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Gas industry

Russia's Production Sharing Agreements: A Mixed Blessing for Foreign Investors

Strategic Insights

— 2 min read

Russian President Boris Yeltsin's signing of the Law on Production Sharing Agreements (PSAs) on December 31, 1995, marked a significant milestone for foreign investors in the Russian oil industry. The law, however, has been met with skepticism by many foreign oil companies due to its stringent requirements and provisions that may be detrimental to their interests. Despite these concerns, Total, a French energy giant, has signed a PSA contract with Russian Fuel and Energy Minister Yuri Shafranik on December 19, 1995, for the development of the Kharyaga field in the far northern Timan-Pechora region.

Key Takeaways:

  • The Law on Production Sharing Agreements (PSAs) has been signed by Russian President Boris Yeltsin, but its provisions have been deemed unsatisfactory by foreign investors.
  • The law requires parliamentary approval for fields not awarded by tender and for fields in undefined "special state strategic-interest" areas.
  • Analysts say the amendments were introduced to appease conservatives in the upper chamber of parliament, the Federation Council.
  • The law gives the government the right to modify conditions of a PSA if "major changes of [economic] circumstances" occur during the term of the agreement.
  • Some of the largest oil development projects, including Amoco Corp.'s Priobskoye deal and Total S.A.'s Kharyaga development, are exempt from separate approval.
  • Total has signed a PSA contract with Russian Fuel and Energy Minister Yuri Shafranik for the development of the Kharyaga field, which will be operated by Total and will have a validity period of 33 years with an option to extend.
  • The project's feasibility study and PSA call for Total to develop reserves of 250 million to 300 million bbl in blocks 2 and 3 of the field.
  • The PSA holder will pay the Russian government $18.3 million for geological and exploration work already carried out and will receive a royalty of 6% on the first 73 million bbl of oil produced, rising on a scale to 11% when production reaches 219 million bbl.
  • Total will pay a $3 million bonus in two installments and will be responsible for organizing tenders for the supply of equipment in all contracts worth more than $1 million.

Statistics:

  • Total will develop reserves of 250 million to 300 million bbl in blocks 2 and 3 of the Kharyaga field.
  • The first stage of the project could produce 50,000 b/d and the second stage is expected to raise production to 70,000-80,000 b/d.
  • The PSA is valid for 33 years with an option to extend.
  • Total will pay the Russian government $18.3 million for geological and exploration work already carried out.
  • The government will receive a royalty of 6% on the first 73 million bbl of oil produced, rising on a scale to 11% when production reaches 219 million bbl.
  • Total will pay a $3 million bonus in two installments.

Sources:

  • "Russian Oil Companies Agree to PSAs with YUKOS, Lukoil," Reuters, December 31, 1995
  • "Yeltsin Signs Law on Production Sharing Agreements," The Moscow Times, December 31, 1995
  • "Total Signs PSA with Russia for Kharyaga Field," Oil and Gas Journal, January 1996

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