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. Last Updated: 07/27/2016

PSA Progress Blasted By Officials, Investors

It's been five years since Russia passed a law on production-sharing agreements — a vital provision needed to unleash foreign investment in the oil, gas and gold sectors — but since then the government's handling of the crucial issue has been atrocious.

Such was the general consensus of some 160 government officials, oil executives and industry experts at Monday's parliamentary hearings devoted to the problems in developing legislature for such agreements, known as PSAs.

"Five years have passed but PSAs have not attracted as much money as was expected," said State Duma Deputy Speaker Vladimir Averchenko, opening the hearings. "The only way out is to amend the PSA law," he said.

PSAs, which encourage investments by companies developing resources by offering them favorable tax treatment in exchange for a share of production, were expected to bring billions of dollars into the country.

But so far little progress has been made, as the process has been beset by numerous delays and disagreements over how to balance protecting domestic producers and workers, and the urgent need for investment from foreign companies that want less restrictions.

One of the most contentious issues has been Russian demands on the use of domestic employees (a minimum of 80 percent of all staff) and of domestically manufactured equipment (70 percent).

Such delays have resulted in the conclusion of just four PSAs since the law was passed in 1995: Sakhalin-1, Sakhalin-2, the Khariaga field in the Komi republic and Siberia's Samotlor field, the latter of which is not operational. Only one, Sakhalin-2, which is operated by a consortium of foreign companies under the name of Sakhalin Energy, is actually producing oil.

Total PSA investment is only now reaching $2 billion, while estimates over the next 10 years range between $60 billion to $100 billion — assuming the process can be simplified.

Red tape and legislative clashes with related laws is a major stumbling block, industry players say.

Last fall, for example, President Vladimir Putin issued a decree transferring responsibility for PSAs from the Energy Ministry to German Gref's Economic Development and Trade Ministry. The idea was to create a so-called "single-window" through which foreign companies could negotiate. Currently, as many as 1,700 separate approvals are needed to launch a PSA, which can take years; in the case of Sakhalin-2 it was three years.

But Prime Minister Mikhail Kasyanov only officially put the decree into effect last week — a fact that provoked a stinging rebuke from former prime minister and current Gazprom board member Viktor Chernomyrdin.

"No presidential decree would have been delayed by five months before," said Chernomyrdin. "Where are we going? What are we doing? How many more months will they [the Economic Development and Trade Ministry] need to find people [to deal with the issue]?" he said.

Chernomyrdin was not alone.

"The government has not worked out a single state policy on PSAs," said Sergei Ivanenko, head of the Duma's PSA committee.

"Much time and effort has been spent. We don't need PSAs on paper," said Glenn Waller, director of the Petroleum Advisory Forum, which lobbies for foreign companies. "PSAs work in 64 countries. Russia does not need to reinvent the bicycle."

Mukhamed Tsykanov, Gref's deputy, said several ministries would sit down together later this month and work out a new strategy.