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. Last Updated: 07/27/2016

Cabinet Plans to Scrap All but 5 PSA Projects

The government said Tuesday it saw no future for production sharing practices devised to help develop its massive natural resources, as regular tax legislation was already stable enough to attract foreign investors.

Deputy Prime Minister Viktor Khristenko told news agencies the Cabinet would propose to amend legislation, keeping only five existing PSA projects on stream and scrapping some 30 potential PSA deals signed over the last decade.

Analysts said scrapping the potential deals could upset oil majors such as BP, ConocoPhillips and ENI, but said they were likely to continue working under the regular tax regime.

Production sharing gives investors a predictable tax regime for the entire life of a project in countries with a volatile economic regime. In Russia, license holders can apply for production sharing if they think a project can be implemented only with tax exemptions.

The government and many domestic oil firms say the regular tax regime has become much more predictable in the last few years, enabling international majors to invest in Russia without seeking tax exemptions.

The government has said a recent decision by oil major BP to acquire a 50 percent stake in TNK for $6.75 billion was the best proof that investment could be done on the basis of the regular tax regime.

Khristenko said the government wanted its oil, gas or other natural resources to be offered first at open tenders and only then, if no contenders were found, reoffered on PSA terms.

"There will be a very limited list of fields which should be developed [under PSA] -- because of intergovernmental agreements or because of exceptionally tough conditions, in particular in offshore zones," Interfax quoted Khristenko as saying.

Khristenko said five PSA deals would survive, including two offshore oil projects on the remote eastern island of Sakhalin, led by Royal Dutch Shell and ExxonMobil, as well as a French TotalFinaElf-led Arctic project and a TNK-BP giant Samotlor Siberian field.

Three dozen other potential PSA projects are in the initial stage of talks and never produced oil or gas, as investors were negotiating better terms or awaiting improved political and economic stability in Russia.

The most important of those include a BP-led eastern Siberian Kovykta gas field, seen as a base for gas supplies to China, a joint oil project in Russia's Arctic between ConocoPhillips and local major LUKoil and a gas project in the south led by Italian energy group ENI.

"We would be very disappointed if the state decided to change the PSA status for Kovykta," BP spokesman Peter Henshaw said, adding that until now, investments have been made on the understanding that the regime would be kept for the project's life.

Valery Nesterov from Troika Dialog brokerage said he saw no legal problem in canceling potential PSA deals, given that no final agreements have been signed with investors.

"This decision would be a big victory for Russian firms such as Yukos, which have enough money to develop oil fields on the basis of the regular tax regime and don't see why their competitors should be granted privileges," he said.