::: RUSENERGYLAW Journal ::: #3'2005

RusEnergyLaw JOURNAL • Archive/3'2005

EDITORIAL

Yelena Novikova, Doctor of Law, Lead Research Associate, Center for Environmental Law Studies at the Institute of State and Law with the Russian Academy of Sciences

Dear Colleagues,

The Russian State Duma has voted on the new Draft Law “On Subsoil” submitted by the Russian Government. The advantage of the new Draft is the replacement of the administrative model of subsoil use regulation for all types of usage of subsoil (inc. petroleum) with a contractual one, which provides the parties with equal opportunity and places them on equal legal footing.

The main objective of the contractual model implementation in subsoil use is to stabilize the rules. In order to provide this stability, the legal mechanism should include:

! stabilizing provisions of a contract to protect a subsoil user from changes in legislation (“grandfather clause”);

! provisions for voiding, terminating or suspending a contract and inclusion of a complete list of terms and conditions for the mentioned actions;

! provisions limiting subsoil user liability for the damage caused by past activity;

! protection of the parties’ rights in independent arbitration based on international law practices.

However, this mechanism is omitted in the Draft, the latter containing none of the considered elements of the mechanism to provide the needed stability in the rules.

At present the Russian laws “On Subsoil” and “On PSA” regulate projects under the licensing regime and PSA regime respectively. Article 2 (7) of the Draft removes this division, making the provisions of the Draft applicable to the projects operating under PSAs. The provision of the Draft stipulates that the projects under the PSA regime shall ‘take into account’ the provisions of the other legislative acts. This wording has no precise legal meaning, thus rendering a project vulnerable to parallel and inconsistent regulations.

The provisions of the Draft law allow for restrictions on foreign participation while not defining the circumstances, under which such restrictions should be imposed. Furthermore, article 9 (2) provides the government with the right to amend the definition of a permitted user.

The Draft does not define ‘a mining property complex.’ This means there are no defined criteria for what exactly is included in such a complex. In turn, this fact complicates the ownership registration for such a complex, prevents the mortgaging of a complex and also creates problems of identification of the company assets in case of its liquidation.

The state retains the right to make a compulsory purchase of the right to subsoil use. Meanwhile, the Draft fails to specify whether such a purchase would be made at a market price, and it also lacks an explanation of how such a price would be calculated.

In terms of dispute resolution, the Russian Federation Arbitration Procedure Code stipulates that the state arbitration courts have exclusive jurisdiction over any dispute arising between a foreign party and the state, thus ruling out third party arbitration as a potential mechanism for dispute resolution.

The Draft makes the provisions of its Chapter Six applicable retroactively to the current license agreements, and what is even worse, the Draft permits the state to refuse to enter into a contract or to grant a licence for subsoil use if a company actually did obtain a right to subsoil use but did not yet use the licence.

The Draft law permits only auctions as a mechanism to award a license / contract. From the perspective of the potential subsoil user, the time period between auction notification and the auction per se has been reduced to 45 days, which makes it nearly impossible for the companies that do not have access to the insider information to participate in the auction. In addition, the decisions will be based purely on financial grounds as opposed to the tender procedure that exists in the current law; the latter requires the applicant to show the advantages of a proposed project in terms of environmental safety and/or environmental impact.

In the new Draft Law defensible and significant step has been made to reform the remaining rudimentary legal area of subsoil regulation. However, it would take many sophisticated efforts still to really improve investment climate in Russia.

BACK TO CONTENT