A Study On The Russian Federation Law About Production Sharing Agreement

Russia is China’s biggest neighbour and vice versa. Whether in terms ofgeographical location or complementarity of the two countries’ demand, the oil andgas cooperation is the most sensible choice for the two countries. Sino-Russian oiland gas cooperation is not only limited to the fields of oil and gas trade and pipelineprojects but already expands into the fields of exploration and development andtechnical services, which will also serve as the main aspects of Sino-Russian oil andgas cooperation in the future. Thus it is necessary to fully understand the ProductionSharing Agreement of the Russian Federation, the basic law to achieve thiscooperation.Russia is one of a few countries where the production sharing agreement ofinternational energy is stipulated by law. First of all, we need to understand thebackground for Russia’s introduction of the Production Sharing Agreement in order tomore accurately understand its reasons and aims. The Production Sharing Agreementwas enacted in1995and revised in1999and2003. In the early1990s, Russia faceddomestic economic depression and the economy of its European part began to declinedue to the increasing depletion of resources while the country’s economic centre ofgravity began shitting to the Far East. The development of the Far East must rely onits rich reserves of energy, especially oil and gas resources. In order to attract foreigninvestment to develop the oil and gas industry in eastern regions, Russia enacted theProduction Sharing Agreement of the Russian Federation in1995.Comparing the two amendments of the Production Sharing Agreement of theRussian Federation with the existing law, with the methods of literature research andcomparative analysis, we can find that Russia has been constantly strengthening itsown protection but imposed more and more demanding requirements on foreigninvestors. Although politically foreign investors are given some degree of legalprotection as well as simplified finance and revenue and preferential treatment, theAgreement has showed a very strong self-protection ability in terms of sharing, staff and equipment. Compared with the1995Production Sharing Agreement, the currentProduction Sharing Agreement sets so high a threshold for foreign investors that thepurpose of attracting foreign investment for oil and gas development can hardly beachieved.Oil and gas cooperation between China and Russia will be a long process, andmore and more cooperation will lie in the fields of exploration and development.Therefore, we must have a relatively objective understanding of the advantages anddisadvantages of the impacts of the Production Sharing Agreement of the RussianFederation. According to the stipulation of the Agreement, Sino-Russian oil and gascooperation will face a lot of difficulties. For example, China must in the first placefollow the general Russian tax system to get involved in the auction of relevant oiland gas fields and obtain the mining right; at least70percent of equipment should beRussia-made in the development of the project; the profit share of the Russian federalgovernment should be no less than32%. The provisions above will give Chinesecompanies engaging in oil and gas cooperation with Russia tremendous pressure andburden. But we must also be noted that there still exist favorable factors for Chinesecompanies according to the Production Sharing Agreement. For example, theprovisions of production sharing and mineral use fee could be determined by specificagreements, which leaves wiggle room for Sino-Russian oil and gas cooperationthrough which Chinese companies could maximise their interests as fully as possible.Among the agreement articles are state guarantee and steady article whose presencemay provide political and legal safeguards for China’s investing companies andeliminate some unnecessary concerns for Chinese companies to invest.The Production Sharing Agreement of the Russian Federation is one of the lawsthat China’s energy cooperation with Russia must subject to. According to the currentSino-Russian cooperation situation, Chinese companies need to keep strengtheningtheir own strength, strive to achieve a more favorable proportion of stock whencooperating with Russian oil and gas companies, maximise their interests in taxation,profit-sharing and other provisions through flexible skills in agreement negotiating,and keep accumulating experience to better understand the oil and gas resources ofRussia and relevant laws and regulations.