On specific aspects of legislation on production sharing agreements

Parliament hearings “Legal problems of signing and implementation of production sharing agreements (PSA) on development of continental shelf fields” took place in the RF State Duma yesterday. Insaf Saifullin, the Deputy head of the Department of long-term development, science and ecology, made a speech at the hearings.

As I. Saifullin noted, PSA is considered in Gazprom as an efficient supplementary mechanism for attraction investments in large-scale projects. The Company has thoroughly studied the outlooks for the PSA regime implementation, possibility of warranted provision of investors’ interest concerning recovery of investments as well as risks due to probably low prices for commodities produced. “We’ve made certain that realization of the projects of hydrocarbon fields development in the Arctic shelf, elaborated with Gazprom’s participation, would be much profitable on PSA conditions”, stressed I. Saifullin.

At the same time, according to the speaker, there are a number of problems in the Law on SPA. As long before as in 2000 the RF Government approved “The plan-schedule of preparation of normative and legal acts on production sharing agreements”, stipulating implementation of sixteen acts. However, the plan-schedule still remains unrealized. For example, according to Clause 6 of the Law on PSA, agreements related to continental shelf sub-soil development are subject to approval by separate federal laws. “However, the procedure for such approval and the content of corresponding law are still not formed. And we are deeply interested in the soonest approval of such procedure”, noted I. Saifullin. The second important problem is instability of the legislation on PSA. Thus, the Law on SPA approved on December 30, 1995 has suffered a number of significant changes. In spite of the fact that a number of amendments caused positive impact on the Law content, continuous changes put foreign investors on alert. Besides, numerous modifications hamper activity in the field of PSA, according to the speaker.

For example, an amendment was approved in 2001 that allowed for implementation of “direct production sharing” mechanism. That mechanism relieved investors from payment of federal and regional taxes and dues, except of a single social tax, and replaced them with direct production sharing between the state and an investor. From the point of view of experts, lawyers and taxation specialists, foreign partners will face a problem of double taxation under such a scheme. It might be hard for foreign investors to prove the fact of payment of tax in Russia to their native tax authorities, and they are reasonably anxious of the necessity to pay the taxes twice.

In conclusion Insaf Saifullin stressed the absence of clear, simple and understandable system of the state management of PSA. The supervision of the sphere is circulating among different federal bodies and a “single window” principle declared by the RF Government and assuming all coordinations and agreements in a single administration is actually inactive.

Information Directorate, OAO Gazprom