Klondike for the Independent
Is Opened by the New Underground Resources Law in Exploration
The new Underground Resources Law, a draft of which was approved of by the Government in March, will create incentives for investment inflow in exploration and will engage small businesses in operations on undeveloped fields as it envisages a possibility of assigning rights to use to other companies. This will help commit new reserves and, consequently, will boost mineral extraction, believes Mr. Vsevolod Gavrilov, a developer of the bill and Deputy Head of the Department for Property and Land Relations, Ministry for Economic Development and Trade of the Russian Federation.
Mineral Use Revolution
RusEnergy: As is known, MEDT took an active part in drafting a new version of the Underground Resources Law, together with the Natural Resources Ministry. Which of the bill’s provisions do you regard as the most revolutionary?
Gavrilov: In my opinion, this is, first and foremost, shifting to civil law relations in mineral use and leveraging a tender as the key tool in allocation of mineral use rights. As is known, mineral use in Russia currently relies on administrative law, and, in addition to tenders, tenders with investment commitments, which are not distinguished with transparency, are held.
Let me also note that the bill introduces such notions as technical project and appraisal. This unnoticeable, on the face of it, provision is in fact very important because it will enable to abandon the practice of individual requirements (which is very corrupt), which will be substituted with the practice of declaration in the field of mineral use. A mineral user will be able to independently draft a detailed development project, relying on technical regulations, rules and laws, and to submit the same for appraisal. On the part, appraisers will verify conformity of the project to established requirements. A mineral user will not be able to get down to operations on a subsoil section until these steps have been taken, subject to a positive resolution of the appraisers.
Another critical provision on which we reached a principle agreement with the Natural Resources Ministry but which has not yet been incorporated into the text is application of the arrangements for market appraisal of mineral use rights as the prime tool for quantification of obligations of the parties, for instance, the amounts of a lump sum tender fee, the amount of performance bond, damage calculation etc.
To Defend Investors
RusEnergy: Why was MEDT so vehemently insisting on conversion of subsoil management from the sphere of administrative law to that of civil law relations?
Gavrilov: Civil law relations are mainly appealing by stable, predictable conditions of use. Most importantly, they provide guaranteed protection of rights of all parties. Mineral use means long investments and a protracted payback period. And civil law relations are a necessary pledge of stability of these relations.
Another important thing is that rights to use become an object of civil law relations. The English of this is that these rights may be pledged with a bank, a loan may be accommodated against them, and investments may be made using this loan. Administrative law does not provide such option.
RusEnergy: But, with the licensing system, a mineral user is also able to take legal action. There is an option to sell a license, by transferring it to a subsidiary. What is a principle difference?
Gavrilov: In administrative law a unilateral resolution taken by authorities may be also appealed to court as an illegal action of officials. However, it is in civil law only that the state gives up its sovereign immunity, due to the principle of equality of parties in civil law relations, and acts as an equal. And it is advantageous not only to an investor but also to the state because the state may act in court not only as a defendant but also as a plaintiff.
In addition, civil law relations envisage the arrangements for securing obligations – a banker’s bond, pledge, and surety etc. This enables, in case of improper performance of these obligations, to enforce compensation to the extent of guarantees. This is a very efficient arrangement, absolutely transparent and market-based.
When administrative law remains in such crucial sector as mineral use it is archaism. Life itself pushes us to civil law relations. It is impossible to sell a license now; instead, they sell a company together with its license. Turnover of rights, in the essence, exists but in a “grey” form, through turnover of companies having these rights. Actually, a new version of the Underground Resources Law aligns real-life requirements with established practice.
RusEnergy: In connection with introduction of turnover of mineral rights use, authors of the law are taxed with transfer of subsoil in private property. How can we object to them?
Gavrilov: There is no such risk at all. Undoubtedly, we could build up civil law relations so that they will envisage private property for subsoil sections. But they are based on another ground. The object of turnover is rights to use rather than real estate, i.e. subsoil sections.
Speaking in a stricter legal language, the bill contains provisions that prevent from levy of execution against any particular real estate item and its alienation. If anybody has claims against the state, execution shall be made upon the Russian treasury.
So apprehensions of this kind are largely due to insufficient experience in application of civil jurisprudence in mineral use. Natural use, and in particular mineral use, has traditionally fallen under administrative law, and geologists are fearful of new relations. But, in this case, these apprehensions are groundless.
Everything for the Small Ones
RusEnergy: Some critics of the bill assert that its adoption will make operations of small and medium business in mineral use even more complicated, because all attractive sections will be bought up at tenders by large companies having at their disposal necessary funds. Do you support this forecast?
Gavrilov: Just the opposite. In terms of participation of small and medium business, the new Underground Resources Law contains by an order of magnitude greater than чем существует сейчас. Because at present small companies, irrespective of their economic potential, are often simply unable to get to the very resource-distribution procedure.
Of course, their participation will be determined by their economic options. Understandably, a small company cannot come to a large field where mega investments are required. It is uncommon in global practice, too. However, it is inefficient for large companies to operate on small sections because they incur internal mobilization administrative expenses, operating expenses etc.
Small and medium companies will claim small sections. If you look at trends in the global oil industry, you will see that companies tend to outsource many types of work, especially drilling and exploration. For instance, up to 80% of exploratory wells are drilled by small companies in the U.S.A. They run a risk, then acquire rights to use and, take note, it is only in accordance with civil law that they can be sold to a large company, if they achieved commercial results. It is the basic incentive for small companies, according to a new law.
Concession Signs
RusEnergy: Obviously that, if relations between the state and the mineral user are determined by an agreement for subsoil plot use, many things will depend on the nature of this agreement. Are you going to approve of any sample agreement? Who and when should draft it? Will it be close to a concession agreement, as some observers assert?
Gavrilov: We consider drafting of a sample agreement is quite possible; this is an open issue now but it is not of principle nature because all material conditions of the agreement are prescribed in the bill. I think the consortium consisting of five establishments dealing with the bill will address this issue – the Natural Resources Ministry, the Ministry for Economic Development and Trade, the Finance Ministry, the Ministry of Justice, and the Ministry for Industry and Power Engineering. Such resolution may be discussed between the first and second reading of the Underground Resources Law.
When asked whether or not it is close to the concession agreement, let us say as follows: it has certain signs of a concession, namely – use through exclusive rights. But I would not designate the proposed agreement as a concession one. The fact is that Russian civil law already envisages such legal foundation as commercial concession, or franchising.
This new type of obligations, the mineral use agreement, which was offered by the Natural Resources Ministry, differs from the above one. In addition, one should remember that the Government introduced a bill on concession contracts to the State Duma. So calling a subsoil plot use contract a concession would not be quite right, because it can only confuse its participants.
Conditions for Foreigners
RusEnergy: The law enables the Government to deny access to subsoil to foreign companies at the stage when tender conditions are drafted. How logical is it to introduce such limitations when Russia needs giant investments into undeveloped regions of Eastern Europe and offshore fields? Some companies (e.g. ExxonMobil) have already said they will take a pause in expanding their operations in Russia, due to onset of these limitations.
Gavrilov: Those limitations on presence of foreign capital, which are envisaged by the bill, apply in most countries. Their essence can be reduced to the fact that a foreign company must operate through a subsidiary registered in the country where the project is implemented. This proposal is so natural that there were no objections to it.
There will hardly be any additional obstacles to development of poorly explored areas. Of course, access to foreigners may be limited in some well-explored fields. But similar measures, even much more stringent ones, exist in laws of many other nations. For instance, in Norway where foreigners are prescribed to establish a consortium with participation of a state-owned company.
RusEnergy: If a foreign company establishes a subsidiary in Russia, will it serve as a sufficient condition for overcoming obstacles? Will they track the origins of capital of the companies participating in tenders for strategic fields, and which companies can be regarded as Russian ones?
Gavrilov: It is the issue we are going to explore. But it is a matter of legal technique, rather than concept. Most importantly, we want the center of profits to be located in Russia and taxes to be paid in Russia.
RusEnergy: Speaking of the need for foreign companies to set up subsidiaries in Russia, developers of the bill refer to the U.S. and Norwegian experience. But it should be recognized that confidence of foreign companies in judicial and tax systems of these countries is still greater than to Russian ones. Will foreigners be able to defend their positions in international courts?
Gavrilov: Generally speaking they do not have such opportunity so far, except in connection with product-sharing agreements that specify under laws of which country a process is handled.
If you ask about a possibility for foreigners to defend their positions in international courts, my answer is negative. You cannot preserve something that does not exist. Legal proceedings will be conducted under Russian law. But I would like to draw your attention to the fact that it will be in accordance with Russian civil law that does not yield to EU law by its legal structure and legal options.
Additional Work Needed
RusEnergy: According to the bill, a tender decision should be published at least 45 days prior to its date. A subsoil plot use agreement is to be concluded within 30 days from the tender date, and a preferred bidder must sign a contract sent to it during 10 days. Will these deadlines be extended, as lawyers in many companies express concern that they are too short, taking into account particularities of negotiations in Russia?
Gavrilov: Frankly speaking this is a purely technical matter so I don’t have an answer. If investors have apprehensions we are ready to address them.
RusEnergy: The law does not contain any clear-cut procedure for a mineral user to abandon operations on a subsoil plot if, presumably, seismic prospecting showed that the plot is not promising, and there is no sense in drilling. What is MEDT’s standpoint in this issue?
Gavrilov: The fact is that many issues are addressed automatically in civil law. In particular, if you acquired a right by having won it at a tender and concluded a contract, then any unilateral waiver of its performance will not lead to major problems, unless a contract provides otherwise.
The procedure for changing obligations of the parties to the contract has already been prescribed in the bill; individual components of this procedure can be adjusted.
RusEnergy: Will a mineral user be obliged to continue drilling and other work, according to the plan of work recorded in the license agreement if, based on seismic prospecting it understood there is no sense in further work under the plan? Will it have to pay a fine for repudiation of the work plan?
Gavrilov: This problem must be settled in a mineral use agreement in which a mineral user’s liabilities and a procedure for their adjustment must be recorded. In fact, this has already been envisaged in the bill and, to avoid retelling it, I would like to refer readers to the text, which, by the way, can be easily found in the Internet – on the website of the Russian Natural Resources Ministry.
RusEnergy: When may the reworking be finalized?
Gavrilov: We expect the bill to get in the State Duma as soon as possible because we have in place positions fully agreed upon at the stage of the bill concept. It is preferable to further rework legal technique and public regulations and to adjust details associated with civil law standards in the State Duma, together with deputies, so that to save time.
Awaiting Investments
RusEnergy: What implications will this bill’s adoption have on mineral use? Will revocation of licenses from mineral users defaulting on their obligations speed up? Will prices for subsoil plots move up during tenders, in line with governmental revenues under this item? Can one expect greater investment inflow in mineral use?
Gavrilov: The revocation procedure will neither accelerate nor slow down but will only depend on how well any existing mineral user complies with prescribed requirements. We do not see any link between passing of the bill and revocation of licenses from unfair mineral users.
Will prices for subsoil plots look up? We hope very much they will, just as budget revenues. As soon as rights to use become objects of usual civilized civil circulation, their investment appeal will improve.
As concerns oil fields, with currently high prices their attraction as an investment is mostly determined by price factors. However, we expect significant investment inflow in the marginal profitability group.
The bill is drawn up so that to encourage investments into exploration as much as possible, to engage small business in operations on undeveloped plots, naturally, with possible subsequent re-sale of mineral use rights to other market players, if they are unable to develop these plots themselves.
This will enable to involve new reserves and, accordingly, to boost mineral extraction. Probably, this will be the primary practical significance of the new law.
Marina Sysoeva
RusEnergy
