Conference on Investing in Russia under the Law of Production Sharing Agreements
April 16, 1998 University of Houston Hilton Houston, Texas
Professor William P. Streng Vinson & Elkins Professor of Law, University of Houston Law Center; Consultant, Bracewell & Patterson, Houston
Jim Skelton Corporate Counsel, Conoco Inc.
James Cuclis Partner, Vinson & Elkins, Houston
Thomas Hurley Associate General Counsel; Amoco Corp.
Charles T. Fee, Jr. General Tax Counsel, Exxon Ventures (CIS) Inc.
Professor Streng: I would like to convene these proceedings. I am William Streng, a professor at the University of Houston Law Center, and I am very pleased to welcome you. These proceedings deal with and examine the Russian Production Sharing Agreement (PSA) legislation and generally the subject of investing in Russia.
I would briefly like to introduce each of the three speakers and then I will provide a larger introduction as each one of them comes to the podium. On my immediate left is Jim Skelton, Corporate Counsel at Conoco; next to my left is Tom Hurley, Associate General Tax Counsel at Amoco; and to his left is Charles Fee, General Tax Counsel for Exxon Ventures CIS. All of these individuals have been actively involved for some period of time with respect to Russian petroleum investments and planned investments.
The origin of this program is partly attributable to activities of the Houston Journal of International Law, in conjunction with the University of Houston Law Center's program early in the 1990s. With the funding of the companies represented here and others, a project was initiated to assist the Soviet Union first, and subsequently, the Russian Federation, with the preparation of a system of laws to facilitate investment from outside Russia, particularly from the United States, into the energy exploration and development sector in Russia. These activities in this project included developing suggestions and recommendations concerning rules about property rights and the development of production arrangements, environmental laws, and tax laws.
Being optimistic Westerners and not really not ever considering that the concept of free markets and capitalism had never been substantially utilized in Russia, we all thought, charging ahead, that we would be able to help solve these problems with some expedition. But that obviously has proved not to be the case, which is why a few years later, seven or eight years later, we are still here examining this issue. But, thanks to the Houston Journal of International Law, that project did produce some quite successful volumes concerning this subject, These volumes reflect a history of the beginning of petroleum legislation, which started with the Soviet Union and--then with its breakup at the end of 1991--continued with the Russian Federation itself.
Now the subject that we are discussing today is primarily the production sharing agreement, a fundamental concept I would like to identify. This is a concept that was introduced in Indonesia in the early 1970s as an alternative to the previously used concession agreement. This concept of a production sharing agreement has now spread to many countries, including Russia. While the theory underlying production sharing is really simple, obviously, its implementation is far from elementary: in application it has quite a highly complicated and individualized context, particularly in the Russian Federation.
Basically, the investor signs a contract with the host country, which grants the investor the exclusive exploration and production rights for some specified period of time. The investor agrees to conduct exploration and production (E&P) operations at its own expense, and then recovers its cost. Thereafter some degree of profit splitting occurs, with the profit splitting, in some instances increasing as the profitability increases for the party that has undertaken this financial risk. …