Russia has found what has been purported to be a panacea for its economic woes-the production-sharing agreement (PSA), soon to be widely implemented in the country's oil and gas sector.
Traditionally, Russia's oil and gas sector has led the way in attracting foreign investment since the fall of the Soviet Union-a total of $4.2 billion as of Jan. 1, 1999.
Western specialists estimate that, once the use of PSAs is in full swing, direct foreign investment in the sector could total $64 billion.
Foreign investment will undoubtedly have a positive impact-creating new jobs and boosting the economy. But Russian companies are concerned about ensuring that the country realizes maximum benefit from this potential windfall.
So far, the only Russian PSAs that have been implemented are for two Sakhalin Island offshore development projects being undertaken by foreign consortia; these were instituted by presidential decree in 1995.
Meanwhile, Russia's Duma will consider two Russian oil fields for development under a PSA regime: the Northern Territories complex, licensed for exploration and production to a joint venture of Russian oil giant Lukoil (60%) and Conoco Inc. (40%); and Priobskoye oil field, licensed to Russian major Yukos.
The Northern Territories complex lies north of the Timan Pechora oil province. It is underexplored, with a postulated potential reserve estimate of 1.3 billion bbl of oil. Priobskoye is estimated to hold original oil in place of more than 4.4 billion bbl.
Domestic wariness
Russia needs $8-10 billion/year just to maintain current oil and gas production levels. Failure to attract adequate investment would force Russia to either scale back oil exports or reduce domestic consumption. That is why the PSA is being touted as so vital for the sector's future.
The PSA is to be implemented at 125 oil and gas fields throughout the country. For every $100 invested, foreign investors can expect $24 profit, with $76 going to the Russian side-at least under the PSA model.
This type of investment is well-protected from financial disasters such as the deep recession Russia entered in August 1998. It is also seen as a way of attracting "reliable" capital.
But many Russian companies see the PSA as containing hidden dangers.
Large projects that involve significant foreign capital could undermine Russia's control over the sector and bind development to foreign rather than domestic needs, the argument goes. The unprecedented rights granted to foreign investors under the PSA terms are seen as a possible threat to Russia's economic sovereignty as well as a means of exerting considerable foreign influence on Russian legislation and politics.
The PSA is also seen as having the possible effect of locking Russia into a raw materials dearth, as much of the oil produced under PSAs will be exported. Historically, the Russian oil industry has preferred to develop refineries to take the crude rather than export it.
In addition, large projects in ecologically sensitive regions such as Sakhalin and Siberia mean potential environmental problems-which are already widespread throughout Russia's petroleum operations. With drill- ing under way off Sakhalin, there have been allegations of unlawful pollution of the surrounding fishing grounds.
Not all Russian oil companies are won over by the PSA model. Many think that, if the business climate in the country were more normal, they would be able to attract domestic capital and finance the projects themselves. There is also no guarantee that only "reliable" capital will be attracted. So the country must find a way of protecting itself from speculative investment.
But there are clear benefits that will emanate from the widespread implementation of PSAs throughout Russia's oil and gas sector. Foreign investors will directly or indirectly contribute to aims such as promoting regional development, introducing new technology and management methods, developing related sectors, boosting export potential, and maintaining a secure domestic energy supply.
Aside from the general benefits of improved economics and technology transfer, if projects are undertaken jointly by foreign and Russian oil companies, the Russian firms would likely benefit from increased profits and stock values.
As a result, they would be better placed to secure bank loans or raise capital in the stock market.
