Russian state takes full control of continental shelf

Dmitry Medvedev

Publish date: August 15, 2008

Written by: Kristin Vibeke Jørgensen

Translated by: Charles Digges

The Russian continental shelf can be divided between the two state giants Gazprom and Rosneft, and all others will be held on the peripheries and the environment could be the loser. Over the summer, Russian President Dmitry Medvedev signed an amendment to the Russia law regulating the petroleum operations on the Russian continental shelf. The amendment entails that licenses will be given out without any form of open competition

This was earlier accomplished with tenders, where businesses competed for licenses within a defined criteria, for example, technology and environmental efforts

Safeguarding the national treasury
Medvedev has stated that the continental shelf is Russia’s national treasury, and therefore laws and procedures that regulate the use of the shelf must be of a special character. Medvedev stressed that the grounds for the amendments are to assure rational exploitation of the shelf’s resources.

The new law is based on the condition that that a sole state programme will chart, develop and exploit petroleum operations on the Russian shelf.

State giants gain full control
From now on, Prime Minister Vladimir Putin and his government will chose which businesses will be able to operate on Russia’s continental shelf. It is not know what criteria will be the conditions for a business’s selection because the law doesn’t say anything about this.

Further only Russian businesses where 50 percent of the shareholders are Russian juridical entities, can own licenses to the Russian shelf. Additionally, businesses applying for licenses must already have five years experience in offshore oil activities.

In practice, this gives Russia’s state controlled Gazprom and Rosneft full control over offshore petroleum operations in Russia’s northern regions. The Russian newspaper Vzlglyad reports that Rosneft and Gazprom have already begun to divide the shelf between themselves.

Taking the legal path
At that, the amendment steers toward the fact that it will be more complicated for foreign companies businesses to operate on the Russia shelf. The same holds for other Russian companies aside from the two state giants.

In parallel with the new law taking force the authorities are endeavoring through lawsuits to confiscate licenses to the Russian continental shelf that are already in private hands. Though authorities had won many suits, they have newly lost one against Sintezneftegas, which has licenses to two fields in the Barent’s Sea.

The authorities have appeal the suit. They have also stated that Sintezneftgas will regardless not hold a license in the future.

Broad support in Parliament
Deputy Minister Igor Sechin presented the law for the president. He has earlier pointed out that Gazprom is most interested in gas and Rosneft in oil. There is therefore no competition expected between the two businesses. Both Rosneft and Gazprom are assumed to have participated in the formation of the law, which has been met with broad support in parliament.

Sergei Bogdanchikov, Rosneft’s chief, has stated that at least 61.6 trillion roubles ($2.5 trillion) are need to build up the Russian continental shelf by 2050. He additionally implied that at least 12 to 13 million roubles are need for building up the controversial area between Norway and Russia.

Twenty five percent of the world’s remaining resources
The Russian continental shelf is 4.2 million square kilometers. Russian estimates indicated there are 136 billion tons of petroleum under the shelf – around 25 percent of the worlds remaining resources.

Curently there is only one offshore project in commercial operation in Russia; in the Sakhalin region in Far Eastern Siberia, even though large deposits were discovered more than 30 years ago in the European part of Russia. Rosneft is currently participating on the shelf in the Sakhalin -1 project. Additionally, Rosneft has an array of licensed for offshore work in Sakhalin and the Kamchatka peninsula off eastern Siberia. According to the Russian newspaper Kommersant, it is expected that Rosneft will be awarded 29 licenses by the authorities.

bodytextimage_olga_sud.jpg Photo: (Foto: Rashid Alimov/Bellona)

Gazprom, for it’s part, is participating in the Sakhalin- 2 project with 50 percent plus one share and is in the driver’s seat for the build up of the Shtokman and Prirazlomnoe fields in the Barents Sea.
Environment on the back burner
Olga Krivonos, a legal advisor with Bellona’s St. Petersburg office, the Environment and Rights Centre Bellona (ERC Bellona) says that the amendment will lead to a less open and objective evaluation from the bureaucracy’s side.

“Hereafter decisions will be taken on the background of the bureaucracy’s own internal preferences,” said Krivonos.

Bellona is concerned that the environment will take a back seat as a result of these changes. The Amendment will lead to less openness and insight around those who award licenses. Open and transparent relationships are a prerequisite for the least possible environmentally damaging petroleum policy.

The authorities will have few possibilities for sanctions if the shelf is to be divided between the two large state corporations, and penalties for damage to the environment are very weak in Russia. The absence of competition could lead to businesses neglecting the environment. Strict regulation and control from the authorities side will be important for securing the environment to the strongest possible degree.