Energy: Oil and Gas 2019

Last Updated August 09, 2019

Russia

Law and Practice

Authors



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Russian law provides that the Russian Federation is the sole owner of all rights to the subsoil and natural resources (including hydrocarbons), and such rights are inalienable. Oil and gas companies may only obtain rights to 'use' the subsoil, and these rights may only be granted by the Russian State to public and private legal entities in the form of a licence. Ownership title to extracted oil and gas generally passes to the licence-holder from the moment of extraction.

The following State bodies are involved in and responsible for the oil and gas industry in Russia:

There are several agencies and services within the jurisdiction of MNR. The Federal Agency on Subsoil Use (Rosnedra)  acts on behalf of the State in various matters that refer to the subsoil use, administers the State system of licensing of subsoil use and is responsible for control over relations between the State and subsoil users. Rosnedra works through the network of its territorial departments that are actively involved in licensing issues, including in auction and tender procedures.

Another authority within the jurisdiction of MNR is the Federal Service on Supervision in the Sphere of the Natural Resources Use (Rosprirodnadzor). Rosprirodnadzor monitors compliance with ecological legislation, geological surveys, and efficient use and protection of subsoil resources, and performs inspections on the compliance of the subsoil users with the legal requirements of subsoil use and licence conditions. Rosprirodnadzor acts through its territorial departments.

The Federal Environmental, Industrial and Nuclear Supervision Service (Rostekhnadzor)  is responsible for control over the safe use of subsoil resources, and monitors compliance with industrial safety standards and environmental regulations.

The oil and gas industry in Russia is under the strict control of the Federal Antimonopoly Service (FAS), which performs a supervisory role over the fuels and energy sector, monitors the prices of petroleum products, controls natural resources management (tenders and auction for the right to use subsoil), controls gas prices, and sets tariffs for gas and oil transportation via pipelines.

As of today, the Russian oil and gas industry has participation from private companies as well as several major oil and gas companies in which the Russian State holds a controlling stake.

Oil and gas companies with a State-controlled stake include the following.

  • PJSC Oil Company Rosneft (Rosneft) is an upstream and downstream company, in which the Russian government controls a 50.01% interest. Rosneft develops oil and gas onshore and offshore fields, has its own processing plants and participates in a number of projects abroad.
  • PJSC Gazprom (Gazprom) is a major developer of natural gas. Gazprom’s main business is the development, processing, transportation and sale of natural gas. Gazprom owns the Unified Gas Supply System (UGSS), Russia’s largest gas pipeline system. The Russian government holds a 50.23% interest in Gazprom.
  • PJSC Gazprom neft (Gazprom neft) is a 95.68%-owned subsidiary of Gazprom. It develops and processes oil and gas, and produces and sells petroleum products. Gazprom neft is engaged in several onshore and offshore projects. One of its key offshore projects is Prirazlomnoye, an oil development project on the Russian arctic continental shelf.
  • PJSC Transneft (Transneft) is an owner and operator of the oil trunk pipeline system. It provides transportation services for crude oil in Russia and abroad. The Russian government holds a 78.55% interest in Transneft.
  • JSC Transnefteprodukt (Transnefteprodukt) is a 100%-owned subsidiary of Transneft. Transnefteprodukt transfers light petroleum products through its pipeline system.

The oil and gas industry is subject to various laws governing prospecting, development, production, taxes, labour standards, health, industrial safety, environmental protection and other matters. The following laws (amongst others) regulate the oil and gas industry in Russia.

  • The principal law governing the use of minerals and the subsurface in Russia is the Law of the Russian Federation No 2395-1 “On Subsoil” dated 21 February 1992 (Subsoil Law), which is regularly updated in accordance with applicable procedures and is supplemented by various subordinate regulations. The Subsoil Law sets out the basic principles and features of the licensing and regulatory framework for the oil and gas industry, and contains rules governing the issue, transfer, surrender and revocation of licences for subsoil use.
  • Federal Law No 187-FZ “On the Continental Shelf of the Russian Federation” dated 30 November 1995 (Continental Shelf Law) contains provisions related to (i) the exploration and development of mineral resources located within the continental shelf; (ii) construction of artificial islands, structures and pipelines; and (iii) drilling activities.
  • Federal Law No 69-FZ “On Gas Supply in the Russian Federation” dated 31 March 1999 (Gas Supply Law) is the basic framework of the gas supply system in Russia. This law regulates, inter alia, the following:
      1. the scope of authorities of the federal state bodies and local authorities in terms of gas supply;
      2. conditions of development of the Russian gas market;
      3. gas pricing and tariff policy; and
      4. access to the gas transportation system.
  • Federal Law No 117-FZ “On Export of Gas” dated 18 July 2006 (Gas Export Law) regulates the issues of gas export (including LNG).
  • Federal Law No 147-FZ “On Natural Monopolies” dated 17 August 1995 (Natural Monopolies Law) should be taken into consideration as the business activity of oil and gas companies are under the strict control of FAS. The law regulates, inter alia, the following: (i) the sphere of activity of natural monopolies (pipeline transportation of oil, gas and petroleum products); and (ii) the rights and liabilities of natural monopolies.
  • Federal Law No 99-FZ “On Licensing of Certain Types of Activities” dated 4 May 2011 (Law on Licensing) establishes the list of activities that demand obtaining a licence.
  • Federal Law No 57-FZ “On the Manner of Conducting Foreign Investments into Companies Having Strategic Significance for Securing the Defence of the Country and the Security of the State” dated 29 April 2008 (Law on Strategic Entities), which establishes the limitations for foreign investors who wants to acquire control in an oil or gas company engaged in development of Subsoil Plots of Federal Significance (as they are defined below).
  • Federal Law No 16-FZ “On Foreign Investments in the Russian Federation” dated 9 July 1999 (Law on Foreign Investments).
  • Federal Law No 7-FZ “On Environmental Protection” dated 10 January 2002 (Environmental Protection Law) is a legal framework for environmental protection. It governs all aspects of petroleum operations that can affect the environment.
  • Federal Law No 116-FZ “On Industrial Safety of Hazardous Industrial Objects” dated 21 July 1997 (Industrial Safety Law) obliges companies to ensure that they operate hazardous industrial facilities in a safe manner.
  • Federal Law No 225-FZ “On Production Sharing Agreements” dated 30 December 1995 (PSA Law), which regulates the (i) terms, scope, tax aspects, liability and termination of PSA; and (ii) warranties of an investor.
  • “Regulations on the Licensing of Subsoil Use” approved by the Resolution of the Supreme Council of the Russian Federation No 3314-1 dated 15 July 1992 (although this legal act is currently effective, it is not generally enforced).

In addition, certain other laws, bylaws and regulations apply to the oil and gas industry in Russia. Currently there are several draft laws under consideration that could have significant influence on the subsoil use regulation (please refer to 6.4 Material Changes in Oil and Gas Law or Regulation for details).

The Subsoil Law establishes a licensing system for subsoil use in Russia. The licence for subsoil use is a document certifying the right of its holder to use a subsoil plot within specified boundaries in accordance with the purposes stated therein for an established period, subject to certain terms and conditions set out in the licence.

The most common way for a private investor to be involved in upstream activities in Russia is to become a shareholder of a legal entity that already has been granted an appropriate licence for subsoil use. Applicable legal restrictions and limitations regarding the acquisition of shares of subsoil users should be taken into consideration, especially for Strategic Subsoil Users (please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum).

As another option, it is possible to incorporate a new company in Russia and take part in auctions or tenders in order to be granted with the appropriate licences.

The Subsoil Law provides for the following types of licences for subsoil use:

  • exploration (including prospecting and evaluation);
  • detailed E&P; and
  • exploration (including prospecting and evaluation), detailed E&P (so-called combined licence).

The above-mentioned licences for subsoil use are issued by Rosnedra or its territorial departments (depending on the type of mineral, quantity of the reserves and location of the subsoil plot).

A licence for exploration (prospecting and evaluation) is the main permit/authorisation granting its holder the right to carry out exploration within the specified licence area. The Subsoil Law provides that the maximum term of a licence for exploration is five years. However, there is an exclusion stating that a maximum term of seven years may be granted for a licence for exploration of subsoil plots located (fully or partly) in the Northern and Far East regions of Russia. In addition, licences for exploration of offshore fields can be granted for ten years.

For carrying out production, a subsoil user must be granted with either (i) a licence for detailed E&P, or (ii) a combined licence. The detailed E&P licence or combined licence is issued for the lifetime of a mineral deposit, calculated on the basis of a feasibility study for E&P that ensures the rational use and protection of the subsoil (practically, such licences are granted usually for 25 years).

As a general rule, effective terms of all types of licences for subsoil use can be extended, provided there are no violations of the licence conditions made by the subsoil user.

Certain restrictions are provided for foreign investors in respect of the commencement of detailed E&P within the Subsoil Plots of Federal Significance (as defined below). Please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum for more details.

The Subsoil Law also provides for the possibility of granting a short-term (one-year) licence for subsoil use. Such a licence may be issued if the previous licence for subsoil use was terminated; however, the suspension of subsoil activities within the relevant subsoil plot is not possible (for example, due to technical reasons). In such a case, a temporary licence for subsoil use could be granted to the operator until a new licence for subsoil use is issued (to a new subsoil user).

Russian law provides for the production sharing agreement as a mechanism for Russian and foreign investments into the development of subsoil resources. However, in general, PSAs have practically become ineffective in terms of attracting foreign investments into Russian oil and gas projects as of the early 2000s. Currently there are only three PSA projects operating in Russia, all of which were approved in the 1990s.

Subsoil use through such form as risk service agreements is generally not common in Russia. However, this mechanism is becoming more popular, especially for the development of offshore projects.

As a general rule, licences for exploration (including prospecting and evaluation) are granted without a tender or auction based on applications filed with Rosnedra (or its territorial departments) by the interested subsoil users. The bidder is required to provide certain accompanying documents, including documents evidencing its financial and technical abilities. In the event that there are two (or more) applications filed in respect of the same subsoil plot, Rosnedra will organise an auction for granting the right to use the appropriate subsoil plot. As a result of such auction, the winner will be granted with a combined licence.

Subsoil licences for detailed E&P and combined licences are generally issued through tenders or auctions.

According to the Subsoil Law, the basic criteria for determining the winner of a tender are (i) the scientific and technical level of the geological survey, (ii) the completeness of mineral extraction, (iii) the contribution to the social and economic development of the appropriate region, (iv) the timing of implementation of working obligations, and (v) the level of protection of the subsoil and environment. It is anticipated that tenders will no longer be used as a mechanism for granting subsoil use rights in the near future.

The basic point for determining the winner of the auction shall be the amount of the lump sum payment for the right to use a given subsoil plot.

For the purposes of taking part in an auction or tender for the right to use subsoil, the applicant should, inter alia, provide the following information to Rosnedra:

  • information on financial capacity;
  • information in respect of available qualified specialists and technical facilities/equipment; and
  • detailed enquiries describing the technology for carrying out subsoil operations.

In the following cases a licence for subsoil use activities could be granted without a tender or auction procedure:

  • after the holder of an exploration (prospecting and evaluation) licence had made a commercial discovery, it can be granted with the production licence (there are certain restrictions applicable to the discovered Subsoil Plots of Federal Significance (as defined below); please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum for more details);
  • licences for carrying out subsoil use activities on gas fields located on the Russian continental shelf (the list of such fields is separately determined by the Russian government) are granted by the Russian government without auction; and
  • licences for subsoil use that are granted under a PSA.

Pursuant to the Subsoil Law, the payment system for the use of subsoil currently consists of the following payment obligations:

  • lump sum payments in cases specified in the licence for subsoil use;
  • regular payments for subsoil use (applicable for the stages of exploration and detailed exploration);
  • fees for the right to participate in tenders and auctions; and
  • other payments and fees set forth by the legislation of the Russian Federation on taxes and duties.

The taxation of upstream operations comprises of two taxes: (i) the Mineral Extraction Tax (MET), which generally corresponds to the internationally used category of 'royalties', and (ii) beginning from 2019, the Additional Income Tax (AIT), which generally corresponds to 'excess profit payment'. It is envisioned that AIT will apply to upstream operations at new subsoil fields with a low level of depletion, by reducing the fiscal burden compared to MET, thus allowing licence-holders to leverage the initial expenses incurred at the start of operations. Below is a detailed review of MET and AIT as applied to oil and gas operations.

MET

MET is a federal tax applicable to companies and individual entrepreneurs acting as subsoil users. MET taxpayers are required to register with the Russian Tax Service Inspectorate within 30 days from the date of State registration of the subsoil use licence.

Hydrocarbons for MET purposes include dehydrated, desalinised and stabilised crude oil, natural gas condensate (stabile condensate, a wide spread of light hydrocarbons and their products), associated gas from oil wells, other associated gas and methane from coal beds.

MET’s taxable base is defined as the net volume or weight of the extracted hydrocarbons (except for the hydrocarbons from new offshore hydrocarbon deposits, for which the MET taxable base is the value of extracted minerals). A special regime for determining the taxable base of MET on hydrocarbons from new offshore hydrocarbon deposits is established for a period ranging from 60 to 180 calendar months (depending on the specific offshore region) from the start of the commercial exploitation of the new offshore deposit.

The volume or weight-based MET rates

0% MET – associated gas from oil wells; natural gas from the Yamal and Gydan peninsulas within the volume of 250 billion cubic metres extracted within 12 years used for production of LNG; natural gas condensate from Yamal and Gydan peninsulas within the volume of 20 million tonnes extracted within 12 years used for production of LNG; hydrocarbons from internal waters, territorial seas, continental shelf of Russia and the Russian sector of the Caspian Sea where the depletion degree for each type of hydrocarbons as of 1 January 2016 is below 0.1% and the hydrocarbons were not registered in the State balance of mineral reserves as of the same date.

MET on crude oil = number of tonnes of crude oil multiplied by RUB919 multiplied by dynamics of oil prices factor minus the extraction factor. The extraction factor is a derivative of factors of depletion, reserves, difficulty of extraction and the specifics of the territorial location of the oil field. The dynamics of oil prices factor equals zero (hence, MET also equals zero) for super-viscous oils and certain hot oil and kerogen shales under certain conditions.

MET on gas condensate = number of tonnes of gas condensate multiplied by RUB42 multiplied by reference value of the item of reference fuel multiplied by difficulty of extraction factor multiplied by adjusting factor. The resulting derivative is further increased by 75% export duty on oil with certain further adjustments.

MET on natural gas = each 1,000 cubic metres of gas multiplied by RUB35 multiplied by the reference value of the item of reference fuel multiplied by difficulty of extraction factor. The resulting derivative is further increased by an average transportation tariff factor with further adjustments.

The value-based MET rates for new offshore hydrocarbon deposits:

  • Azov and Baltic Sea hydrocarbons – 30% MET for 60 months from the start of commercial use;
  • Black Sea (less than 100 metres depth), Pechora Sea, White Sea, Japan Sea, southern part of Okhotsk Sea, Russian part of Caspian Sea – 15% MET for 84 months from the start of commercial use;
  • Black Sea (over 100 metres depth), northern part of Okhotsk Sea, southern part of Barents Sea – 10% MET on oil and 1.3% MET on natural gas for 120 months from the start of commercial use; and
  • Kara Sea, northern part of Barents Sea, eastern part of Arctic ocean – 4-4.5% MET on oil and 1% MET on natural gas for 180 months from the start of commercial use.

AIT

AIT is in effect from 1 January 2019 and applies to licence-holders engaged in hydrocarbons’ exploration, exploitation, treatment and storage, as well as manufacturing of associated gas treatment facilities and leasing out of equipment to a third party performing all of the above.

The object of taxation is the additional income received from extraction of hydrocarbons on newly discovered subsoil plots in East Siberia, and small and underutilised fields in the old petrochemical provinces of West Siberia: (i) East Siberia (Sakha Yakutia, Irkutsk and Krasnoyarsk regions, Nenets region) and (ii) specifically carved-out territories in West Siberia with low degrees of depletion and low levels of reserves.

Additional income is the pre-calculated earnings from the sale of hydrocarbons reduced by actual expenses and further reduced by pre-calculated expenses.

Pre-calculated earnings are based on the international price for Urals reference crude oil and the domestic Russian gas prices. Actual expenses include generally all expenses associated with the exploration, extraction and transportation up to the pipeline, including major capital expenses, salary and wages of employees, and R&D expenses. The expenses are deducted in the tax period when incurred without regard to depreciation rules. The loss can be carried forward to next tax periods with a small multiplying factor of 1.163. The pre-calculated expenses are generally comprised of payable export duty and pipeline transportation expenses.

The tax period is one year and the tax rate is 50%. Payers of AIT are also obliged to pay MET, but at a much smaller nominal level.

Profits generated from the sale of hydrocarbons are subject to Corporate Profits Tax (CPT) and Value Added Tax (VAT).

The CPT applies to gross income reduced by allowable expenses, depreciation charges and deductions. The MET and AIT are also deductible in arriving at the CPT taxable basis.

The standard rate for both taxes is 20%. The CPT consists of federal (3%) and regional (17%) portions. The regional portion may be reduced by regional laws by not more than 4.5%, making the overall CPT rate as low as 15.5%.

A regional investment project provides a form of tax exemption that aims to attract investments to specific regions of Russia. Under regional investment projects, the federal portion of CPT (2%) is eliminated and the regional portion of CPT can be significantly reduced (in some cases below 10%). Under the regional investment projects regime, MET is also reduced during ten years with a complete exemption from MET during the first two years of the project. The property tax is also reduced (in some regions to 0%) under regional investment projects.

Tax exemptions and abatements of a similar nature are also available under the regimes of specially established priority social and economic development areas, and special economic zones.

There is no special tax regime applicable to petroleum operations, but production of petroleum and other fuels is subject to a fixed amount of excise duty.

Effective Russian legislation provides special conditions in respect of granting the right to explore and develop oil or gas fields located within the Russian continental shelf. Licences for such fields can be issued only to Russian legal entities (i) that have not less than five years’ experience of operating within the continental shelf of Russia and (ii) in which the Russian State controls (directly or indirectly) over a 50% share. For this reason, as of today, only Rosneft, Gazprom and Gazprom neft have been granted with subsoil use licences in respect of oil and gas fields located within the continental shelf of Russia. Due to sanctions imposed by the USA and EU on major Russian oil and gas companies, their activities in terms of offshore projects (including joint ventures with foreign partners) are suspended or limited.

Russia has taken measures to develop import substitution and local content policies in a number of sectors, including oil and gas. The Subsoil Law provides that one of the objectives of subsoil use licensing is, inter alia, advancement of the social and economic interests of the citizens of Russia and protection of the national security interests. While conducting an auction for the right to use a subsoil plot, the contribution of the participant to the socio-economic development of the territory is taken into account. Previously there was a common practice to include in the subsoil use licence obligations of the licence-holder to engage Russian legal entities and individuals for carrying out subsoil activities or implement other measures aimed at development of local infrastructure. After the licencing process was completed (please refer to 2.8 Other Key Terms of Each Type of Upstream Licence for more details regarding actualisation of licences), such a practice gradually ceased to be continuous. Practically, as of today, the licence-holders enter into different socio-economic agreements with local governments and administrations regarding their contribution to the development of local territories.

In addition, local content requirements are provided for in the PSA Law. The PSA Law sets an obligation of the investor to grant priority to Russian legal entities for participation in works under the PSA as contractor, supplier, transport operator or in any other way.

As a general rule, the subsoil user is allowed to proceed with development and production after it has:

  • duly approved oil and gas reserves, and bypass minerals located within the deposit;
  • agreed a field development plan and facility construction project (these documents are subject to mandatory approvals and expertise);
  • a mining allotment act that identifies specific boundaries of the mining allotment (issued by territorial departments of Rostekhnadzor); and
  • permission for use of land plots that are necessary for proper development and production of minerals.

Development plans should be prepared by the subsoil user (or by an engaged contractor) and are subject to mandatory co-ordination with Rosnedra. If a holder of an exploration licence who has at its own expense made a commercial discovery of a subsoil field, such holder is able to file an application to Rosnedra for granting the licence for production of minerals within the discovered field. However, the appropriate conversion of the licences is not an automatic process and is subject to cumbersome procedures and fulfilment by the applicant of multiple legal requirements.

Legal requirements in respect of the content of the licence for subsoil use are envisaged by the Subsoil Law. It is stated that, among other things, the licence for subsoil use should contain the following:

  • information regarding the subsoil user and State authorities that issued the licence;
  • purpose (type) of the licence (ie, exploration, detailed exploration, production);
  • boundaries of the subsoil plot granted for use;
  • effective term of the licence;
  • main deadlines for commencement of subsoil operations (including preparation of the development plan, reaching the designed production capacity, submission of geological information for state evaluation, etc);
  • payment conditions regarding the subsoil use;
  • agreed output levels;
  • conditions regarding the rational subsoil use, safety works and protection of the environment; and
  • procedures and deadlines for preparation and implementation of decommissioning plans for oil and gas fields, and land rehabilitation.

In February 2015 the Russian President initiated the process of one-time 'actualisation' of the subsoil use licences. This actualisation was completed by the end of 2016. The main purposes of such actualisation process were (i) to bring the licences to the unified standard format, to exclude an ambiguous interpretation of the licence terms and to rectify technical mistakes; and (ii) to make the transfer to the new system of control and management over the licences through the project documentation. For this reason, as of today, a significant amount of subsoil use licences do not contain specific deadlines for preparation of the exploration or development plans and volumes of works to be carried out – these requirements are currently stated in the project documentation. Practically, as part of the actualisation process, all subsoil users were given an opportunity to extend the existing conditions in relation to work obligations and to have the other licence terms amended.

Previously it was a normal practice when certain obligations of the subsoil user regarding the supply of oil and gas for domestic needs were stated in the subsoil use licences. As of today, such obligations are not covered by subsoil use licences. However, it is possible that licences might envisage the obligations of a subsoil user to construct certain infrastructure or facilities (plants or refineries).

As a general rule, it is possible to amend the terms and conditions of the subsoil use licence subject to compliance with certain requirements.

A licence for subsoil use terminates upon the expiry of its term, or at an earlier date on the grounds provided for by the Subsoil Law (or in the licence itself). The Subsoil Law and the licences for subsoil use generally provide for the following grounds under which the relevant licence can be revoked, suspended or limited:

  • violation of the 'material terms and conditions' of the licence for subsoil use and/or the project documentation, such as minimum work commitments or completing work to be carried out by specified milestones (there is no statutory definition of what is deemed to be a violation of the 'material terms and conditions', which has allowed this provision to be interpreted broadly);
  • repeated violation by the subsoil user of the subsoil regulations (practically, 'repeated violations' means three or more violations);
  • the failure to commence operations within the established timeframes or to produce required output volumes;
  • the occurrence of an emergency;
  • the emergence of a direct threat to the life or health of people working or residing in the area of subsoil use operations;
  • untimely payments of levies and taxes for the use of the subsoil;
  • liquidation of the licence-holder; and
  • a failure to submit reporting data and records.

Practically, the licences for subsoil use do not contain any specific provisions regarding the export of produced oil and gas. For a description of Russian legal regulation in the sphere of export of oil and gas, please refer to 3.12 Laws and Regulations Governing Exports for more details.

As mentioned in 2.1 Forms of Allowed Private Investment in Upstream Interests, the most common way for a private investor to take part in upstream activities in Russia is to acquire shares/participation interests in a Russian legal entity that has already been granted with licences for subsoil use.

In accordance with Russian law, the subsoil use licence itself (and the rights granted under such licence) cannot be sold, assigned, pledged or otherwise encumbered. As a general rule, a licence for subsoil use cannot be transferred. Meanwhile, the Subsoil Law permits the transfer of subsoil use rights in certain cases. Such cases include transfer of the subsoil use rights as a result of corporate reorganisation of the subsoil user.

The Subsoil Law also permits the transfer of subsoil use rights within a group of companies:

  • from a parent company to its subsidiary;
  • from a subsidiary to the parent company; or
  • between subsidiaries of the same parent company.

A licence-holder can also transfer its subsoil use rights to a newly created subsidiary established to carry out operations on a particular subsoil field, subject to the following conditions:

  • the newly established subsidiary is incorporated in the Russian Federation;
  • all relevant equipment and assets (including in-field infrastructure) required for proper performance of works envisaged by the relevant licence/project documentation are transferred to the newly established subsidiary;
  • the new subsidiary must have the required permits/ancillary licences that are necessary to carry out the subsoil activities; and
  • at the moment of the transfer of the respective subsoil use licence, the original licence-holder must own at least 50% of the charter capital of the newly established subsidiary.

Any transfer of subsoil rights mentioned above is subject to a special approval of Rosnedra (or its territorial department). The procedure of transfer of subsoil use rights could take up to 140 days. The terms and conditions of the appropriate licence for subsoil use cannot be revised or amended during the process of re-issuance (breach of this requirement could lead to early termination of the licence).

Transfer of the rights to use Subsoil Plots of Federal Significance (as they are defined in 4.1 Foreign Investment Rules Applicable to Investments in Petroleum) to the legal entities with foreign participation is generally prohibited, unless such transfer is exclusively approved by the Russian government.

As a general rule, Russian law does not set out specific production limits. It is common practice that production and output levels are determined by the licence for subsoil use or project documentation covering the extraction of oil and gas.

In general, the principles and objectives of oil and gas production are established by the Russian government in the Energy Strategy of Russia for the period up to 2030 (Strategy), among which further strengthening of relations and close co-operation with the Organization of the Petroleum Exporting Countries (OPEC) is indicated. Moreover, the Strategy contains indicators of the strategic development of the mineral resource base of the fuel and energy complex up to 2030. Based on these data, it can be assumed that the Russian State does not establish clear production quotas, but rather determines the development vector and predicts the production volume for a given period.

However, despite the fact that Russia is not a member of OPEC, Russia nevertheless participated in the preparation of a joint declaration on co-operation between OPEC countries and non-OPEC countries, which provides for the intention of all participants to adjust the volumes of oil production on a voluntary basis. In particular, according to the latest data, Russia should reduce oil production by 228,000 barrels per day. In June 2019, it was reported that during the previous month Russia reduced the average daily level of oil production by 317,000 barrels per day, thereby exceeding the obligations under the agreement by 39%. The agreement was concluded for the first half of 2019 with the possibility of revision and prolongation.

Three State-owned natural monopolies (Gazprom, Transneft and Transnefteprodukt) deal with trunk pipeline transportation of gas, oil and petroleum products. Oil transportation falls under Transneft’s responsibility. Transnefteprodukt is responsible for the movement of petroleum products. Gazprom operates the UGSS. Since the above-mentioned companies are natural monopolies, the transportation tariffs for their services are regulated by the FAS and Federal Tariff Service.

Being natural monopolies, these companies are subject to a third-party access regime (which depends on capacity availability) and regulated tariffs regime for transportation services under the Natural Monopolies Law. Details are covered in 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly.

There are no explicit legal restrictions for private ownership in respect of oil and gas plants, refineries and pipelines. There is certain draft legislation that provides that the Russian State must have at least 75% in the charter capital of the operator of the trunk pipelines. However, this draft law is not currently in the process of consideration.

In the case of privately owned pipelines, the relevant investor could be treated as a natural monopoly and subjected to applicable special rules and tariffs. Provision of services by an entity included in the register of natural monopolies in the areas of gas, oil and petroleum products transportation through trunk pipelines is an activity of strategic significance for ensuring the country's defence and the security of the State. For this reason the terms and conditions of the Law on Strategic Entities are applicable to such entities (please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum).

Transneft’s oil pipeline system operates pursuant to annual transportation contracts and is subject to regulated access. Access to capacity is allocated among oil producers on a non-discriminatory basis in proportion to the volume of oil planned to be delivered by each producer to the Transneft pipeline system. Priority for allocating capacity is given for supply to oil refineries located in Russia and for domestic consumption. Once access rights are distributed, oil producers generally cannot increase their allotted capacity in the pipeline system, although such producers have limited flexibility to change delivery routes. In general, oil producers are allowed to assign their access rights to other producers.

Rules for access to gas infrastructure are provided for in the Gas Supply Law and Natural Monopolies Law, under which monopolistic activity includes the transportation of natural gas through pipelines and the entities involved in it are considered as natural monopolies. State-controlled Gazprom owns the UGSS, which is the exclusive exporter of natural gas. As for intrastate regulation, Gazprom provides access to its trunk pipeline system on a non-discriminatory basis and distribution systems to any third party, subject to transportation capacity availability and other obligatory rules (for instance, conformity of a product’s quality and compliance with technical standards). When such access is given, Gazprom and the third party enter into a transportation services agreement. Refusal to grant access to a pipeline to a third party can constitute abuse of dominant position and can be challenged by an interested party and the FAS. If the consumer delays payment for gas supplies, the supply of gas may be limited or suspended.

Please note that the remainder of this section applies to downstream operations where private investment is permitted.

Russian law does not provide for a separate and a single licence for downstream/midstream operations. However, the companies involved in downstream/midstream activities are required to obtain certain technical licences and permits from authorities that are necessary for proper processing, refining, transportation and other similar activities related to oil and gas.

The Law on Licensing, as well as other laws and regulations, lists business activities that can only be performed subject to licences and permits, and establishes procedures for issuing such licences and permits. In particular, to conduct their operations in downstream/midstream areas, oil and gas companies may be required to hold licences and permits for, inter alia:

  • exploitation of explosive, flammable and chemically hazardous industrial facilities (of different classes);
  • collection, transportation, processing, utilisation, detoxification and placement of hazardous waste (of different classes);
  • transportation of hazardous goods via different types of transport;
  • discharge of pollutants into the environment; or
  • fire extinguishing on production sites and facilities.

In general, each type of licensed downstream/midstream activity is subject to a separate licensing regime. The above-mentioned licences are issued for an unlimited term. Oil and gas companies are able to engage contractors for certain types of work that require the appropriate ancillary licences.

In addition, various permissions and approvals are required for construction of facilities and infrastructure for downstream/midstream activities.

The downstream/midstream operations are not specifically singled out in the general tax regime in Russia. Please refer to 2.4 Income or Profits Tax Regime Applicable to Upstream Operations as a reference model of taxation of these operations.

Commercially, certain gas sale, gas transportation and oil transportation prices of Russian natural monopolies (Gazprom, Transneft, Transnefteproduct) are regulated by FAS. Among others, State tariff regulation applies to:

  • intra-Russian wholesale gas prices;
  • the gas main pipeline transportation price for independent gas producers;
  • gas transportation prices through pipelines belonging to independent gas transportation companies;
  • gas transportation prices through the gas distribution grid;
  • gas logistical/support service charges by suppliers to gas consumers;
  • retail gas prices to households, including liquefied gas;
  • the price for connecting the equipment to the gas supply service for end users; and
  • the price for oil transportation through main oil pipelines.

Downstream and midstream operations are not specifically singled out in the general tax regime in Russia. Please refer to 2.4 Income or Profits Tax Regime Applicable to Upstream Operations as a reference model of taxation of these operations.

In accordance with the Gas Export Law, Gazprom is the only company that has the right to export natural gas. Previously Gazprom also had the exclusive right to export LNG from Russia. However, Gazprom’s export exclusivity in terms of LNG export was terminated in 2013. Please refer to 3.12 Laws and Regulations Governing Exports for more details.

Local content requirements that are applicable to upstream operations are also relevant to midstream/downstream activities (please refer to 2.6 Local Content Requirements Applicable to Upstream Operations).

Key terms of each specific licence for downstream activities (listed in 3.3 Issuing Downstream Licences) vary and depend on the type of such licence. In general, the Law on Licensing provides a list of the main requirements applicable to the licensing of downstream activities:

  • legal title to premises and buildings, and other facilities used for the licensing activity;
  • existing qualified and professional employees;
  • existing production control system;
  • compliance with the applicable legal requirements and rules; and
  • compliance with the required insurance coverage (where applicable).

Licences for downstream activities could be suspended or terminated early on the grounds stated by the Law on Licensing.

Appropriate condemnation/eminent domain rights belong to the State, which has the right to seize the required land plots in several cases only. These cases include construction of gas or oil pipelines and infrastructure or any other objects of federal significance. The amount of compensation for a seized land plot consists of the market value of such land plot, losses caused by the seizure of a land plot (including losses arising from non-performance of obligations by the owners of such land plot to third parties) and the loss of profit. If, simultaneously with the seizure of land plots, the real estate objects located on such plots are seized as well, the market value of these real property objects shall be reimbursed.

Individuals and legal entities (including foreign ones) have the right to equal access to the acquisition of land plots into ownership, with the exception of border areas, the list of which is established by the President of the Russian Federation.

There are no specific provisions in Russian law that provide for open access rights to third parties in relation to the oil and gas infrastructure privately owned (unlike with pipelines operated by Gazprom and Transneft). However, the rendering of gas or oil pipeline transportation services by private entities may result in the natural monopoly regime under the Natural Monopolies Law being applied. Please refer to 3.2 Rights and Terms of Access to Any Downstream Operation Run by a National Monopoly for more detailed information.

There are no unbundling requirements in Russian law: both upstream and downstream business can be consolidated in one undertaking or holding, which is widely used in the Russian oil and gas sector. Such players are obliged to comply with Russian anti-monopoly laws and regulations.

In general, Russian legislation does not provide for specific restrictions or limitations on the sale of oil, gas and petroleum products into the local market other than licensing regulations described in 3.3 Issuing Downstream Licences.

Any sale or distribution of oil, gas and petroleum products in the territory of the Russian Federation should be compliant with antitrust regulations set forth by Federal Law No 135-FZ “On Protection of Competition” dated 26 July 2006 prohibiting abuse of dominance, discriminating conditions, cartel agreements foreclosing access to the market or territorial division, fixing prices and any other anti-competitive conduct.

If oil, gas and petroleum products are being sold within the territory of Russia, Belarus, Kazakhstan, Armenia and/or Kyrgyzstan (Customs Union) then the sale should be compliant with the competition requirements of the Eurasian Economic Union. In addition, Russian refineries are required to ensure the compliance of fuel sold in the Customs Union with the emission standards adopted pursuant to the Technical Regulation of the Customs Union "On Requirements on Automobile and Aviation Gasoline, Diesel and Marine Fuels, Jet Engine Fuel and Fuel Oil" dated 18 October 2011 (as amended).

As mentioned above, since oil and petroleum products transportation carried out by Transneft and Transnefteprodukt is considered as a monopolistic activity, these companies are qualified as natural monopolies.

In respect of exporting oil, access rights to oil pipelines are distributed among petroleum producers and oil retailers in proportion to the volumes of oil produced and delivered to the pipeline system of Transneft. The Ministry of Energy on a quarterly basis approves the schedules that provide the precise volumes of oil that each oil producer can pump through the Transneft system.

The UGSS (as defined above) is tasked with collecting, transporting, dispatching and delivering natural gas supplies in Russia and is owned and operated by Gazprom. The Gas Export Law grants exclusive rights to export natural gas to Gazprom and grants exclusive rights to export LNG to (i) Gazprom; (ii) legal entities that have licences for the development of subsoil plots of federal significance that (as of 1 January 2013) provided an obligation to construct an LNG plant (or an obligation to route natural gas in gaseous state to LNG plants for liquation); (iii) Russian legal entities with over 50% participation of the State that use oil and gas fields within the internal sea waters, territorial sea or continental shelf of the Russian Federation, the Black Sea or the Azov Sea and that produce LNG from natural gas in gaseous state extracted from the said oil and gas fields, or that produce LNG from natural gas in gaseous state extracted under PSA; and (iv) subsidiaries of the legal entities identified in (iii) above where such legal entities have over 50% participation in the voting rights of the subsidiaries and where such subsidiaries’ activities conform to the conditions described in (iii) above.

With respect to export of the natural gas in a gaseous state, Gazprom remains the sole entity with appropriate exclusive rights. Under the currently effective legislation, Gazprom must provide access to the UGSS to all independent suppliers on a non-discriminatory basis subject to available capacity and other factors.

The marine vessels’ and railway cars’ fleets are not dominated by natural monopolies – many oil and gas companies own (or lease from private owners) their fleets of river/marine vessels and railroad cisterns. Russian Railways is a State-owned company and it establishes tariffs for the transportation of hydrocarbons, but as a locomotion company it is not involved in State regulation of exports of hydrocarbons. Similarly, in some cases the atomic-powered icebreaker fleet, ultimately controlled by State-owned Rosatom company, may be hired by the hydrocarbons exporters for icebreaking escort services in the Arctic, but this again deals only with the transportation cost and not with export regulation by sea.

The customs export duties on crude oil (Urals brand) are gradually reduced by the application of a reduction factor (0.833 for 2019 and down to 0 in 2024). The reduction of customs export duties will be compensated for by a gradual increase of MET through the same period.

The present customs export duty rates (further reduced by the reduction factor mentioned above) are as follows:

  • 0% for Urals median monthly price below USD109.5/tonne;
  • 35% from the difference between median monthly price under USD146/tonne and the benchmark of USD109.5;
  • USD12.78 + 45% from the difference between median monthly price under USD182.5 and the benchmark of USD146; and
  • USD29.2 + 30% from the difference between median monthly price over USD182.5 and the benchmark of USD182.5.

Super-viscous oils are charged with reduced export customs duty. Oil from East Siberia is effectively exempt from export customs duty. Export of LNG is exempt from export customs duty as referred to in 6.2 Liquefied Natural Gas (LNG) Projects.

Export of natural gas attracts export customs duty of 30%.

The below petroleum products attract export customs duty as follows:

  • light and medium distillates – 30%;
  • straight-run petrol – 55%;
  • commercial petrol – 30%; and
  • fuel oil (masut) – 100%.

As mentioned above, Russian law does not provide for a separate and a single licence for downstream/midstream operations. Those ancillary licences that oil and gas companies require for proper downstream/midstream activities (mentioned in 3.3 Issuing Downstream Licences) can be transferred only under a limited number of cases. The Law on Licensing provides that such licences are subject to re-issuance if (i) the merger of two legal entities takes place (provided that both of these entities hold the same type of licence), (ii) the licence-holder’s legal name is changed or (iii) the licence-holder’s address is changed.

In general, Russian law does not provide for the opportunity to transfer appropriate licences from one legal entity to another (in comparison to the licences for subsoil use).

The Law on Strategic Companies (together with certain accompanying legal acts) provides certain restrictions and limitations in respect of the acquisition of control by foreign investors over any Russian legal entity that has strategic significance for the national defence and security of the state. A list of activities that have strategic significance is set out in the Law on Strategic Companies. Among others, this list includes exploration (prospecting and evaluation) and/or detailed E&P of minerals carried out within the Subsoil Plots of Federal Significance (as defined below). A subsoil user engaged in such activity is qualified as a 'Strategic Subsoil User'.

The Subsoil Law provides that, among other things, a subsoil area falling within the following categories will be classified as a Subsoil Plot of Federal Significance (a list of these plots was initially published by Rosnedra in March 2009 and is updated on an ongoing basis):

  • subsoil plots with (i) oil reserves in the amount of 70 million tonnes or more and (ii) gas reserves of 50,000 billion cubic metres or more (based on information maintained at the state balance of mineral reserves on or after 1 January 2006);
  • subsoil plots located within the internal seawaters, the territorial sea and the continental shelf of the Russian Federation; and
  • subsoil plots the use of which requires the use of land areas that are classified as defence or security land areas (hereinafter together referred to as 'Subsoil Plots of Federal Significance').

The Law on Strategic Companies provides that the following transactions and other actions regarding the acquisition of control over a Strategic Subsoil User by a private foreign investor (or a group of persons that includes such foreign investor) are subject to the preliminary approval of the Russian Governmental Commission for the Monitoring of Foreign Investments in the Russian Federation (Commission):

  • an acquisition (direct or indirect) of 25% or more of the voting shares of a Strategic Subsoil User; or
  • the right to determine the decisions of a Strategic Subsoil User (including those related to its business activity); or
  • the right to appoint the general director and/or more than 25% of the management board of a Strategic Subsoil User; or
  • the unconditional ability to elect 25% or more of the members of the board of directors (or other collegial governing body) of a Strategic Subsoil User; or
  • the right to act as a management company of a Strategic Subsoil User.

In addition, an acquisition by a foreign investor controlled by foreign states, international organisations or foreign entities that does not disclose information regarding their beneficial ownership and controlling persons of more than 5% of the voting shares of a Strategic Subsoil User will also require preliminary approval of the Commission.

The Law on Strategic Companies also envisages that the acquisition by a foreign investor of the fixed production assets of a Strategic Subsoil User, the value of which represents 25% (or more) of the balance sheet value of the assets of such company as of the last reporting date, will trigger the necessity of obtaining the Commission’s approval.

It is a general rule that a foreign investor controlled by foreign states, international organisations or foreign entities that does not disclose information regarding their beneficial owner and controlling person (or entities under their control) is prohibited from acquiring control over a Strategic Subsoil User; ie, 25% or more.

Failure to obtain prior approval for an appropriate transaction will either render the transaction void or may prevent the foreign investor (or the group of persons that includes the foreign investor) from voting at shareholder meetings of the relevant Strategic Subsoil User.

The Subsoil Law also provides certain additional provisions applicable to the Subsoil Plots of Federal Significance. A licence for subsoil use in respect of such subsoil plots cannot be re-issued to a legal entity that is under the 'control' of a foreign investor (or a group of persons that includes a foreign investor) without the consent of the Russian government, and this in turn will only be granted in “exceptional circumstances”. The list of such circumstances is not defined and is determined by the Russian government on a case-by-case basis.

The Russian government has the right to prevent a licence-holder owned by a foreign investor from moving to the detailed E&P stage in the event of a threat to the Russian State’s security. The method of blocking the transition depends on whether the licence-holder has an exploration (prospecting and evaluation) licence or a combined licence. In the latter case, if the Russian government exercises its blocking power and terminates the combined licence, it has to pay compensation to the subsoil user. However, the current method of calculating the relevant compensation may not cover the subsoil user’s actual costs.

In addition, in the interests of national security, Russian legal entities with foreign ownership may also be subject to certain limitations during the course of their participation in auctions or tenders for the right to use the Subsoil Plots of Federal Significance.

Furthermore, the Law on Foreign Investments provides that the chairman of the Commission is able to decide at his own discretion whether the transactions carried out by the foreign investors in respect of Russian legal entities are subject to approval under the Law on Strategic Companies. In other words, any transaction (regardless of the size of the shareholding/participation interests to be acquired) of a foreign investor in respect of any Russian legal entity (regardless of whether such Russian entity is a Strategic Subsoil User) may potentially require approval under the Law on Strategic Companies.

The principal environmental laws for the oil and gas industry are the following:

  • the Environmental Protection Law;
  • Federal Law No 174-FZ “On Environmental Assessment” dated 23 November 1995 is aimed at verifying that the project documentation that relates to any business or another activity is in compliance with the environmental legislation;
  • the Industrial Safety Law;
  • Federal Law No 33-FZ “On Specially Protected Natural Areas” dated 14 March 1995 (Law on Special Natural Areas) establishes the special regime of natural territories where certain business activity is limited or prohibited;
  • Federal Law No 89-FZ “On Industrial and Consumption Waste” dated 24 June 1998 establishes the regulation of management of industrial and consumption waste in order to avoid adverse effect on human health and the environment, regulates the disposal and handling of hazardous waste, and establishes the 'polluter pays' principle;
  • the Land Code of the Russian Federation regulates a wide scope of matters that are related to land resources and establishes categories of lands on the basis of designated use; and
  • the Water Code of the Russian Federation regulates the usage, management and conservation of water resources.

For information about the principal environmental regulators, please refer to 1.2 Regulatory Bodies.

As a general rule, environmental obligations do not depend on the scale of a petroleum project itself. There are a number of legal requirements applicable for both onshore and offshore petroleum projects that must be complied with (for offshore requirements, please refer to 5.3 EHS Requirements Applicable to Offshore Development).

The basic obligations of subsoil users in respect of environmental protection are mainly stated in the licences for subsoil. Before commencing any petroleum project, the company should obtain from Rosprirodnadzor a positive approval of its environmental impact assessment. The authorities shall assess all project documentation, including the documentation in respect to commencement of the project (construction and launching of operations) and its termination (decommissioning). Project documentation relating to refinery, oil and gas transportation, and hazard disposal is also subject to State assessment. In addition, companies must include a plan for land rehabilitation and for addressing damage caused to the environment as a result of oil and gas activities.

Starting from 1 January 2019, companies that operate petroleum facilities shall obtain a 'complex environmental permit' from the territorial departments of Rosprirodnadzor. This authorisation replaces permits for air emission and waste disposal.

Another important environmental obligation relates to flaring of associated petroleum gas. The subsoil users are allowed to burn only up to 5% of associated petroleum gas and the remaining 95% should be properly utilised (for example, for internal needs of petroleum facilities or local infrastructure). If a company exceeds the established 5% of gas flaring, it could be subject to penalties.

In general, EHS requirements related to onshore activities are also applied to offshore operations. In addition, offshore operations should be in compliance with certain other EHS requirements, especially those envisaged by the Continental Shelf Law.

It is a common practice that EHS requirements for offshore activities are set out in the appropriate subsoil use licence. Breach of these requirements could lead to significance negative consequences, including early termination of the subsoil use licence.

Additionally, a subsoil user is obliged to obtain certain permissions and authorisations (which, inter alia, also deal with EHS issues) before commencement of an offshore project. Such approvals include (i) approval for building, operation and use of artificial islands or constructions on the Russian continental shelf, (ii) permits for water use in relation to building of artificial islands and fixed or floating platforms, and (iii) permits for dumping waste on the continental shelf.

A company carrying out oil production on the Russian continental shelf has to prepare an oil spill prevention and liquidation plan. Such a plan is subject to mandatory State ecological inspection.

Under Russian law, oil or gas facilities shall be decommissioned upon the expiration or early termination of a subsoil use licence. In general, the procedure and time limits for such decommissioning are designated in the subsoil licence and project documentation. As oil or gas facilities are classified as hazardous industrial facilities, the decommissioning procedure also falls under the regulation of the Industrial Safety Law.

Types of decommissioning are divided into liquidation and conservation (temporary suspension) of the facility. In the case of full or partial liquidation of the facilities, the whole enterprise should be put in a condition that does not create a risk to human health and/or the environment. In the case of conservation, the safety of human health and the environment should also be taken into consideration and the enterprise should be kept in such condition that preserves the field, wells and other facilities so it will be possible to put them back into operation in the future.

In relation to offshore decommissioning, oil or gas companies that operate artificial islands, installations and structures placed within the territory of the continental shelf are also responsible for decommission upon the completion of subsoil use works. It is envisaged that appropriate artificial islands, installations and structures that are not used any more should be removed by those entities that build them. Such removal should be carried out within the terms stated in the construction permits, subsoil use licences or project documentation. In offshore decommissioning, legal requirements envisaged by international treaties (which were ratified by the Russian Federation) should also apply.

The Subsoil Law provides that liquidation and conservation of the facilities that are used on the basis of PSA have to be implemented under the decommissioning fund that is financed by the subsoil user. Russian law does not provide for subsoil users’ (which are not working on the basis of PSA) obligation to create appropriate decommissioning funds. The MNR prepared the draft law that proposed to oblige respective subsoil users to create special decommissioning funds. These funds will be invested into future liquidation or conservation of the facilities used for subsoil use activities. As of today, such amendments have not yet been adopted.

Currently, Russian legislation does not regulate prior-owner liability and as a consequence of such legal gaps there is a problem of abandoned oil or gas facilities. It is a common practice that authorities grant subsoil use licences that cover the licence area where certain facilities (for example, wells) of the previous subsoil users are located, so the new licence-holder becomes liable for such facilities and their maintenance.

During the last decade the Russian government has increased its attention to environmental issues (including climate change) and this area is currently treated as an important part of national policy. The Russian authorities have enacted various legal acts regulating the issues of climate change and appropriate practical steps to be undertaken.

As of today, the Environmental Protection Law contains the main provisions that refer to climate change. Moreover, the following legal acts were implemented in terms of climate change and environment protection:

  • Decree of the President of the Russian Federation No 889 “On specific measures for improvement of energy and ecological efficiency” dated 4 June 2008;
  • Resolution of the Russian Government No 1225-r “On ecological doctrine of the Russian Federation” dated 31 August 2002; and
  • Decree of the President of the Russian Federation No 861-rp “On climatic doctrine of the Russian Federation” dated 17 December 2009.

In terms of international treaties, the Russian Federation is a party to the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol. The UNFCCC was signed by the Russian Federation on 13 June 1992 and ratified on 28 March 1995. The Kyoto Protocol was signed on 11 March 1999 and it entered into force after its ratification on 16 February 2005. Russia has implemented its obligations under the first stage of the Kyoto Protocol (which ended on 31 December 2012). After that, the Russian Federation made a decision not to participate in the second stage of implementation of the Kyoto Protocol.

The Russian Federation signed the Paris Agreement under the United Nations Framework Convention on Climate Change regarding greenhouse emissions on 12 December 2015 (Paris Agreement). The Paris Agreement has not yet been ratified by the Russian Federation. However, a plan for implementation of a set of measures to improve State regulation of greenhouse gas emissions and preparation for ratification of the Paris Agreement was adopted.

According to the Subsoil Law, local governments have certain powers in respect of determining the rules for the use of widespread minerals and subsoil plots of local significance. The Subsoil Law provides that the right to use subsoil plots (irrespective of their status) can be significantly limited due to State security or environmental reasons. Use of subsoil plots can be fully or partially limited to prevent danger to human life, the environment, or facilities and if such subsoil plot is located within the territory of towns, suburban zones, industrial or transport facilities. Local governments are able to set appropriate limits and restrictions in respect of widespread minerals and subsoil plots of local significance.

In addition, pursuant to the Law on Special Natural Areas, certain restrictions and limitations can apply in respect of exploration and/or production of minerals within the territories of national parks, nature reserves and other land plots with special status. Local authorities may obtain powers regarding the establishment of appropriate parks and reserves, determination of their status and way of use. Moreover, additional restrictions and limitations can be imposed on subsoil use activities on the basis of Russian legislation related to the indigenous peoples of the Russian Federation and their communities.

In order to encourage the development of heavy oil, the Russian tax regulation establishes certain tax benefits and incentives. Such benefits reduce tax rates that are applied to heavy oil or oil that is developed on certain listed subsoil fields. Additionally, when calculating the tax, companies can take into account the difficulty of oil development and to which level the field has already been developed.

In 2018 a draft law was introduced by the MNR that would also encourage the development of heavy oil. This draft provides for the establishment of specific “scientific and technical sites” where it will be possible to use new technologies for exploration and development of heavy oil.

Russian law does not provide for any specific and separate subsoil use licences for production of LNG. General legal requirements and procedures regarding subsoil use licensing are applicable to LNG projects.

In 2013 the Gas Export Law was significantly liberalised in respect of the list of legal entities allowed to export LNG from Russia (before these amendments, Gazprom was the sole and exclusive exporter of LNG). Now a legal entity is able to carry out exports of LNG if it meets established legal requirements stated by the Gas Export Law (please refer to 3.12 Laws and Regulations Governing Exports). The Russian government approved an exhaustive list of Russian legal entities that have the exclusive right to export LNG. This list includes Gazprom (including its subsidiary Gazprom-Export), Rosneft and subsidiaries of PJSC “Novatek” (such as Yamal LNG, Arctic LNG 1, Arctic LNG 2 and Arctic LNG 3).

The Russian government drafted certain legal regulations regarding the support and improvement of LNG projects (for example, in terms of development of required infrastructure and facilities, and organisation of shipping of LNG).

In addition, there are certain tax incentives applicable to LNG projects, including (i) a 0% export customs duty for export of LNG and (ii) a 0% mineral extraction tax for natural gas and gas condensate extracted within the territory of Yamal Peninsula that is used for production of LNG.

The Russian oil and gas industry has a long history of its development and during this period its legal regulation has been significantly improved. As of today, the most interesting aspects of legal regulation of the Russian oil and gas sector are the following: (i) export of oil and gas (including LNG) (please refer to 3.12 Laws and Regulations Governing Exports for more details) and (ii) raising foreign investments into the Subsoil Plots of Federal Significance (please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum for more details).

The most recent legal development that has an important effect on the oil and gas industry relates to the introduction of a new AIT tax. Please refer to 2.3 Typical Fiscal Terms Under Upstream Licences/Leases for additional details regarding AIT.

Recent amendments made in the Law on Strategic Entities are also material for oil and gas projects in Russia. These relevant amendments introduced a new concept of “non-disclosing foreign investor” (please refer to 4.1 Foreign Investment Rules Applicable to Investments in Petroleum for details).

In addition, there are also certain draft laws that could have a significant effect on subsoil use licensing matters. For example, one of the draft laws provides for the establishment of a special “register of unfair subsoil users”. It is suggested that subsoil users that do not on a timely basis make lump sum payments for granting a licence will be included in this register and on this basis will not be allowed to take part in any tenders or auctions for the right to use subsoil plots within two next years.

Another draft law envisages updating the content of the licence for subsoil use. It is suggested that all licences for subsoil use will provide the exact deadlines for preparation of the project documentation and deadlines for fulfilment of a subsoil user’s obligations regarding the development of the subsoil plot (as a result of the actualisation of subsoil use licences (please refer to 2.8 Other Key Terms of Each Type of Upstream Licence for more details) appropriate deadlines were mainly removed from the licences).

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