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Regulatory overview

Work in progress

Regulation of the industry is a work in progress, with federal, regional and local authorities each promulgating rules. The principal legislation governing the sector includes the

Constitution of the Russian Federation, the Civil Code, the Tax Code, the Subsoil Law, the Natural Monopoly Law, the Gas Supply Law, the Federal Law On Gas Exports, the PSA Law, the Law On the Continental Shelf of the Russian Federation, and the Law On Foreign Investments in Strategic Industries. One notable omission to this list is the Law On Trunk Oil Pipelines, various versions of which have been in review since 1999 but is yet to be adopted, with the oil pipeline industry regulated by presidential decrees in the meantime.

The most recent structural change on the energy side of the government was the abolition of the Federal Energy Agency in May 2008. We also note the abolition of the FTS, which was integrated into the FAS from 2015, although this was not an energy-specific change. At the federal level, regulatory oversight of the oil & gas industry is divided primarily between the Ministry of Energy and the Ministry of Natural Resources, both reporting to Dmitry Kozak, Deputy Prime Minister in charge of all matters related to industry (with the exception of the military), energy and trade. The Ministry of Energy sets government policy for the industry and drafts legislation regulating the energy sector. The Ministry of Natural Resources licenses subsoil resources and additionally regulates exploration and geological prospecting for the oil & gas sector.

Law-enforcement functions related to subsoil use are delegated to the Federal Agency for Subsoil Use (Rosnedra). Rosnedra is subordinate to the Ministry of Natural Resources and organises tenders and auctions for the award of subsoil licences, issues and terminates subsoil licences and supervises compliance by licence holders with the terms of such licences. The one exception to this is offshore licences, which are actually granted by the Russian federal government. In addition, control and surveillance functions of the Ministry of Natural Resources are carried out by the Federal Service for the Supervision of the Use of Natural Resources (Rosprirodnadzor).

The Ministry of Finance also plays a significant role via its oversight of the general tax regime, and the industry-specific regime, via the Federal Tax Service. More peripherally, the Ministry of Economic Development oversees the activities of the natural monopolies and reform legislation, while the Ministry of Transportation runs the Federal Agency for Rail Transportation, which plays an important role regulating rail shipments of crude and refined product.

Other important contributors are the FAS and the Federal Customs Service (FST), all directly reporting to the prime minister’s office.

In addition, the Russian state is a controlling shareholder of several major oil & gas companies in Russia, and executes its daily influence through their respective boards of directors, mostly populated with government representatives. Although we have seen some transition away from government officials to more industry representatives on the boards of state-controlled companies, the changes have proved nominal and will not result in any lesser degree of government involvement in their activities, in our view.

Renaissance Capital

20 June 2019

Russian oil & gas

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Federal meets regional meets local…

The Constitution of the Russian Federation stipulates that the use of subsoil is under the joint jurisdiction of the federal and regional authorities. Hence, legislation at the federal level grants a measure of autonomy to regional and local authorities to exercise rights for the use of natural resources and, specifically, provides that the use of subsoil is under the joint jurisdiction of the federal and regional authorities.

In principle, Russian federal law prevails over contradictory regional or local laws. Even so, historically, authorities at the regional or local level held substantial sway over the operations of oil and gas companies in a given location. In particular, regional authorities used to share jurisdiction over the granting of subsoil licences with the Ministry of Natural Resources, under the constitutional two-key provision. In 2004, though, the Subsoil Law was amended via Federal Law No. 122-FZ, dated 22 August 2004, which brought to an end the prior two key provisions.

More generally, both regional and local authorities enforce taxation regimes, while they are also entrusted with administering land use regulations and overseeing compliance with environmental and worker safety codes. Indirectly, local and regional authorities can influence the use of the national and local pipeline networks through their ability to regulate land use and environmental matters. In practice, this means that a tie-in from, say, a newly producing field would require local and regional blessings.

…bar in the offshore areas…

That said, operations in offshore areas (generally within a 200 nautical mile limit) are separately regulated by the Federal Law On the Continental Shelf of the Russian Federation, of 30 November 1995. Federal Law No. 191 On the Exclusive Economic Zone of the Russian Federation also governs activity within this area.

Offshore oil- & gas-producing activities, including the drilling and laying of pipelines and the operation of oil & gas production facilities, are overseen by the Federal Agency for Subsoil Use as well as several other governmental entities, including the Federal Security Service, the Federal Service for Ecological, Technological and Nuclear Surveillance, and the Federal Fishery Agency.

…while PSAs stand alone

In addition, petroleum operations carried out under production-sharing agreements (PSA) are also governed by the specific Federal Law On Production Sharing Agreements, of 30 December 1995.

Importantly, however, the PSA Law states that operations conducted under a PSA struck under the auspices of the PSA Law are governed by the PSA itself, and that they should not be affected by contrary provisions of any other legislation, including, for example, the federal Subsoil Law, of 21 February 1992. Furthermore, any PSAs that were struck between investors and the Russian government prior to the enactment of the PSA Law are excluded from any subsequent legislation. These (Sakhalin-1, Sakhalin-2, and Kharyaga) are known as grandfathered PSAs, and are the only PSAs that still exist in Russia today.

Renaissance Capital

20 June 2019

Russian oil & gas

Constitution stipulates joint jurisdiction of the federal and regional authorities

Offshore is a federal patch

PSAs are governed by specific legislation

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Renaissance Capital 20 June 2019

Russian oil & gas

After the law covering PSAs was introduced at the end of 1995, 28 other oil & gas projects were approved by the Russian State Duma for development under these terms. However, under amendments to the PSA Law introduced in April 2003, most PSA approved fields had to be auctioned again, with a view to them being developed under existing tax conditions. With the exception of the three grandfathered PSAs, we do not believe the Russian government will entertain any new PSA projects in the foreseeable future.

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