National Mineral Resources University Saint-Petersurg, 2012
Production Sharing Agreements as a Form
of International Cooperation
N. Chebaeva, post-graduate student Supervisor Professor Dr. Igor B. Sergeev
National Mineral Resources University Saint-Petersurg, 2012
PSA – a contract, under which the state as the owner of mineral resources gives to a company as a contractor exclusive rights
(on a paid basis) to explore and develop a deposit while providing technical and financial services.
Production Sharing Agreements
One-stage sharing mechanism
1995 Federal Law “On Production Sharing Agreements”
1
Two-stage sharing mechanism 2
National Mineral Resources University Saint-Petersurg, 2012
Production Sharing Agreements One-stage Mechanism
Total output
Investor’s Oil
Rentals Oil for distribution
Government’s Oil
Taxes (no Income Tax)
Investor’s Net Profit Oil
Total Investor’ Oil
Total Government’s Oil
Agreement concluding
Bonuses
Federal Budget
Regional Budget
National Mineral Resources University Saint-Petersurg, 2012
Production Sharing Agreements Two-stage Mechanism (Modified Indonesian Model)
Total output
Cost Oil
Royalty and Rentals Oil for distribution
Profit Oil
Investor’s Profit Oil
Government’s Profit Oil
Tax Oil Investor’s Net Profit Oil
Total Investor’ Oil
Total Government’s Oil
Agreement concluding
Bonuses
Federal Budget
Regional Budget
National Mineral Resources University Saint-Petersurg, 2012
June 1995, Exxon Neftegas Limited Business contractors: ExxonMobil (30%, USA); Rosneft (20%, Russia); ONGC (20%, India); SODECO (30%, Japan)
Sakhalin I
Sakhalin II
Kharyaga Oil Field
July 1994, Sakhalin Energy Business contractors: Gazprom (50%+1, Russia); Royal Dutch Shell (27,5%-1, Netherlands and UK); Mitsui (12,5%, Japan); Mitsubishi (10%, Japan)
December 1995, Total PPP Business contractors: Total PPP (40%, France); StatoilHydro (30%, Norway); Zarubezhneft (20%, Russia); Nenetsk Oil Company (10%, Russia)
PSA at Russian Fields
30.12.1995 Federal Law “On Production Sharing Agreements”
National Mineral Resources University Saint-Petersurg, 2012
Income Taxation under PSA for Foreign Investors
Tax Oil = Income tax
is appropriate for foreign investors
Two-stage mechanism
Only two-stage mechanism
Income tax is not paid, but implied into splitting shares
One-stage mechanism
In fact, double taxation
With some international agreements double
taxation can be avoided
Principle diagram of PSA
Investor Government
Technolo-gy and know-ledge
Experience
Finance
Resources
Informa-tion
Rights
Partnership
Risks Sharing
Production sharing
Governance
Third Parties
Social Ecological
Environment
Business
National Mineral Resources University Saint-Petersurg, 2012
Ø Lack of flexibility in resource management
- Cannot change plans and project parameters without permission à difficulties in operation - Limits for foreign employees hiring and foreign subcontractors engaging - Government has an opportunity to limit export - Cannot dispose its property (in the project) without permission - Has to start work within a year after PSA subscription
Ø Immaturity of institutional environment - Long, complicated and full of bureaucracy process of getting license, conditions elaboration, negotiation, approval, etc. - Complicated procedure of changing terms, passing out the license and dissolution - Functions and responsibility of governments bodies are not clear and distinguished
Ø Lack of experience, examples and case studies Ø Limitedness of fields available for development under PSA Ø Auction system à Higher entry barriers Ø Individuals cannot be investors
Investor Disadvantages
National Mineral Resources University Saint-Petersurg, 2012
Investor Advantages
Ø Stabilizing proviso - terms and conditions are remain in force during the whole contract period and cannot be changed unilaterally - in case of legislation changes, which deteriorate investor’s results, the terms of the PSA should be changed to compensate it - laws that limit investor’s rights, stated in the PSA, don’t extend over it
Ø Disputes resolution in an international arbitration court. Opportunity to chose a court
Ø Special tax regime Ø Cost oil as a recovery of expenses Ø Opportunity to delegate tax obligations to the operator of the PSA Ø Opportunity to keep accounting records in foreign currency Ø Stage-by-stage return of explored territories à “disposal” of assets not in
use
National Mineral Resources University Saint-Petersurg, 2012
Government Disadvantages
Ø Partly loss of state immunity as it agrees to litigate Ø Stabilizing proviso à Absence of opportunity to
litigate agreement’s terms Ø Less financial results comparing with licensing,
because of cost oil, which reduces profit oil and tax oil
Ø Because of the auction system, there are no guarantee to accept the best project in the sense of technology and rational subsoil usage
Ø The term and condition elaboration process is not clear, it causes corruption
National Mineral Resources University Saint-Petersurg, 2012
Government Advantages
Ø Special terms in a contract that provide rational subsoil usage and allow the government to regulate investor’s activity - regulations that limit investor’s opportunities to change plans and project conditions - rentals and royalty, the aim of which is to maintain the environment and compensate damages - the government can take back territories, that are used not rationally, as a part of investor’s obligation of territory return
Ø Opportunity to limit investor’s production export in “special” cases. It can help to support domestic market in crisis situations
Ø Involvement of new technologies into the sector, development of domestic technology and science
Ø Opportunity to develop marginal or technologically difficult deposits
National Mineral Resources University Saint-Petersurg, 2012
Third Parties 1. PSAs oblige investors to make payments to maintain
the society (region development, region small people)
2. Limitation of foreign employees (20%) and foreign subcontractors (70% of all costs) involvement - advantage for domestic employees and subcontractors. Stabilizes the social atmosphere in the region, supports national economy. - disadvantage for foreign employees and subcontractors - can cause application of worse equipment and decrease project performance
National Mineral Resources University Saint-Petersurg, 2012
Clause 7 of the Federal Law “On Production Sharing Agreements” states the limitation of foreign employees and subcontractors involvement
• Russian entities have prerogative right to participate in a project as subcontractors
• Cost of domestic materials and equipment should be no less than 70% of total costs for materials and equipment in a year. Items are considered as domestic, if they are produced by Russian entities or individuals at Russian territory with Russian materials and details (no less than 50%)
The clause contradicts the first principle of the World Trade Organization - non-discrimination
Russian PSA and WTO
The Russian Federation became a member of the WTO on August 22, 2012 Amendments are still not introduced
National Mineral Resources University Saint-Petersurg, 2012
Why PSA is important?
Technological difficulties
Low profitability
Cases of application
Development of marginal deposits under licensing is not interesting for investors. For such deposits PSA plays a role of “a bridge into profitability”.
Because of difficult conditions, special technologies are needed for efficient development of a field. Russian companies haven’t access to these
technologies or want to avoid them. PSA allows to attract those who can and are willing to overcome such difficulties
National Mineral Resources University Saint-Petersurg, 2012
Detecting Deterrents All PSAs currently active in Russia were
signed before the introduction of the Federal Law “On Production Sharing Agreements”
Possible deterrents are in norms of the Low.
Deterrents are in cost oil limitation or institutional
environment
The first focus should be on institutional
environment
Significant differences between active PSAs terms and norms of the Law is in cost-oil limitation and pre-phase procedures
Cost oil limits under norms of the Low are one of the most beneficial for investors in the world
Need to do
Specify functions and responsibility
of state bodies
Create additional incentives for investors
Change conditions of international agree- ments
Add obli- gations facili-
tating develop-ment of the sector
Abolishment of the double auction system
and parliament approval. Increase
control
Special attention to harmonize Russian
legislation with International Law
Mainly – additional guarantees decreasing economic and political
risks
Revise conditions regarding double
taxation
Establishment of the company which will act on behalf of the
government
Development of technical, technological issues and research
Simplify procedures
Detect and remove
gaps and discrepancies in
legislation Steps
The priority is not to attract investors, but attract investors with technologies, knowledge and experience.
Alteration of the legislation is needed
National Mineral Resources University Saint-Petersurg, 2012
v In general, production-sharing agreements are more beneficial and profitable for foreign investors than licensing. At the same time, they allow the government to develop complicated and marginal fields, attract technologies and knowledge in the sector
v The main deterrent is underdeveloped institutional environment
v Alteration of the legislation is needed
Conclusion
National Mineral Resources University Saint-Petersurg, 2012
Thank You!
