Unconventionals in Russia: Legal Aspects

By Jennifer Josefson and Alexandra Rotar, December 23, 2013

The unconventional resource boom that hit the United States and Europe had gone relatively unnoticed in Russia until recently. Ignoring the world’s fascination with the potential of unconventional hydrocarbon resources, Russia repeatedly downplayed their importance and maintained its focus on the development of its rich conventional reserves. 

That was until in the fall of 2012 when Russia suddenly re-engaged in intense drafting of legislation for tax incentives related to tight oil that came to life one year later. The tax incentives, enacted in July 2013, have been an offspring of the burst of Arctic deals between Rosneft, a state-controlled oil company, and foreign investors. 

While the political will appears to be behind the reforms and the economic benefits are promising, the question, however, remains whether this reform will grow into a comprehensive regulation for unconventionals in Russia or remain a one-time, partial solution for a piece of the larger Arctic deals. 

Legislation: The First Attempt

Although Russia has outwardly acted coolly to unconventional development, the 2013 amendments establishing tax incentives are not the Russian legislature’s first attempt at tackling the economic hurdles of unconventional development. The first attempts to establish regulation related to Russian unconventional development date back to 1998 when Russia introduced a package of economic incentives to encourage the development of tight oil. The 1998 measures provided for tax relief with respect to oil reserves qualifying as “hard to extract.” The determination as to whether an oil reserve was “hard to extract” was made by the State Reserves Committee on a case-by-case basis upon an application from a subsoil user. In its determination, the State Reserves Committee relied on certain, non-exhaustive, “temporary criteria for qualifying oil reserves as hard to extract” developed by the Ministry of Natural Resources for that purpose.  

However, by 2002, the 1998 measures had been abolished in the course of tax reform that replaced various mandatory payments related to subsoil use by a unified mineral extraction tax. Since then there have not been any significant legislative developments with respect to Russian unconventional reserves until the end of 2012. 

Lost in the Fog

The lack of legislative development with respect to unconventional reserves in Russia has created a number of obstacles for the potential development of these high-cost unconventional plays. Among other things, at the most basic level, Russia does not have a commonly agreed legal definition of what constitutes an unconventional reserve. It has remained largely debated whether such definition should be based on geological, technological or economical criteria. In the absence of such general definition, Russian legislation relies on various criteria, which differ in their interpretation of what resources should be treated as unconventional.

For example, the Russian PSA Law, adopted in 1996, provides that a production sharing agreement can be granted, among other things, “when development of a field requires application of special costly technologies for extraction of significant volumes of hard to extract subsoil reserves in difficult geological conditions.” Nevertheless, while the PSA Law provides this possibility, this definition has