No. 3, 2009

Oil of Russia magazine talks to Darya Vasilevskaya, Cand. Sc. (Law), Corresponding Member of the Russian Academy of Natural Sciences

The legislative framework of subsoil use has already been formed in Russia: today, it comprises both federal and regional laws. The basic law for the development and functioning of the Russian system of subsoil use is the Subsoil Law of the Russian Federation adopted in 1992 and amended thereafter. On the whole, Russia's subsoil law is developing in line with general trends in the development of subsoil legislation in advanced countries, with the government playing a bigger role as the subsoil owner and a sovereign.

Q: How would you assess the current legislation on subsoil use?

A: Subsoil legislation was substantially amended in 2008 to establish the criteria for referring subsoil plots to those of federal significance, set the requirements for the composition of the users of subsoil plots of federal significance with differentiation of subsoil plots by their location (onshore or offshore deposits), and define specific features of the issue, use and reissue of licenses for subsoil plots of federal significance, with a special procedure stipulated for granting the rights to use mineral resources located on the continental shelf of the Russian Federation.

Restated article 2.1 of the Law on Subsoil of the Russian Federation refers individual subsoil plots to those of federal significance for the purpose of ensuring the country's defense and security. The list of such plots was published in the official publication of the Russian Federation - Rossiyskaya Gazeta - and includes over 1,000 sites located both on the territory of Russia and its continental shelf. As was mentioned above, the amendments made to subsoil legislation introduced restrictions for the access of legal entities with foreign participation in their capital or foreign investors to the use of subsoil plots of federal significance. The requirements set to subsoil users have been tightened considerably and differentiated by the plot location (onshore or offshore deposits).

It has been established that if a subsoil plot of federal significance is located on the territory of the constituent entity of the Russian Federation, the Russian government is empowered in each specific case to define (for a particular tender or auction) possible restrictions on the composition of subsoil users or stipulate no restrictions whatsoever for foreign investors.

Tougher requirements are set for potential subsoil users as applicable to the plots located on Russia's continental shelf.

In particular, two conditions have to be met to obtain the right to use offshore deposits. First of all, a legal entity should have at least a 5-year experience in the development of deposits on Russia's continental shelf. Secondly, a legal entity should be incorporated in accordance with the legislation of the Russian Federation and have a government stake of over 50% in its charter capital.

As applicable to subsoil plots of federal significance, decision-making on granting the right to subsoil use has been shifted from the federal executive body (the Federal Agency for Subsoil Use, Rosnedra) to the government of the Russian Federation. The rights to use subsoil plots located on the continental shelf will be granted without holding any tenders or auctions.

Another important novelty of the law is that the holder of a combined license for use of a subsoil plot of federal significance is allowed to commence exploration and production at the field only after the completion of a geological survey thereof and upon special approval from the Russian government.

The law also stipulates that if, in the process of geological exploration, a subsoil user (either a Russian legal entity with foreign capital participation or a foreign investor) holding a geological license (obtained before the amendments came into effect) or a combined license discovers a mineral deposit that meets the requirements (criteria) made to a subsoil plot of federal significance, the Russian government may refuse to grant the right to use the plot for exploration and production purposes.

If the Russian government decides to refuse to grant the right to use a subsoil plot of federal significance for exploration and production purposes, it must compensate the subsoil user for the expenses incurred in carrying out the geological survey and pay remuneration for the discovery of the field.

Apart from the above-mentioned regulations for the use of subsoil plots of federal significance, the amendments actually placed a ban on the reissue of licenses for subsoil plots of federal significance. This legislation stipulates that in exceptional cases the Russian government may decide on the transfer of the right to use subsoil plots of federal significance to a company with foreign investor control of more than 10% of the Company's share capital. The law does not specify, however, which cases are regarded as exceptional.

The following can be referred to basic modern trends in the development of subsoil legislation: considerable limitations on foreign participation in the activity linked with the use of subsoil plots; the transfer of major decision-making on the use of subsoil plots of federal significance to the level of the government of the Russian Federation; the establishment of a special regime for the provision and use of subsoil plots on the continental shelf of the Russian Federation.

Q: What are, in your opinion, the main directions for improving subsoil use legislation today?

A: First of all, it is necessary to eliminate (minimize) administrative barriers impeding the development of the sphere of subsoil use, and also involve small and medium-size businesses in the process. This work primarily involves measures to draft administrative regulations on major government functions and government-rendered services in the sphere of subsoil use, specify the provisions of the Subsoil Law of the Russian Federation that stipulate grounds for refusal to accept applications for participation in tenders (auctions), clarify the procedure for the preparation and approval of technical documentation and the holding of tenders and auctions for the right to use subsoil plots.

It is also necessary to stipulate the possibility of expanding the boundaries of mining allotments to make sure that a deposit discovered as a result of additional exploration can fully remain within the area of a mining license. This legislative novelty will help subsoil users to build up, without any limitations, additionally explored reserves located in underlying beds.

Secondly, it is necessary to improve economic mechanisms in the sphere of subsoil use, including the need to specify and expand the criteria for the differentiation of severance tax and give up fees for the provision of government-owned geological information.

Q: What are, in your opinion, the main problems in the development of the resources of the Russian continental shelf and the ways to overcome them?

A: Today, the continental shelf of the Russian Federation is actually the sole reserve of hydrocarbons. At the same time, it has been poorly studied geologically. Technologically Russia seriously lags behind other countries in the construction and operation of equipment required to carry out work on the country's continental shelf and also faces serious personnel problems.

At the same time, owing to the amendments made to subsoil legislation, geological exploration as an independent type of subsoil use is not used as applicable to subsoil plots of the continental shelf. Only combined licenses can be granted (for geological survey for, exploration and production of hydrocarbons). As was mentioned above, very tough requirements are set to potential subsoil users on the continental shelf and today only two government companies comply with them.

In my opinion, in order to intensify work on the Russian continental shelf, it is expedient to consider the possibility of easing requirements for the prospective group of subsoil users to allow a larger number of companies to operate on the shelf.

Another possible mechanism could be the drafting and implementation of a special government program for the geological study of the Russian continental shelf. This program could use funds from the federal budget to carry out geological studies, provide necessary technical and technological support and resolve personnel problems.