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. Last Updated: 07/27/2016

PSA Law Amendments Spook Foreign Investors

The amendments boost Russia's clout in oil and gas investment projects.

Russia's parliament has thrown new hurdles in the path of foreign investors by passing amendments to a law regulating investment in the country's fuel and mineral reserves.

Amendments to the Law on Production-sharing Agreements made Wednesday will boost Russia's control over big oil and gas investment projects by requiring foreign companies to hire mostly Russian workers and contractors, and by giving the Duma final approval over the terms of each investment contract.

The amendments also give other Russian legislation precedence over the production-sharing law in the granting of a key license -- called the license on subsoil use -- needed to produce oil on Russian territory.

Foreign oil companies say this defeats the purpose of production-sharing agreements, which are meant to guarantee foreign and domestic investors absolutely stable terms in multibillion-dollar development projects.

"The reason we want the PSA is for stability -- to be able to plan our business, to know the tax regime and the economics of the project," said one U.S. oil company executive, who asked not to be identified. "If there's another law that takes precedence, it adds uncertainty."

Investors, however, said they can stomach the amendments if it means the State Duma, the lower house of parliament, will accelerate approval of several additional laws meant to strengthen PSAs.

Communist Duma deputies -- the main opponents of foreign investment -- have promised to begin debating the so-called Enabling Law once amendments to the PSA law are passed.

The crucial Enabling Law would amend a variety of existing Russian laws to bring them 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.

The Enabling Law was on the agenda for debate Thursday, but the chances of its being passed before the Duma recesses Friday are slim. The law has been hanging in limbo since the Duma passed it in a first reading over a year ago.

"We have been expecting it for so many years -- we still believe and hope it will be passed," said Irina Arkhipova, spokeswoman for Royal Dutch/Shell in Moscow.

Shell is also holding its breath as the Duma considers granting production-sharing agreements for 10 new projects, two of which involve Shell investment. Legislators have approved only seven PSAs to date, while over 100 await ratification. Shell's projects include an oil field called Salym in West Siberia and the Komsomolskoye oil and gas field in the Far North, which Shell intends to develop with Purneftegaz, a subsidiary of Russian oil company Rosneft.

"It's been a long process, and it's not over yet," said Grant Bowie, director of Shell's Moscow office. The two projects together would bring roughly $25 billion in investment to Russia.

A project involving U.S. oil company Occidental Oil and Gas also is on the list.

Foreign companies aren't the only investors jockeying for PSAs. Many big Russian oil companies have also applied for the contracts, which ease an investor's tax burden during the early stages of a project.

Surgutneftegaz, Russia's third-biggest oil company, will be able to boost investment in its Federovskoye field if its PSA is passed with the list of 10.

It is unclear whether amendments passed Wednesday to a separate law, the Law on Foreign Investment, affect production-sharing agreements.

Deputies amended the law to state that investors are protected from detrimental change in Russian legislation for up to seven years or until the investment is recouped, whichever period is shorter.

The amendments also guarantee investors compensation if property is renationalized.