Factory and polluted river in the city of Dzerzhinsk
Photo: Pavel Kassin
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Beating It Out of the Source
// Homeland Puts Its Stores Up for Sale
Resource Use
Natural Resources Minister Yury Trutnev has said that, on October 30, the government will present a new law “On Resources.” The drafters of the law, the Ministries of Natural Resources and Economic Development, think that it will simplify the system for licensing and stimulate investment in geological investigation and the rational use of geological resources. However, the new draft is not to the liking of regional authorities. The Federal Assembly will hold a roundtable meeting on October 25 to discuss, again, their opinions.
Resources Should Serve the State
Disagreements about the main law of the land on resources have been going on for years. At the end of last year, the authors of the new law “On Resources,” the Ministries of Natural Resources and Economic Development, were completely unable to agree even on key questions. The Ministry of Natural Resources insisted that the state, as the proprietor of the resources, should be able to allow or prohibit the actions of producers. MERT (the Ministry of Economic Development and Trade) was in favor of agreements between the state and producers.
In the fall of this year, exactly a month after Resources Minister Trutnev formulated his opinion on the new law “On Resources,” he said, “resources should serve the state.” At first, Trutnev decided to get rid of the source of the “two keys” (the decision on the development of a resource being decided by both the federal and local authorities). But he did not have to wait for a new law for long. Amendments to the law “On Resources” were already in place by this summer. Trutnev's plan was further to set new rules so that geological investigations of resources would be interconnected. In other words, so that producers automatically received the right to develop resources if they found them.
In addition, the ministry favored auctions and decided to narrow the requirements for producers and to control observation of licensing agreements. In reality, they foresaw the cancellation of licenses only if the producer exceeded the term for exploitation of the resource. The Resources Ministry started to defend the law before it was even passed. Recall that, this summer, there was a similar problem with Salym Petroleum Development, a joint enterprise between the Anglo-Dutch Shell Co. and Russian Evikhon. In violation of its licensing agreement, the company did not develop its field, since they were waiting for a production-sharing agreement on the Salym Group. Only after it became clear that they would have to develop the field in the usual manner did they begin to draw investments. The conflict was solved by expanding the licensing agreement. Now, according to John Barry, president and chairman of the Shell concern in Russia, “the company is continuing actively to develop the field and has already agreed with Transneft on its inclusion within the truck pipeline system.”
The Economics Ministry is suggesting economic sanctions in answer to the rest of the violations. And they are significantly harsher than those prescribed by current legislation. “Sanctions against violators should be comparable with the loss suffered by the state,” Trutnev said. He added, “That is most of all my personal position. But I hope that it will be reflected in the law.” The new version of the law “On Resources” will be presented on October 30 and debated in the next meeting of the government. Trutnev has already made the provision that the draft will not be a detailed presentation, but the “structure and ideology for a law.”
Rights and Obligations
The Economics Ministry's Center for Strategic Development has prepared a draft of the law “On Resources” (Kommersant has received a copy). In this latest draft, it looks as though the Ministries of Economics and of Natural Resources have found a compromise on the issue of the relationship between the state and the producer. In the draft, there is mention of new rights for the developers of fields. They will be able to be contractors (that is, they will receive it under contract) or extra-contractual (on the basis of acts undertaken by the owners of the field), on a fixed term (no more than 49 years) or on an unlimited term, for compensation (paying for the use of the field, including taxes) or without compensation. In every case, the ownership of the field will remain with the Russian Federation.
The right of use may be provided on the basis of an agreement on production sharing, but that is given only for geological investigation and production of mineral wealth. Such an agreement may be made without an auction, however, if the law “On Product Sharing” allows it.
Finally, a field may be used under a rental agreement a month after the conclusion of the registration of such an agreement. In that case, the renter receives all the corresponding rights and obligations. The form of ownership is also defined then. Possible losses, interest payments and forfeit payments are included in it. For example, every day after the expiration of the rental agreement for geological information will cost 1000 rubles.
The draft also includes new terms for use and auction of fields allotted in the state fund. Within the next month, information is to be published on the use of fields in the state fund and, within the next three months, an announcement is to be developed by those who wish to obtain the right to those fields. The auction will be set a month after the first announcement. If no announcement is made within three months after the announcement, an authorized federal or local body (if that right has been delegated to a subject of the RF by the authorized federal authority) may change the conditions of the use of the field. Among possible uses of field, there are geological study, production of mineral wealth (including supplemental investigation), extraction of underground water, the construction and maintenance of underground facilities, elimination of production byproducts and the use of geothermal energy. Whether an application was filed or not, and whether or not the terms of use were amended, the auction should be held within a year of the inclusion of the field in the state fund. If the auction is declared invalid, a new one should be held within a year.
It is interesting to note that the Economics Ministry is suggesting a minimum (starting) rental payment annually for every unit of volume (mass) of mineral wealth. For oil, including natural gas condensate, it is 1.50 rubles per ton. There is a provision, however. If the production takes place in the sea, within territorial seas, on the continental shelf, within an exclusively Russian economic zone or outside the Russian Federation in territories but under its jurisdiction, the minimal payment will be 0.25 rubles per ton. For natural gas, it will be 0.50 rubles per 1000 cubic meters (or, according to the same provision, 0.10 rubles per 1000 cubic meters).
The Resource Is the Market
Producers of natural resources are also taking part in the writing of the law “On Resources.” For example, executive director of TNK-BP German Khan has said that, “First of all, licenses must be given out exclusively on an auction basis. Second, the possibility of extending the licensing term must be available until the actual end of the project. If there is a conflict between those two time requirements, it will immediately be felt in the capitalization of the company. Third, it is worth working out a mechanism to transfer the license with a group of companies with a minimum of formalities. For example, if the structure of a company changes, and the license must be reregistered to an affiliate of the company, that should be possible with a minimum of bureaucratic procedure, so that the re-registration process is not slowed down. All companies now, maybe at different paces, have to provide greater transparency, and that means changing structures, so as not to slow down the process of restructuring. The question of transferring licenses in this case is highly problematic. Finally, a need has developed for a secondary market for licenses, so that a company can sell its geological exploration license legally, quickly and effectively… We have made our suggestions. What the result will be, we will see. But the Natural Resources Ministry's announcement shows that it has listened to us and it understands,” Khan said.
Foreign companies operating in Russia are also in favor of the new law. John Barry, Shell representative in Russia (Shell is the biggest bidder in the Sakhalin-2 project) told Kommersant, “The new version of the law On Resources' differs from the previous one for the better. The main thing is that the draft stimulates development of new fields. In my view, the Russian government has an interest in establishing a legal basis on which foreign companies can work as freely as they can, for example, in the USA or Canada. As far as I know, the clause requiring the development of Russian fields by foreign companies exclusively with a product-sharing agreement with a Russian company has been removed from the new version of the law On Resources.'”
The new law has its opponents as well. Aleksandr Belyakov, first deputy chairman of the Duma Committee on Natural Resources and Resource Exploitation, thinks that there is no need for the new version of the law, and that all issues can be settled by amending the existing version of the law. He is against providing rights to exploit fields exclusively by auction. “That is chasing after momentary benefit,” he says. He also opposes allowing foreigner have the same rights to resources as Russian companies. And he disagrees with the suggestion to limit authority to manage the state resource fund. “There is no problem of two keys. It is a problem of rights and responsibility. If the center dispenses with all authority over the management of resources, it automatically takes on all responsibility. That is a consequence of the fact that, in the regions, they won't take any initiative on the rational use of resources,” Belyakov said.
Chairman of the Federation Council Committee on Industrial Policy Valentin Zavadnikov thinks that, “the main principle for the division of resources should be the universal introduction of open public auctions as the single method for maximizing state income, since arbitrary decisions by bureaucrats always lead to abuse and reduction of state income.” He also holds that the benefits now in place for individual subjects of the Federation (aboriginal minorities, social agencies, agricultural enterprises and so on) should be replaced by monetary subsidies. “By introducing auctions on the open market for the right to use of natural resources, the state can also set the real cost and raise investment attractiveness in the raw materials sector of the economy,” he said. “Starting with the present inefficiency of resource usage, we can attain a market that will set the prices for resources, instead of bureaucrats doing so, and thus increase budget income, which will enable us to raise the competitiveness of the country on the world market.”
Evgeny Grinov, president of the Russia Development Fund and advisor to Federation Council chairman Sergey Mironov, has suggested founding a natural resource bank in Russia, a natural resources brokerage and a monitoring system. The resource bank, according to Grinov, would control the production and use of resources, the brokerage would guarantee their marketability and the monitoring system would allow the state to check on it all.
Irina Rybalchenko
All the Article in Russian as of Oct. 21, 2004
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