vk.com/id446425943

Licensing

Introduction

Renaissance Capital

20 June 2019

Russian oil & gas

The main legal issues surrounding the (current) licensing regime for exploration and production operations are covered in the Subsoil Law and a host of regulations issued pursuant to it (known as the Subsoil Regulations). Prior to January 2000, when substantial amendments to the Subsoil Law were passed, typically exploration licences were granted for up to five years, production licences for up to 20 years, and combined exploration and production licences for up to 25 years.

Following the amendments, the maximum exploration term stayed capped at five years (or 10 years on the continental shelf), while the production term was made as long as required for the rational full exploitation of the deposit. In practical terms, this means that the production term is set out in the feasibility study, and has to be approved by the regional department of the Ministry of Natural Resources.

Interestingly, the Subsoil Law does not expressly provide for a combined licence term over which exploration and production can be carried out, but the Ministry of Natural Resources customarily issues a combined licence for the term that is actually envisaged in the production licence.

Getting them…

Exploration licences are generally awarded without a tender upon a decision of the Ministry of Natural Resources, or its regional department, but with approval from the relevant regional authority. Upon discovery of oil, a production licence might be issued without a tender to a holder of an exploration licence. Exploration licences may be transferred only under certain limited circumstances. A licensee is also generally granted rights to use land covering the licensed area.

The Subsoil Law and associated regulations govern licensing

Exploration licences are generally awarded without a tender

On the other hand, either production or combined licences are awarded via tenders or auctions. Auctions are run by the Federal Agency for Subsoil Use, normally by its regional department, with the appropriate regional authority no longer involved except in a consultative capacity.

According to legislation currently in place, the winner is the participant that submits the most technically competent, financially attractive, and environmentally sound proposal that, of course, meets the published tender terms and conditions.

In accordance with the Law On Foreign Investments in Strategic Industries and related changes to the Subsoil Law (dated 29 April 2008), foreign investors seeking control in strategic oil & gas fields (defined as recoverable reserves in excess of 70mnt of oil and 50bcm of gas) need to get pre-approved by the relevant bodies of the Russian government before the licence can be issued.

Arctic offshore licences can only be given to state-controlled companies with more than five years of relevant experience on Russian continental shelf, which limits the candidates to just two companies, Rosneft and Gazprom. Historically, the licences were issued on request without an auction. However, this practice was suspended (and a moratorium on issuing new offshore licences was adopted by the government in 2016) after Rosneft and Gazprom were interested in the same acreage on two separate occasions in 2013 and 2015. After three years of discussions, amendments to the Law on the Continental Shelf of the Russian Federation were adopted from 9 Dec 2018, removing a sentence that no auction is required. While the moratorium on new licences is still technically in force, we assume that these new amendments will allow Rosneft and Gazprom to compete for new

Production or combined licences are awarded via tenders or auctions

Only Rosneft and Gazprom can receive an Arctic offshore licence

offshore licences in the auction process in the future in case their interests clash again. Privately held Russian oil companies, in particular LUKOIL, Surgutneftegas and Bashneft (prior to its acquisition by Rosneft in 2016), have consistently lobbied for the removal of the restriction limiting ownership of Arctic offshore licences to just Rosneft and Gazprom. However, there is no sign at present that the restriction may be lifted.

Production licences are non-transferable, except in limited circumstances, as specified by the Subsoil Law. A subsoil production licence gives its holder exclusive production rights to an identified area (including subsurface zones) for the term of the licence. A licence holder has the right to develop and sell oil or gas extracted from the licence area. The Russian government, however, retains ownership of all subsoil resources at all times, and the licence holder only has rights to the crude oil when extracted. The licences generally require the licence holder to make various commitments, including:

▪Annual extraction of an agreed-upon target of reserves.

▪Conducting agreed-upon drilling and other exploratory and development activities.

▪Protecting the ecology in the fields from damage.

▪Maintaining various agreements with local communities living on, or near, the fields.

▪Regularly submitting formal progress reports to regional authorities.

▪Paying certain production and land-use taxes when due.

The licences generally require the licensee to make various commitments

…and keeping them

Failure to comply with the terms of the licence, or with the provisions of the Subsoil Law and Subsoil Regulations, can lead to fees and penalties, stoppages of production and revocation of the licence. The Ministry of Natural Resources, again primarily via its regional departments, oversees compliance with the terms of the licence. Grounds for fines or revocation are:

▪A breach or violation by the licensee of material terms and conditions of the licence.

▪Repeated violation by the licensee of the Subsoil Regulations or environmental legislation.

▪Failure by the licensee to commence operations in accordance with the licence.

▪A determination by the government that an emergency situation has occurred.

▪a direct threat to the life or health of people working or residing in the area affected by the licence.

▪The liquidation of the licensee.

If a subsoil licence is revoked, all oil & gas facilities in the licensed area, including underground facilities, must be liquidated or undergo conservation. In accordance with both liquidation and conservation regulations, all mining facilities and oil & gas wells must be maintained at a level that is safe for the population, environment, buildings and other facilities. Conservation procedures must also secure the conservation of the relevant oil & gas field, mining facilities and wells for the full period of conservation. These procedures could result in significant unforeseen costs for licence holders.

Failure to comply can lead to fees and penalties, stoppages of production and revocation of the licence

vk.com/id446425943

Tellingly, licences granted in accordance with the Subsoil Law cannot be sold or transferred to another entity except under limited circumstances, such as to a spun-off company or a subsidiary in which the licensee has a 50% or greater share. Generally, a licence cannot be held by more than one legal entity.

Land-use permits

In addition to a subsoil production licence, permission to use surface land within the specified licensed area is necessary and is normally granted by the regional authority at the site. In the event that subsoil resources are subsequently discovered to extend beyond the original scope of the licence, it is usually necessary to obtain an amendment to the licence to expand the subsoil and land-use rights associated with it.

Land-use permits are typically issued for specific production areas, upon the submission of standardised reports, technical studies, pre-feasibility studies, budgets and impact statements completed by designated Russian institutes or specialist firms. A land-use permit generally requires the holder to make lease payments and to restore the associated land to a condition adequate for future use, at the licensee’s expense, on the expiration of the permit.

Subsoil licensing fees

A holder of a licence for exploration and assessment of hydrocarbons has to make quarterly payments for the use of the subsoil based on total acreage, at a rate in the range of RUB120-540/km2 (RUB50-225/km2 offshore) pa for prospecting operations, and in the range of RUB5,000-20,000/km2 (RUB4,000-16,000/km2 offshore) pa for exploration operations. These rates are established by the Subsoil Law.

Fees for combined exploration, appraisal and production licenses are negotiated by the parties to each licence. More importantly, the Subsoil Law and Subsoil Regulations include a basic framework for the taxes applicable to licence holders. Before the 2001 amendments to the Tax Code, the taxes payable included royalties, a one-time licence fee, excise taxes for certain premium resources, and payments to a fund for resource development. Since January 2002, however, the industry has been subject to a general tax regime, which requires payment of the MET, which we discuss below. In addition, the Subsoil Law and Subsoil Regulations impose the following fees: a licence fee; a fee for participation in a tender; and quarterly subsoil fees discussed above.

Operating approvals

Finally, the Federal Law On the Licensing of Certain Types of Activities, of August 2001, lists activities relating to the oil & gas industry that require separate licensing. These include, among others, the operation of oil & gas mains and other equipment, the storage of oil and gas and their respective products, the processing and transportation of hydrocarbons and hydrocarbon products, and the sale of oil and gas and their products. The Ministry of Energy and Rostekhnadzor, a government agency, are authorised to issue these licences.

Renaissance Capital

20 June 2019

Russian oil & gas

Transfer rights limited

Local authorities involved in landuse permits

A range of fees are payable in respect of subsoil resources