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Shelved Commodities: Cabinet Divided on Offshore Plans

The Russian government has been unable to adopt a program of developing reserves on the continental shelf for quite a number of years. Various ministries insist on different versions and one of them has proposed to split the program in two independent parts. 

No Agreement in Sight 

Minister of Natural Resources and Ecology Yuri Trutnev sent a letter to the Cabinet of Ministers in late April offering a radical solution for the conflict around the governmental plan of continental shelf development. He suggested drafting two parallel documents: his ministry would make an exploration program and the Ministry of Energy, a development program. 

Deputy Prime Minister Igor Sechin reacted on May 12 giving the Ministries of Natural Resources, Energy, Industry and Trade, and Economic Development ten days to draft joint proposals on the idea of Trutnev. To date, these governmental organizations have been ignoring the orders of Putin’s deputy. No concerted opinion seems to be in the making. 

The natural resources minister was apparently sick and tired of having to coordinate efforts with conservative colleagues at the energy ministry after the ordeal of ironing out inconsistencies in amendments to the mineral legislation. The straw that broke the camel’s back was the energy ministry’s veto on an amendment that would have expanded the list of eligible offshore operators by adding subsidiaries of state companies. 

Prime Minister Vladimir Putin in January instructed the ministries of natural resources and energy to jointly prepare and adopt a draft long-term program for the continental shelf. The deadline is December 1, 2011. Trutnev is not optimistic about the timeframe. 

‘The work on different versions of the document, which is dubbed a concept, a strategy and a program, has been going on since 2006, and the agencies in charge were the Ministry of Economic development and the Ministry of Energy,’ he wrote in the letter to the Cabinet leading the readers to an undeniable conclusion: the approach was wrong. The only solution, he claimed, was to split the document in two parts, ‘considering the need to follow the historically proven and efficient practice of organizing exploration work in stages.’ 

Trutnev’s Trick 

The part of the program, which Trutnev’s ministry is ready to draft, would focus on geophysical and geological exploration on the continental shelf through 2030, the duration of the current Energy Strategy of the Russian Federation. 

Another goal of the natural resources ministry is to use this job for amending the current discriminatory regulation of access to offshore licenses. To do it, Trutnev proposes splitting the exploration program in two scenarios. One would demonstrate how poorly the offshore program might go ahead under the current regime of access; and the other scenario would require amendments to the legislation to enable more operators obtain licenses, legitimize exploration on terms of risk, and increase financing from both private and state sources. 

It is not difficult to guess which of the scenarios is expected to yield the desired increase of proved and probable reserves on the Russian continental shelf. If the government adopts it, the amendments to the mineral legislation would become a must—regardless of the energy ministry’s resistance. 

Unwanted Aliens 

‘We have submitted two draft laws to the government to define the status of offshore operators,’ Deputy Director of the natural resources ministry’s State Regulation Department Darya Vasilevskaya told RusEnergy. ‘One draft makes access to offshore licenses possible for companies with experience in foreign projects. The other one makes subsidiaries of state companies eligible for obtaining such licenses.’ 

Both amendments used to be parts of one draft bill, which the ministry submitted to the Cabinet in the fall of 2010. The energy ministry, however, objected to the inclusion of subsidiaries and the document went back to the Ministry of Natural Resources for making corrections. Now the amendments have returned to the Cabinet in the form of two separate bills even though they address the same Article 9.3 of the Law on Subsoil. 

Here is how an official of the energy ministry explains its attitude: ‘We are aware that it is impossible to drill wells on our continental shelf without assistance of foreign partners. But we believe that the selection of the companies for this job ought to be more meticulous.’ The ministry is convinced that tree state companies and the current set of regulations are enough to attract international partners. 

Resistance Fighters 

Trutnev’s proposal to split the responsibility for drafting the governmental plan does not suit the energy ministry either. In his letter, Trutnev wants the Ministry of Energy and Ministry of Industry and Trade to prepare a program ‘aimed at development of discovered reserves, enhancement of national servicing and shipbuilding sectors, and development of offshore oil and gas producing centers.’ 

In fact, he asks the government to allow his ministry to manage surveying and exploring on the continental shelf (using a collection of investment encouraging instruments) and delegate the task of dealing with upstream investors at subsequent stages to the other ministries. 

The energy ministry argues that the exploration and development phases cannot be separated and the regulatory base must be unified to address all the issues. Ideologically, the position of this ministry is closer to the attitude of Sechin, and the fate of Trutnev’s liberal proposals is rather dubious. They are unlikely to be accepted unless the price of oil declines significantly. 

In National Interests? 

If the amendments proposed by the Ministry of Natural Resources and Ecology are accepted, Article 9.3 of the Law on Subsoil would read approximately as follows: 

‘Subsoil users on continental shelf blocks of federal importance can be legal entities, which were established according to the legislation of the Russian Federation, possess at least five years of experience of geological studies, exploration and development of continental shelf blocks of the Russian Federation or abroad, and in which the Russian Federation’s equity interest is more than 50% and/or the Russian Federation can directly or indirectly manage over 50% of total voting stock in such legal entities and their business subsidiaries.’ 

The ministry intentionally omits the requirement for the parent state company to control 100% of its subsidiary. The idea is to make access to offshore projects legitimate for all joint ventures with foreign stakes of up to 49%. ‘Such joint ventures cannot apply for licenses as Rosneft of Gazprom do. We want them to have this right too,’ Darya Vasilevskaya said. 

The stakes Rosneft can offer to foreign partners in offshore projects (e.g. in its abortive alliance with BP or in Black Sea projects with Exxon Mobil and Chevron) are the maximum it can cede under the current version of the Law on Subsoil. ‘Our experts have calculated the size of it with utmost precision,’ Rosneft spokesman Rustam Kazharov assured RusEnergy. 

The government holds 75.16% of Rosneft through its arm Rosneftegaz. Another 9.44% of Rosneft belongs to Rosneft-controlled RN-Razvitie and the remaining stock is in the hands of private shareholders. In each of the company’s offshore JVs the state indirectly controls 50.13%. A foreign partner can get 33.3%, the maximum allowed by the legitimate proportion. 

If the government decreases its stake in Rosneft to 51%, as it intended, the company will be unable to form joint ventures for operations on the Russian continental shelf. This is exactly what Gazprom cannot do because the state controls only 50.002% of its voting stock. 


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