- For an analysis in the English language see Hammer, U, and Oestensen, T M, ‘The Main Features of the New Petroleum Act’, Marius, 1985, and Krohn, M, Kaasen, K, Lund, M, Rein, J, and Sogn, P C, Norwegian Petroleum Law, Olso, Sjoerettsfondet, 1978. A complete and more updated overview is given in Hagen, L, Hammer, U, Michelet, T G, and Stang, T, Petroleumsloven, 1989, Tano, Oslo; see also Selvig, E, Petroleumsrett til studiebruk, Oslo, Nordisk Institutt for Sjoerett, 1995. A new law on petroleum activity was issued on 29 November 1996.
- A shorter overview of the Norwegian system, and its placement in the international picture of oil legislation, can be found in Daintith, T, The Legal Character of Petroleum Licences: a Comparative Study, University of Dundee, Centre for Petroleum and Mineral Law Studies, 1981, 185–199; Hossain, K, Law and Policy in Petroleum Development, London, Frances Printer (publishers) Ltd, 1979, 100–109, and Smith, E, Dzienkowski, J S, Anderson, O L, Conine, G, and Lowe, J S, International Petroleum Transactions, Denver, Rocky Mountain Mineral Law Foundation, 1993, 330–334; see also Smith, E, and Dzienkowski, J S, p 50-Year Perspective on World Petroleum Agreements’, Texas International Law Journal, 1989, 13–46. The ‘contractual’ system will be examined below, under §2.
- The distinction between what is agreed between the parties and what is set unilaterally by the state is not always readily recognisable: some significant modifications operated by the Norwegian government in the early 1970s on the original oil regulation of the 1960s created an intense debate in the Norwegian legal environment, the two poles of which are represented respectively by Braekhus, S, Tillatelser til utvinning av petroleum paa den norske del av kontinentalsokkelen, Oslo, 1975, and Fleischer, C A, ‘Grunnlovens §97’, Jussens venner, 1975, 183–253. The actual cases that started this debate were never presented to court, so the relevant uncertainties have remained unclarified.
- Those conditions of the licence that can be considered agreed between the investor and the state are to be considered binding on the state, and can be amended only in accordance with the strict criteria set for administrative contracts (see Bernt, J F, ‘Forvaltningsavtaler’, Institutt for Offentlig Rett, Bergen, 1975, 1–32). In a case involving modifications of the timing for payment of royalty, which prejudiced the liquidity of oil investments, the state was condemned by the Supreme Court for having unduly modified the agreed conditions of a licence: Norsk Retstidende, 1985, 1355–1392, commented by Mestad, O ‘Hoegsterettsdommen i produksjonsavgiftsterminsaka’, Marius 1986, 118.
- See for example a presentation of Norwegian oil policy in Daehlin, K, ‘Maal og midier I konsesjonspolitikken’, in Selvig, lc, 289–304.
- For a list of oil-related legislation in Russia until 1994, as well as a discussion of its contradictions and the problems arising therefrom see Konoplyanik, A, ‘Kontseptsya Legalizatsii Soglashenij o Razdele Produktsii b Rossii: Klyuchevje Aspektj’, Konoplyanik, A, and Subbotin, M, Gosudarstvo i Investor: ob Iskusstbe Dogovarivatsya, Vol 2, Moscow, Folio, 1996, 21–43. The first major law in this field was the Law on Underground Resources of 21 February 1992. For a quick overview of some of the effects that the absence of comprehensive legislation may have on oil investments see Starr, R, Foreign Participation in Oil and Gas Projects in the Former Soviet Union: a Legal Perspective, Journal of Energy and Natural Resources Law, 1994, 4, 442–451.
- A list of all major projects considered by foreign investors shows that in 1995 none of the projects had been launched yet: Konoplyanik, A, ‘Kak Utolit Investitsionnij Golod?’, Konoplyanik and Subbotin, Gosudarstvo i Investor, oc, Vol 2, 83f.
- A description of this conflict can be found in Wälde, T W, ‘Foreign Investment in CIS Oil and Gas and its Implications for Other Countries, OPEC Bullettin, 1994, 7, 16–20, 18, and Wälde, T, ‘International energy Investment’, Energy Law Journal, 1996, 191–215, 198f.
- On the decline of oil production m Russia and its causes see Konoplyanik, A, ‘Rossiskaya Neftynaya Promishlennost: Nalogovoe Zakonodatelstvo y Inostrannie Investitsii’, Konoplyanik and Subbotin, Gosudarstvo i Investor, oc, Vol 1, 106–108; see also, for example, Doria, J P, and Khartukov, E M, ‘International Oil and Gas Investments in the CIS States’, Wälde, T, The Energy Charter Treaty, London, Kluwer Law International, 1996, 37–67, 47ff, Stoleson, M A, ‘Investment at an Impasse: Russia's Production Sharing Agreement Law and the Continuing Barriers to Petroleum Investment in Russia’, Duke Journal of Comparative and International Law, 1997, 7, 671–689, 673ff, and literature referred to in footnotes 17, 18, 23–26.
- In the practice of international business the concept of ‘creeping expropriation’ has recently been introduced, defining the situation by which a plurality of small modifications of the legal system, particularly the taxation system, gradually transfers the bulk of profit from the investor to the state. The economic result may be that of an expropriation, but no expropriation was effected from a formal viewpoint. Risk insurance against the risk of creeping expropriation is now offered, for example by the MIGA, the agency that provides investment guarantees for the World Bank; see also Seek, A, ‘Investing in the Former Soviet Union's Oil Industry: The Energy Charter Treaty and its Implications for Mitigating Political Risk’, Wälde, The Energy Charter Treaty, oc, 110–134, 114ff, Khatukov, E M, ‘Investing in Russia's Oil and Gas: Fiscal terms, Risks and Rewards’, Oil and Gas Law and Taxation Review, 1994, 119–125, presents a thorough analysis of the Russian fiscal system and concludes that, even if it is not heavier than the fiscal burden of other countries, combined with Russian political instability it creates a serious obstacle to foreign investment.
- The conflict is described by Kryukov, V ‘The Changing Role of the Regions in Solving the Problem of the Russian Oil Industry: From Words to Action’, OGLTR, 1995, 2, 51–61.
- For a very clear presentation of the factors that prevented foreign investment at the time referred to in the text see Konoplyanik, A, ‘The Russian Oil Industry and Foreign Investment: Legal Aspects and the Problem of Business Risk’, in Wälde, T W, and Ndi, G K (eds), International Oil and Gas Investment—Moving Eastward?, London, Graham & Trotman Ltd, 1994, 181–194. The same author does not hesitate to define the Russian investment climate as unstable and unfriendly: ‘Kontzettsya Legalizatsii’, oc, Konplyanik and Subbotin, Gosudarstvo i Investor, oc, Vol 2, 26–34.
- In the work of which the author has participated for some time, in her capacity as attorney to a Norwegian oil company.
- The experience of the Russian-American joint venture White Nights has become a classic example of the difficulties encountered by oil investments under the Russian concession system: during the first three years of activity the project was affected by, among other things, the introduction of seven new distinct taxes in addition to the four that existed at the moment of launching the investment, as well as by eight changes of the already existing taxes: Note, ‘Risks in Russia Remain High as New Taxes Proliferate’, EEE, 1993, 17, 8. See also Khartukov, E M, ‘Russia's Oil Taxation: Strangling the “Golden Goose”, OGLTR, 95, 11, 447–452. The tax system is still extremely volatile, so much so that the US-Russia Business Council's Trade and Investment Forecast ′97, discussed on 1 April 1997 in Washington DC, concluded that ‘in Russia it is clear that the lack of certainty about taxes is deadly for the economy’ (Note, ‘Experts Say Tax Policy Must Be Key Russian Economic Takeoff’, Russian and Commonwealth Business Law Report, 1997, 2, 8).
- The advisory process can be followed nearly step by step in the monthly issues of the most authoritative newsletter directed to oil industry, Russian Petroleum Investor, especially in the years 1994 and 1995.
- For a complete historical view see Gao, Z, International Petroleum Contracts, London, Graham & Trotman, 1994, 59–103, Hossain, lc, 138–158, and Smith, Dzienkowski, Anderson, Conine and Lowe, lc, 334–349. Wälde, T, ‘International Energy Investment’, Energy Law Journal, oc, 200ff, describes the advantages of the PSA model in terms of stability of the fiscal conditions.
- For a very clear overview of the change from early concessions to participation see Smith and Dzienowski, lc, 26–35. See also Gao, lc, 9–21, and Wälde, T, ‘International Energy Investment’, lc, 191 f.
- In some jurisdictions the Government Take replaces taxes with the exception of income tax and royalties, which have to be paid separately by the investor: see Hossain, lc, 145–156, and Smith, Dzienkowski, Anderson, Conine and Lowe, lc, 342–349.
- Art 12.2 of the Law on Underground Resources regulates the content of a licence for the use of mineral rights, and states inter alia that mineral resources can be utilised under different contractual forms, ‘such as a production sharing contract, a service contract’. The production sharing contract is not specified any further.
- Law on Foreign Investment of 4 July 1991, art 40.
- For a more detailed analysis of this matter see Cordero Moss, G, ‘Draft Russian Law on Production Sharing Agreements to Give Needed Legal Framework to Petroleum Investments?’, Survey of East European Law, 1995, 1, 5–11.
- For an overview of oil and gas regulation before the perestroika see Camplbell, G P, ‘Russian Energy Law’, I, OGLTR, 1993, 3, 84–92, 85ff.
- An English translation is published, ia, in International Legal Materials, 1996, 1251, with introductory note by Wälde, T W, and Friedrich, M. Prior to this enactment an intense parliamentary debate had taken place; several PSA- law drafts had been presented, one had even been approved in the first reading: see Cordero Moss, G, ‘Petroleum Legislation in Russia—Draft PSA law Approved in the First Reading’, SEEL, 1995, 4, 11–13, and Hober, K, ‘A Game Called Russian Oil: Trading Oil in the Former Soviet Union. Recent Developments’, JERL, 1995, 2, 96–107, 100. A first attempt to regulate PSAs in 1993 by a Presidential Decree (decree No 2285 of 24 December 1993), the effectiveness of which was seriously questioned on the basis of constitutional law and other considerations: see Konoplyanik, ‘Kontseptsya Legalizatsii’, oc, Konpolyanik and Subbotin, Gosudarstvo i Investor, oc, Vol 2, 35–43; see also Cordero Moss, oc, SEEL, 1995 1, 7–8.
- The Petroleum Advisory Forum was not the only western source of advice to Russia in the field of oil legislation: another major actor was the World Bank, together with the University of Houston: see Wälde, T W, ‘Oil and Gas Legislation in Russia’, in Wälde and Ndi, lc, 235–236. The major lines of advice of these two groups, however, were not in contradiction with each other: for a comparison of the two drafts see Friedrich, M, and Diatchkova, E, ‘The Two Drafts of the Russian PSA Law: a Review’, OGLTR, 1995 (Supplement) 3, i–viii.
- A partial solution to the problems that this conflict might create is given by the PSA law in the field of taxation, by permitting the investor to decrease the Government Take in a way that compensates for any taxes or duties local authorities might impose on petroleum operations notwithstanding the PSA principle that the Government Take replaces any taxes and duties (art 13.1). This shows a clear political will to implement the principles of PSAs in spite of an internal conflict situation that undermines the state's ability to enter into such contractual commitments; however, the mechanism of art 13.1 might result in inadequate compensation where the rate of inflation is higher than the interest rate of the Central Bank, unless compensation takes place promptly.
- This conflict resulted in a compromise that can create difficulties in interpreting the PSA law: art 4 assumes that the mineral rights of the investor are certified by a licence, and makes reference to the Law on Underground Resources of 1992. Even if the text suggests that licensing authorities are obliged to issue a licence in accordance with the terms of the relevant petroleum contract (thus implying that the PSA law-based contract prevails over the licensing requirements of the Law on Underground Resources), the PSA law states elsewhere (art 2.2) that petroleum contracts may not conflict with the Law on Underground Resources; moreover, the licence continues being a document regulated by principles of administrative law, and can be unilaterally revoked by the issuing authorities under certain circumstances (for example, if the investor fails to comply with any terms of the licence; one of the terms being the expected rate of production, that by definition is quite unlikely to be actually met by actual production, the investor must therefore live with the threat of a permanent ground for revocation of the licence).
- Art 6 of the PSA law gives parliament the authority to approve a series of petroleum contracts, thus adding a new round of negotiations and a new counterparty to the list of negotiations that the investor must face.
- Another matter is the question of hierarchy among legislative acts: the acts that rank lower in the hierarchy cannot amend the acts that rank higher. The highest rank (under the constitution) is federal law (adopted by both chambers of parliament), followed in turn by normative acts of parliament, decrees of the president, normative acts of the government: see Sukhanov, E A, Grazhanskoe Pravo, Moscow, Bech, 1994, 1, 31–33.
- Civil Code of 21 October 1994, arts 4 and 422; see also Sukhanov, lc, 36–37.
- Examples of this drafting tradition are to be found for instance in the Law on Foreign Investment: foreign investors may acquire ‘property which in accordance with legislation in force on the territory of the RSFSR may belong to foreign investors’ and may effect activity ‘not prohibited by legislation in force on the territory of the RSFSR’, and the currency shall be determined by ‘the procedure and on the conditions determined by legislation in force on the territory of the RSFSR’ (art 3). Many similar references to prevailing legislation are made in the rest of this law and in practically all other laws issued in Russia.
- In the words of one of the most central actors in the development of the PSA law ‘the law's supporters have been trying hard not to let the law be ruined by the conciliatory commission which from the very beginning was inclined to destroy the law under the pretext of “protecting the state's interests”. Unfortunately, not all attacks have been repelled’: Konoplyanik, A, ‘The Russian Production Sharing Agreement Law’, OGLTR, 1996, 7, 314–315.
- Art 17.2 of the PSA law gives the ability to agree on such adjustment mechanisms on a case-by-case basis. Apart from the fact that the efficiency of any such mechanism would depend on the result of each negotiation, it can be conceived that certain subsequent modifications, operated unilaterally by law, might be so extreme that no compensation is possible: for example, the introduction of high export tariffs, or of severe export limitations, so that proceeds from the export are reduced to such an extent that no adjustment of the split between Profit Oil and Government Take could match the losses of the investor (assuming that domestic oil price is still state regulated and considerably lower than world prices).
- Art 18 of the PSA law prevents normative acts of central and local authorities from restricting the rights that the investor has under the production sharing agreement (with the exception of acts in the field of safety, health and environment, as well as acts taken for the purpose of ensuring the social and state security). References to Russian legislation elsewhere in the PSA law, however, limit the scope of this article: art 9.2, for example, reserves any limitation contained in the Law on State Regulation of Foreign Trade Activities of 13 October 1995, which grants to the Government the authority to introduce export quotas or a licensing system.
- In some instances the state is not willing to submit to foreign national laws, therefore loose formulations are used to determine the law governing the agreement, such as ‘general principles of law’, ‘principles recognised by civilised nations’, or the cumulation of the host country's law with general principles or rules of international law (see for example Smith, Dzienowski, Anderson, Conine and Lowe, lc, 94–100). The Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 1965 provides for such a formulation and an autonomous body of independent arbitration.
- Law on International Commercial Arbitration of 7 July 1993, art 1.2; this law regulates arbitration proceedings that take place in Russia; limitations to arbitrability that are valid for proceedings within Russia must a fortiori be valid for proceedings that take place abroad, since the rationale of such limitations is to prevent matters of public law character being submitted to bodies other than judicial courts of the competent state jurisdiction. With respect to international arbitration, Russian regulations on arbitrability are relevant if the arbitral award is to be enforced in Russia; to what extent such regulations would be recognised abroad depends on how the foreign court requested to enforce the arbitral award construes the New York Convention of 1958 on Recognition and Enforcement of Arbitral Awards.
- The matter is discussed by Konoplyanik, A, Sosna, S, and Subbotin, M, ‘Russia is Looking for Concession Legislation’, OGLTR, 1995, 6, 246–250. Some authors read the enacted PSA law in the context of this preparatory debate, and conclude that the law has actually transported PSA relationships from the administrative law to the civil law sphere: see, for example, Konoplyanik, oc, OGLTR, 1966, 7, 315, and Wälde, T W, and Friedrich, M, oc, ILM, 1996, 1251 ff. However, the wording of the law's text does not explicitly mention this transfer, and it can be questioned whether such an important modification to the legal system can be effected implicitly. Stating that this does not follow necessarily from the text of the law see also Makhalina, M I, ‘Legal Aspects of the Russian Federal Production Sharing Agreement Law’, OGLTR, 1996, 7, 310–313, 310.
- Besides extensive work on the PSA law, the Russian legislative environment is very active in the oil and gas field, and several laws have been proposed, some adopted, and some adopted and promptly amended (laws on oil and gas, on concessions, on the continental shelf, on licensing of the use of the subsoil); in addition, frequent amendments are earned out also on existing laws, such as the Law on Underground Resources and the Law on Foreign Investment. These developments are followed closely by industry journals and newsletters, such as Russian Petroleum Investor. To this day, however, the legislative framework is not considered satisfactory by a number of actors, at least with respect to the projects that have long-term profile.
- An Omnibus Law’ was drafted and presented to parliament, to amend all Russian laws that were in contradiction or not compatible with the PSA law; however, parliament rejected the law several times. For an overview of the legislative work subsequent to the adoption of the PSA law, see Bean, B W, and Jenkyn, A M, ‘Legislative Delay Hinders Benefits of Russia's Law on Production Sharing Agreements’, RCBLR, 1997, 6, 3–5.
- For example, a Governmental Resolution of 21 May 1997 (No 708-r) instructs the State Customs Committee to exempt from import duties any equipment imported under a production sharing agreement; this is to implement art 13 of the PSA law, that enumerates the taxes and duties that are not covered by the Government Take (ie that have to be paid separately by the investor). Import duties are not listed in art. 13, it follows that they are not payable by the investor; it seems therefore that Resolution 708-r has simply implemented a principle contained in the PSA law. However, a principle of Russian law is that any exemption from existing taxes shall be introduced by general tax legislation (art 23 of the Law on the Principles of Budget Organisation and Budget Process in the Russian Federation of 10 October 1991). The PSA law, therefore, is not sufficient basis to issue Acts that are not in compliance with tax- legislation, and Resolution 708-r, that exempts from payment of import duties, is probably not valid.
- On the impact of foreign legal advice on the reforms in Russia see, more generally and with extensive reference to literature and legal sources, Ajani, G, ‘Legal Transplants in Russia and Eastern Europe’, The American Journal of Comparative Law, 1995, 93–117, Gunderson, J L, and Wälde, T W, ‘Legislative Reform in Transition Economies: Western Transplants—a Short-cut to Social Market Economy Status?’, International and Comparative Law Quarterly, 1994, 347–378, Cordero Moss, G, ‘Russian Legislation and Foreign Models. Some Observations on Comparative Law’, Tidskrift for Rettsvitenskap, 1997, 4, 766–791.
- It has been correctly emphasised that not always present Western models are suitable for transplant into post-socialist systems, since they may ‘reflect a preference for mass protection (of consumers and buyers) over the needs of pure economic development’ (Ajani, oc, 115). Supporting legal evaluations with economic analysis would necessarily prolong the process of legal reforms; to meet specific requirements in a shorter timeframe it has been suggested by some authors to proceed in a gradual manner, introducing initially ad hoc legislation which addresses specific transactions or groups of transactions (Gunderson, Wälde, oc, 370f). The experience accrued on this basis could then be used to prepare more elaborate legislation without running the risks connected with direct transplants (Wälde, oc in Wälde and Ndi, oc, 238f). As mentioned above, in countries having a developed legal system it might be difficult to introduce an ad hoc regulation without affecting the rest of the system, and incompatibilities might arise between the new regulation and the existing framework.
Journal of Energy & Natural Resources Law
Volume 16, 1998 - Issue 2