No. 4, 2009
ON THE BASIS OF THE “REASONABLE SUFFICIENCY” PRINCIPLE
Oil of Russia magazine talks to Valery Prozorovsky, Chairman of the RF State Duma Committee for Natural Resources, Environmental Management and Ecology
Q: Recently, state bodies and the press have been focusing particularly on the problem of developing the Russian shelf. What is the reason for this?
A: Experts predict that the intensive growth of demand for energy resources, above all in China and other countries of South-East Asia, in conjunction with the anticipated revival of the global economy as a whole when it comes out of the current crisis, will lead to a significant rise in the demand for energy resources. And for our country, supplying them to the world market will, without exaggeration, constitute the most vital source of funds for maintaining the state's economic and defensive might at the required level, for developing other branches of production and fulfilling pressing social problems.
Consequently, oil and gas will be in demand for a long time yet. But their domestic deposits on land are mainly at the stage of falling production and new reserves discovered are, on average, less by an order of magnitude that the shelf fields and generally located in difficult climatic zones and undeveloped areas. The forecasts testify that, in about ten years time, the drop in production in Western Siberia will amount to some 60 million tons of oil.
In accordance with the Energy Strategy of the Russian Federation for up to 2030, it is envisaged to produce about 20% of the country's hydrocarbon raw materials on the shelf.
80% of the oil and gas fields developed on land have passed their peak productivity point. According to the analysts, a good two-thirds of countries have either reached or passed their hydrocarbon production peaks. These include the USA, Canada, Great Britain, and a whole series of other countries. Unfortunately, Russia is also one of them. In our country, 75% of on-land fields of hydrocarbons have already been developed to an average of 50%.
The general world trend over several pre-crisis years testifies that, on average, the already over fifty countries developing shelf fields were investing 13-15% more every year in surveying and production, the sum doubling over the five-year period. We are way behind in this. Australia, Brazil, Nigeria, the USA, and Angola have long since been engaged in deep-water production of hydrocarbons. We, however, are at the very beginning in this.
Q: In your opinion, is the Russian legislation reacting to the need for more intensive development of shelf fields?
A: Development of the oil and gas complex largely depends on the legislation regulating this process. This also applies fully to the problem of developing the Russian shelf. Above all, it must be precisely determined how interested the state is in its development and in what order of priority, what funds will be needed in consideration of resolving matters of creating a coastal infrastructure, transport, oil refining and gas liquefying facilities, etc.
Since objective circumstances insistently dictate the need for more intensive development of shelf hydrocarbon fields, the legislation should ensure, above all, the economic appeal of such projects, including highly expensive ones, as far as the Arctic shelf is concerned. A lot is now being done in this respect for granting tax and other preferences to subsoil user companies (severance tax holidays for a period from 10 to 15 years, and so on), regulation and reduction in the volumes and times required for obtaining approvals. But this is not enough.
In my opinion, given the shortage of funds, the interests of expanding the field of operations and attracting investments require better thought-out measures to create the conditions for broader participation by both Russian and foreign companies in resolving the complex of issues associated with surveying and developing shelf fields. These measures should envisage development of a competitive environment, ensure, by means of tenders and auctions for potential subsoil users, the maximum possible effect in the economic and social spheres, and promote a rise in the volume and quality of the domestic oil and gas industry and the services provided by the Russian service companies.
Many specialists believe that production sharing agreements provide considerable room for maneuver. Errors made previously in their use are no reason to reject PSAs as a tool for raising investments in offshore oil and gas production.
The inflexible Russian fiscal system not only impedes attracting foreign investment into the country's oil and gas sector but also encourages Russian companies to invest more funds in implementing overseas projects to survey and develop hydrocarbon fields.
It cannot be said that no measures are being undertaken to optimize the tax legislation in the country. This is an ongoing process.
Q: Russia claims a substantial part of the Arctic, considering it a continuation of its own continental shelf. How realistic is the possibility of achieving international recognition of this?
A: The rivalry over division of this geographical region will apparently only increase because of the predicted enormous mineral fields there, the marked trend in recent years towards global warming and the forecasted growth of global demand for hydrocarbon energy resources.
Let us take a brief look at how, in accordance with the international legislation, the boundaries are being set and what particular boundaries - of state territories or exclusive economic zones.
Any state has its frontiers. These often pass across the sea and the part belonging to the state is called its territorial waters. The limits of these are established at 12 nautical miles from the shoreline. The owner of these areas is the full master here, entitled to protect their borders, establish shipping, fishing, subsoil use and other rules within them.
But there is also the concept of the exclusive economic zone. According to the 1982 Maritime Law Convention, a state may include therein the waters within a 200-mile zone beyond its shoreline. This is already beyond the state frontiers. The owner of the exclusive economic zone has the right to develop resources here (mineral and biological) at its own discretion - by state-owned companies, by engaging private capital, including foreign, or by combining these options, as, for example, was done for implementation of the Sakhalin oil and gas production projects. Within its own exclusive economic zone, however, other countries may not be hampered in using it for navigation (including warships and submarines), laying communications cables, underwater pipelines and for other purposes. The state may extend its rights to develop mineral resources of the seabed beyond the 200-mile exclusive economic zone if the UN Commission on the Limits of the Continental Shelf passes a relevant decision on the basis of an application submitted by the given state, together with proof that the seabed here is a natural continuation of its continental shelf in terms of geological structure and the bathymetrical parameters characterizing the relief of the seabed. But this is no longer part of the exclusive economic zone. Everyone can fish here.
There have been several cases of extension of the continental shelf, for example, by Australia, Brazil, Ireland, and New Zealand. Very recently, Norway managed to prove its rights to an area of 235 thousand km2 of the northern seas.
But there are a number of nuances taken into account in international practice in delimiting the boundaries of exclusive economic zones.
Very often, the 200-mile coastal zones of states intersect, in which case the boundaries might be set on the basis of the so-called middle line or on agreements between the interested states.
In 1990, an agreement was concluded between the USSR and the USA on delimitation of economic zones and the
continental shelf in the Bering and Chukchi Seas, as well as territorial waters in the Bering Strait. Moreover, obvious concessions were made to the U.S. side: the resources conceded by Russia amount to 200 million tones of oil and 200 billion m3 of gas. Nor are we allowed to fish here. Nor is it definite that we would be allowed to do so, even though the agreement has never been ratified on our part. In many cases, it is not easy to reach an agreement.
To resolve matters of dispute, the practice is to turn to the International Court in the Hague (we shall not consider the possibility of an arbitration tribunal recognized by both the disputing parties). It issues a decision on delimitation of the boundaries of territorial waters and exclusive economic zones in consideration not only of the geological data and various mathematical calculations of the parameters of the shoreline, the distance to it, the mid-line principle, etc. The determining factor here is often the argumentation of rulings accepted in international legal practice on the basis of the principle of fairness.
For instance, there is an island in the sea belonging to a particular state. Is it entitled to a 200-mile exclusive economic zone around it? If this island is close to the shoreline of another state - should the mid-line be taken between them? What about if this island is merely an uninhabited plot of land or a rock sticking up above the surface of the sea? Decisions are taken, therefore, on the basis of consideration of many nuances, taking into account all the circumstances and arguments presented by the sides and, very importantly, by seeking possible compromise solutions - allowing one side an advantage in one respect, and the other side in another respect.
In our case, the claims to an enormous part of the Arctic shelf with an area of 1.5 million km2 affect the interests not of just two, but a large number of countries.
Russia has applied to the relevant UN Commission for recognition of the given part of the Arctic shelf as its own but the Commission has not yet seen Russia's arguments in the form of detailed geological structure survey data - so the matter has been put off for the future.
