Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Oil PSAs Bogged Down By Daunting Red Tape

The oil production-sharing system has taken a series of hard knocks in recent months as foreign majors quit Russian energy projects amid complaints of insurmountable bureaucracy.

Analysts said they expected the number of production-sharing agreements to shrink further, with several foreign companies still in unresolved wrangles or tied up in paperwork.

The PSA system was introduced in law in 1995 with the aim of creating a stable framework for foreign companies to invest in the oil and gas sector.

But Russian oil analysts say the system ? under which foreign companies share production with the state rather than pay revenues ? is now outdated because local companies have enough money to develop fields.

?The idea of PSA in Russia was born when local companies were poor in funds. After two years of high [oil] prices, they don?t support PSA anymore,? said Gennady Krassovsky, an oil analyst with NIKoil brokerage.

Germany?s Wintershall, part of the BASF group, and Royal Dutch/Shell are two of several foreign companies that have recently come unstuck.

Wintershall said in September it would freeze a $1 billion project with Gazprom to develop an offshore oil field in Russia?s north after the two sides failed to agree the terms of the PSA.

The German company said it would ?wait for more favorable times, more understanding really of investor?s needs.?

This week, the Natural Resources Ministry said it would withdraw a license for a Siberian oil field from Shell because the company failed to meet production conditions.

Shell blamed difficulties in Russia?s PSA process for the failure, saying it had struggled to agree on the text of its instructions for more than five years.

?Years of consultations, tons of documents, but still no real decisions. How do you want us to start pumping oil when there are no guarantees?? a Shell official said.

Foreign companies say responsibility for PSAs is pushed from one ministry to another.

Russian PSA projects produced just 44,000 barrels per day last year compared with total Russian production of 6.5 million bpd.

The government has said it wants PSA production to reach 400,000 to 600,000 bpd by 2005 to 2007, but analysts doubt that PSA output will rise significantly.

Valery Nesterov, an analyst at Troika Dialog, said PSAs may be given another chance after the attacks in the United States amid some concern over possible disruptions to Middle East oil supplies.

?If Europe asks Russia to supply more oil, then Russian authorities will change their mind and put the whole PSA process in order,? he said.