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. Last Updated: 07/27/2016

Cabinet to Strip Regions of Oil, Gas Influence

The government last week said it would radically change the way it issued oil and gas licenses by tightening up rules and stripping powerful regional governors of the right to approve deals.

But the government said there were no plans to revolutionize the system and dismissed a suggestion by a Kremlin official that private firms' oil licenses should be canceled and their terms renegotiated.

"It's impossible to change the current system. We have to revise it to make sure it is working well. Concerning new reserves, we could apply several new rules," Deputy Natural Resources Minister Ivan Glumov told reporters after the government discussed the issue late Thursday.

Russia, the world's No. 2 oil exporter and top gas supplier, holds about 10 percent of proven global recoverable oil reserves and around one- fourth of gas reserves.

Its oil industry was almost fully privatized, but the state formally remains the oil reserves' owner and regulates its relations with their users -- the private firms -- by complicated licensing and production sharing systems.

Newly emerged local oil majors are keen to catch up with Western peers, increase transparency and attract more foreign investments, and they have recently begun to push the state toward revising the existing licensing system, unchanged since 1992.

However, local and increasingly active foreign giants expressed alarm earlier this year when deputy head of the Kremlin administration Dmitry Kozak proposed to nationalize oil reserves and switch from licenses to concessions.

Kozak quickly dropped the idea, which would make oil firms simple employees of the state, but investors said concerns remained.

On Thursday, the state said the idea had been dropped.

"[Prime Minister Mikhail] Kasyanov specifically underlined that we are not talking about switching from the system of licenses to concessions," Deputy Natural Resources Minister Vladimir Engelsberg told reporters.

He said the Cabinet had decided that a new concept of a resource code should be submitted in November with the aim to submit the code itself in the first quarter of 2003.

However, the new code would contain several major changes, including a dramatic limitation in regional governors' powers, whose signature is currently needed to approve any decision by the resource ministry to award a license.

"This anachronism will disappear. The government gave its full support today that the new code should assume only coordination of decisions," Engelsberg said.

This move will follow a number of measures by President Vladimir Putin since he came to power in 2000 to reduce the powers of local governors accumulated under the previous President Boris Yeltsin.

Engelsberg said the new code would contain new forms of agreements with the state on resource use. They are currently limited to licenses and production sharing agreements, but the new code will include concessions and leases.

Glumov said there was little left to distribute as 91.2 percent of proven oil and 83 percent of proven gas reserves were already in the hands of the corporate sector.

However, he promised the new code would contain more drastic measures against firms violating license conditions, developing fields slowly or too aggressively, including license recall.