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Resources Ministry Continues Its Sale
// Use of Resources
On March 17, the administration will discuss the new version of the law “On Mineral Wealth.” Among other things, the new version proposes issuing licenses for the right to exploit mineral wealth exclusively by auction. Auctions held at the end of 2004 and beginning of 2005 for oil and natural gas fields showed that there was a very high level of interest in unallocated, and final prices exceeded opening process sometimes by tenfold. In spite of the success of the auctions, state companies, which have significant limits to their financial resources, strongly oppose the system.
A Boom
The Ministry of Natural Resources developed the new edition of the law on mineral wealth at the end of last year. The bill was handed over to the administration only on March 5, after being approved at parliamentary hearings in the Duma, in sessions of the Supreme Mining Council and the Chamber of Commerce and Industry, and receiving remarks from interested ministries and agencies. One of the major innovations of the new edition of the law is the transition from to auctions for receiving licenses for mineral use.
At present, the legislation mandates that, besides auctions, licenses can be obtained through competitions that place various additional conditions on the use of the mineral resources and do not guarantee that the highest bidder will receive the license. The competitive system has been repeatedly criticized for lack of transparency and high corruptibility.
The biggest scandal broke out in 2001, when the competition for the right to develop the Gamburtsev Val oil field in the Nenets Autonomous District was won by the Severnaya Neft Co., owned by Andrey Vavilov. That caused consternation among all large Russian oil companies, and LUKOIL in particular. Severnaya Neft bid $7 million for the license, while LUKOIL, Surgutneftegaz and Sibneft all bid between $100 and 140 million. The losing bidders were not able to advance their claims in court, but the scandal came to a head early in 2003, after Severnaya Neft, whose main asset was Gamburtsev Val, bought Rosneft for $600 million.
The fight over Gamburtsev Val lead to many fewer auctions for oil and gas deposits, and an even greater cutback in the number of competitive licenses. No new licenses have been given out for the Khanty-Mansi and Yamalo-Nenets Autonomous Districts since 2001.
The auctions held around the beginning of this year and planned for later this year look like real sell offs. It is not surprising that interest in most of the new licenses looks a little like a stampede. Closing prices topped opening prices in many cases by tenfold and the price for a metric ton of extractable oil (category C1+C2) in the more attractive deposits rose by 100 rubles, that is, about $0.50 per barrel.
At the Ministry of Natural Resources, they are saying that the high interest in the new licenses is caused by the fact that there are no longer large reserves of hydrocarbons unallocated. Less than 10 percent of known oil supplies and less than 20 percent of natural gas supplies are unclaimed. Moreover, the deposits already allocated are in the stage of declining production. According to Resources Ministry statistics, the reserves of the main gas and oil provinces have been used up by 70-80 percent in the Caucasus, 50-70 percent in the Ural-Volga region, and over 45 percent in Western Siberia. Therefore, oil companies are being forced to fight for new licenses and raise the prices of the reserves.
The ministry is concerned over the insufficient growth of reserves. In 2004, Russian oil and gas companies produced about 500 million tons of hydrocarbons, but the growth of reserves was only about 300 million tons. Even if licenses for all unallocated deposits were sold, that would not ensure growth of reserves adequate to the volume of production, especially so after a more then decade-long standstill in geological exploration. The ministry, therefore, wants to interest oil and gas companies in discovering new deposits, and the new version of the law on natural wealth proposes a mechanism for “through” licensing, in which the right to development is automatically granted with the discovery of a deposit.
Not to Gazprom's Advantage
The Resources Ministry acknowledges that the heightened interest in new licenses is reflected in the higher starting prices for licenses planned for 2005. In particular, the starting price for the Trebs and Titov fields and four blocks of the Central Khoreiversky field in the Nenets Autonomous District is almost $419 million, that is, about $1.80 per ton of reserves ($0.24 per barrel).
Those prices will probably rise and, possibly, even justify the expenses of geophysical and drilling work at the fields. The Ministry told Kommersant that, for instance, about $225 million was spent in the course of the year on geophysical and drilling work at Trebs and Titov (with reserves of about 140 million tons of oil), $250 million with other expenses considered. A ministry representative said that “taking a minimal annual interest rate of 10 percent and a seven-year crediting period and taking into consideration discounting, the minimum auction price for those fields should be $500 million,” that is, $3.60 per ton of reserves ($0.50 per barrel), which is in keeping with the high prices at recent auctions.
Sibneft paid such a price in December bidding against Rosneft and TNK-BP affiliates for licenses for three lots in the Yamal-Nenets Autonomous District. “We consider that price favorable. After all, on average in Russia today, reserves are obtained for $1.00-1.50 per barrel,” a Sibneft spokesman stated. He added that “these trades have once again shown that auctions, unlike, for example, competitions, are a more market-oriented instrument for finding the buyer with the greatest ability to obtain and develop new assets.” There is general agreement on this point in the private oil companies. State companies, including Gazprom, have a different outlook on the matter.
As Gazprom manager Vasily Podyuk said at a hearing in the Duma on the new version of the mineral wealth law, the mechanism for allocating licenses at auctions alone “does not take into account the technical and technological potential of the competitors.” Gazprom, he said, proposes providing rights to the use of mineral wealth in two phases. “At the first phase, a preliminary selection of competitors is made, who have development programs for the deposits based on the latest technology and modern technological processes and the most attractive investment programs for geological exploration. In the second phase, the competitors selected take part in a closed auction,” he explained.
That type of system could exist, since it could filter out companies buying licenses for later resale. The Resources Minister fears, however, that the Gazprom proposal, if implemented, would limit the list of contenders to companies already active, and it has definitively turned the idea down.
Foreigners Need Not Apply
There will be closed auctions in Russia any way. Companies whose controlling packages belong to foreign individuals or legal entities will not be allowed into trading on the largest and most strategically important deposits. The exact mechanism for fending off the outlanders has not been developed yet, but there are several possibilities. A new version of the law on mineral wealth is needed for this purpose as well. That is why the auction for the deposits in the Nenets Autonomous District was rescheduled. Kommersant has found out that that auction will take place in the fall.
Serious questions arise about how deposits will be classified as strategic. It is not clear who should make that decision – it seems likely that the interested ministries and agencies will be involved. They are, most of all, the Natural Resources Ministry, Ministry of Industry and Energy and Ministry of Economic Development and Trade. There are no criteria for assigning strategic status yet, nor are they in the works. It seems that simply all deposits with relatively large reserves will be out of bounds for foreigners.
Denying foreigners access to the largest deposits solves a nonexistent problem. No foreign company has a direct license now any way. The prohibition on participation in auctions by the Russian subsidiaries of foreign companies can be overcome by enlarging the chain by one link.
But foreigners will rarely need to do that. The largest oil and gas deposits are located on shelves and their development requires gigantic investments, which no Russian company will be unable to make alone. Russian oil companies are certainly not able to work in consortia. So they will have to attract partners from abroad for the most massive projects. It may not be easy to reach an agreement with Western oil giants over the issuance of licenses, but the denial of access to their subsidiaries will only make frustrate the situation.
Denis Skorobogatko
All the Article in Russian as of Mar. 09, 2005
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Photo: Yuri Martianov, Kommerant
