problems with one clause in the latest law. Foreign investors are forced to buy 70 percent of their equipment locally, providing Russian product is "competitive." The vagueness of this requirement could allow Russian producers to demand exorbitant prices.


Investors have more reason to be happy with another provision, which says that a PSA to work an oil field with reserves of 25 million tons or less needs only the approval of the federal and local governments. PSAs for larger fields must still be approved by the Duma.


"Only a PSA can make many small oil fields in Siberia commercially viable," said Stephen O'Sullivan, an analyst with United Financial Group. "It was not worth it for investors to go through all the hassle with the Duma because of a small field, but now there may be less bureaucracy involved."


Another positive development for investors is that according to the new bill, 30 percent of Russia's natural resources can be developed under PSAs, not 20 percent as before.


Chloe Arnold contributed to this article.