Production Sharing Bill Delayed

Parliamentarians and government officials blasted the State Duma's decision Wednesday to delay a vote on a natural resources production sharing bill until April as "mindless populism" that could have dire consequences.

"At present, the fuel and energy complex is holding the Russian economy together," Geology and Resources Minister Victor Orlov told a news conference Wednesday. "The question is how long it can go on without investment."

At the urging of Liberal Democratic Party of Russia leader Vladimir Zhirinovsky, who described the draft law as an opportunity for Western investors to "plunder" Russian resources, the Duma voted to postpone discussion of the draft law until April by a vote of 234-to-127, with one abstention.

Orlov said the government is keen to implement the law as soon as possible, even if it means accepting a shorter list of projects. While the law primarily affects oil and gas production, it also pertains to other resources, such as precious metals.

"The energy sector needs $10 billion to $15 billion in investments a year," Orlov said, contrasting those figures with the $2 billion worth of investment in the entire Russian economy last year. "The sooner we get it the better."

The current draft legislation scales back the list of sites eligible for production-sharing deals -- which allow Western oil companies to export part of the output in return for their investment risk -- from more than 250 in earlier drafts to just 26.

Peter Charow, executive director of the American Chamber of Commerce, said the latest delay was "more of the same old story," but he was optimistic the law would finally win Duma passage. Most of the prime oil fields ripe for development are included on the list, Charow said, calling it "as good as we're likely to see."

Production sharing agreements, the law for which was passed in 1995, have already been drawn up for many sites on the list, such as the $50 billion Priobsk project between Amoco and Yukos. Production, however, is on hold until the Duma approves each specific site -- a condition of the law.

Vladimir Medvedev, president of the Union of Oil Producers and one of the authors of the new list, said in an interview he was confident the list would be accepted by the Duma, "give or take four or five projects."

"The issue is just caught in the ongoing power struggle," he said, adding that his block was working to convince other Duma factions.

Zhirinovsky told The Moscow Times that his party considered the production-sharing law to be "a law on the future share-out of Russia."

"The West will never invest in our economy. They are only seeking cheap raw materials," he said. "We are being transformed into a colony."

Valery Garipov, deputy fuel and energy minister, said the sector owes more than 400 trillion rubles ($701 million) in taxes against a backdrop of steadily falling production. "Without immediate investment, annual oil output will fall to 185 million tons in five years -- half the current level," he said. Russia's output last year was the lowest in 30 years.

Once the legislation is in place, it still will take until the next century for the tens of billions of dollars -- and the millions of barrels of oil -- that ride on the PSA law to start flowing, as the capital-intensive investment projects take years to get online.

But tangible benefits could be realized much sooner, given that investment for most projects on the list is already in place, said Garipov. It would take 1 1/2 years at most to finalize the others, he said.

"In some cases you could feel the impact very quickly, certainly for the people who work in [a specific] factory," Charow said.

-- Reporter Christian Lowe contributed to this report.