Sibneft New Vice President for Production 2/2/2006 C H U K O T K A .org
Chukotka Articles from 2006 back

Chukchi a huge, new, old find 2005

Gold Mining 1993-2004    Coal Mining anthracite
Oil and gas in Chukotka 2006
Anadyrskiy the Rayon coal industry
Bilibino richest deposits ore gold cuprum silver metals of platinum group
The Chaunsky Rayon unified mining-industrial complex is being formed
Shmidt Region Gold mining is the largest industrial sector by revenue
Iul’tinskii Region is rich in tin tungsten and coal.
PEVEK rusting away pier
In recent years though many of the mines have been shown to be uneconomic and have closed,
causing many residents to move to more central regions in Russia and for the port infrastructure to decay.

chaunskaya bay_Wrangelisland.jpg
Pevek (Russian: Певек) is a town and Arctic port in Chaunsky District, part of the Chukotka Autonomous Okrug, Russia. After Anadyr and Bilibino it is the third largest town in Chukotka. Population: 5,206 (2002 Census);[1] 12,915 (1989 Census).[5] The town is a modern settlement established after the First World War to provide a port for the export of minerals as part of the expanding Northern Sea Route.
During the 1940s and 1950s, Pevek was the site of several GULAGs where prisoners mined uranium.
In recent years though many of the mines have been shown to be uneconomic and have closed, causing many residents to move to more central regions in Russia and for the port infrastructure to decay.

Sibneft Begins Offshore Seismic in Chukotka’s Anadyr Bay 2005 
Sits On Riches Lives In Poverty 
 Oil and Gas Basins
Environm against floating nuclear power 
 Oil and Gas Reserves Marketable
ms  Chukotka Prof  Konstantinovich 
Chukotka Auton Regn Overview 10 1998
Some Reserve Estimates
 Sibneft   #5 Russia's oil company
Seeking a Positive Commitment
 exploration history
Roman Abramovich
Abramovich Canada Visit
Sibneft, managed by Roman Abramovich
exploration in difficult Far East basins
Pet Pot Shallow-areas of Russian Arctic
The settlement was founded to house the miners and administrative workers from the Pyrkakay (Пыркакай, later renamed Krasnoarmeysky) tin mine, but was determined to no longer be economically viable in 1998.[5] As of 2009, Krasnoarmeysky is included in the list of settlements currently in the process of being liquidated.[1]




Probable reserves




In-place reserves


Off-balance reserves










Tin (thousand tons )
















Tungsten (thousand tons )
















chukotkaminerals    On the territory of the Okrug 83 deposits of tin are found, mostly complex tin-and-tungsten, including:
    * 1basic - 11,
    * 2gravel - 72.
The greater part of tin and tungsten deposits is concentrated in the Chukotka metallogenic zone. They are situated relatively close to each other in the north of the Okrug. The largest are basic reserves (Pyrkakayski Stockworks, Yioultin, Valkumei, Ekug, Svetloye, Lunnoye). The average percentage of tin in the ore is 0.23%.

The largest deposit is Pyrkakayski stockworks. Location: Chaoun District, 86 km south-eastwards of the town of Pevek.
Characteristics: stockwork group is constituted of 7 deposits with the Okrug’s largest reserves of ВС1С2 category, ore revertible.
In-place reserves: 270.800 tons, or 82% of total Okrug’s reserves; В+С1 – 259. 8 thousand tons, С2 – 11.2 thousand tons.
Average percentage of tin in the ore: 0.23%
Exploration: open cutting is possible.
Slump in tin prices and sharp contraction of domestic market that took place in 1990s resulted in stoppage of tin production at the Valkumei and Yioultin deposits, as well as at numerous tin placers. All such tin deposits have been transferred to state reserve.

Platinum group metals
Probable reserves of the platinum group metals in the Okrug are located in the Anadyr-Kiryak system, which is characteristic of gold, mercury, rarer copper, chromite and tin-and-silver mineralization, as well as of some placers of gold and platinoids.
Advance geochemical search and prospecting works performed in recent years in the Mainitski-Khatyrski platinum-beating area brought new data on metallogenic potential and perspectives of the territory in finding basic deposits of gold, platinoids and chromites; a forecast estimation of these deposits has been provided. Based on recent information, promising metallogenic areas needing a more detailed analysis of their geologic-structural, geochemical and search characteristics have been singled out. These are Algan, Velikorechinsk, Mainits, Rytgyl, Alkatvaam, and Econai areas.
In addition to this, probable reserves of platinum group metals in the Peschanka complex molybdenum-copper-porphyry formation deposit are estimated by the Р1 category as follows: Platinum - 16.2 tons, palladium - 125.5 tons, rhodium - 17.6 tons.

Pure silver deposits have not discovered, but still there are reasons to think that there are reserves with big concentrations of silver. Silver as a co-product is found in many proven gold and tin-silver deposits. Estimated on-site deposits amount to 1087 tons including:

    * 1В+Сi – 45.6 tons – 1041.4 tons,
    * 2C2 – 1041.4 tons.

Probable silver reserves as estimated on 01.01.2003 are set in the amount of 8500 tons by the Р2 category. These are located in two metallogenic areas:

    * Verkhne-Yablonski area with gold and silver mineralization - 2300 tons,
    * Pettymel-Oleptitinsky area with silver and polymetallic mineralization - 6200 tons.

The profitability of industrial exploration of silver-bearing deposits with on-site reserves is judged by economic value of basic minerals, gold and tin.

Tungsten deposits
The Government Statement of Balance includes 28 tungsten deposits on the territory of the Chukotka Autonomous Okrug, including:

    * gravel - 17,
    * basic - 11.

On-site reserves are contained in gravel and basic deposits that by the ВС1С2 category total 63,700 tons, with average percentage of WO3 of 0.06%.
Gravel deposits of the Yioultin District allow open cutting, and three of them have reserves for deep-mined output. Also, gold placers of the Lenotap River contain tungsten trioxide allowing for drag extraction.
In 7 locations with open cutting in the Chaoun District tungsten trioxide is found as a co-product for tin.
In 1992 tungsten production was quitted by the same reasons as production of tin.

Presently no copper extraction locations have been set in the Chukotka Autonomous Okrug.
However as a co-product copper may very well be produced. The most promising in this respect is the Peschanka complex copper-porphyry deposit. Apart from copper, it is proved to contain considerate reserves of molybdenum, gold, silver and platinum group metals.
Exploration work of search and estimation stage have been performed on the Peschanka deposit, mineralization was explored to 700 m depth. Results of this work served as base for estimating probable reserves of Pi category, these made up 1.350 billion tons of ore containing the following:

    * 8.3 million tons of copper (0.61% percentage),
    * 200,000 tons of molybdenum (0.015%),
    * 435 tons of gold (0.32 g/ton),
    * 5000 tons of silver (3.7 g/ton) and
    * 159 tons of platinum group metals (0.12 g/ton).

In connection with steep rise of copper price (it now costs more than $7000 per ton) industrial value of this deposit is worth reconsidering.
Additional copper reserves were found during assessment research of large territories, very promising from the point of view of copper-sulfur formation reserves.

Resource estimation Explored resources
The territory of the CAO contains 10% of the explored gold deposits of Russia. It is estimated that as of January 1, 2006, Okrug’s gold deposits amount to 527.6 tons. This figure includes both balance and beyond-balance resources of lode and placer gold.

Table 1. Explored gold deposits of the Chukotka Autonomous Okrug





Category А+B+C1

Category С2














As of January 1, 2006, 513 gold deposits were found. They differ in types and methods of mining:

Table 2. Gold deposits by types and methods of mining:

Type of deposit

Method of mining

Volume of Gold, in tons







placer, including:




open pit











Distribution of gold deposits is different for each region of the Okrug.
Table 3 shows balance gold deposits (beyond-balance is given in the brackets):

Table 3. Gold deposits by districts and areas (approximate figures):

Administrative District

Type of Gold,


Number of

Method of Mining

Volume (in tons)




22,1  (1,7)























open pit









65,7  (4,5)























open pit









26,0  (7,9)















open pit









165,9  (114,2)



















open pit
















open pit





31,2  (4,4)



















open pit








Resources forecast

Resource expectations exceed the explored resources by many times. As of 01.01.2005, the Ministry of Industry and Development of Russia approved resource forecast for lode gold in 26 locations showing positive geologic and economic parameter.
The total resource forecast for categories Pi-P2-P3 is 950 tons including:

1.290 tons (30.5%) transferred to licensed extractors;
2.660 tons (69.5%) still undistributed.

Total resources according to forecast:

89% - lode gold;
11% - placer gold.

Lode gold of the prime line of mining (new gold deposits profitable for mining in contemporary economic conditions are expected) is divided into the following categories:

1Р1 – 40%,
2Р2 – 54%,
3Р3 – 21%.

Resources and potential gold deposits differ from district to district.

1.Chukotka metallogenic system has been studied best of all. Here the main resources and potential placer gold deposits are situated. The discovered and explored lode gold deposits and prospective lode deposits consist mainly of gold-quartz and gold-sulphide.
2.Oloysk metallogenic system, the second largest system. It is characterized by high placerity of gold. Ore deposits are mainly gold-quartz and molybdenum-copper gold containing formation.
3.Okhot-Chukotka metallogenic belt primarily includes ore deposits of gold-silver formation type.
4.Koryat-Kamchat Province has been studied very little, but there are prospects of finding gold-containing ore deposits of gold-quartz and molybdenum-copper, lode and placer deposits of platinum there.

In eastern parts of the Okrug, presence gold-silver vulcanite and gold-sulphite metamorphosis traces (“Maiskoe” deposits, for example) has been located.


Sibneft New Vice President for Production 2/2/2006

Sibneft named Reval Mukhametzyanov as the company's new vice president for production. Mukhametzyanov returns to the post, which he has held previously, after serving for over three years as vice president of Slavneft.

Mukhametzyanov will oversee the exploration and production operations of Sibneft-Noyabrskneftegas and Slavneft. His long association with the company will allow him to quickly reinvigorate the development of Sibneft's production assets while maintaining the company's current strategy.

Sibneft vice president Andrey Matevosov will continue in his post, focusing his efforts on the development of new exploration and production projects. He will supervise the company's Sibneft-Vostok, Sibneft-Khantos and Sibneft-Chukotka business units.

"In previous years, Reval Mukhametzyanov's high level of professionalism helped Sibneft to achieve some impressive results," said Sibneft president Alexander Ryazanov. "His experience and insight will aid the company in achieving its plans for stabilizing production and ensuring long-term growth."

Born in 1934, Reval Mukhametzyanov is a graduate of Kazan State University. In 1977, he became chief geologist of Nizhnevartovskneft and later headed the Nizhnevartovskneftegas unit in charge of the major Samotlor oilfield from 1982 through 1985. He worked for a decade as chief geologist and deputy general director of Noyabrskneftegas (now part of Sibneft) from 1985 until 1995 before joining Sidanco as executive director and senior vice president.

From 1997 through 2002, Mukhametzyanov served as Sibneft's vice president for oil production. In 2002, he left to become senior vice president of Slavneft.

Chukchi well is a huge, new, old find 2005
World Oil MARCH 2005

MMS apparently wants folks to get interested in the Chukchi Sea off the northwest coast of Alaska.  Only about five wells have been drilled there, and one of them, the Burger discovery, was just reappraised by MMS.  The new verdict is that Burger may be the largest hydrocarbon find on Alaska’s OCS.

The well was drilled during the Chukchi exploration program, headed by Shell between 1989 and 1991. At the time, nobody was searching for gas, so not much attention was paid to the discovery.

The new re-appraisal has lifted the most-likely recoverable reserves from an original estimate of 5 Tcf of gas to a new estimate of 14 Tcf.
The estimate indicates a possible range from 8 to 27 Tcf.
Estimates for condensate' range from 371 million to 1.4 billion bbl with 724 million bbl the most likely

The Burger structure is a 25-mi diameter dome, sitting on a structural ridge that branches southwest across the center of the Chukchi shelf, from a point on the Barrow Arch about 50 miles northwest of Barrow.  The Chukchi sandstone forms an exact analogy to similar rift-sequence sandstones that form the reservoirs at the Kuparuk River field in the central North Slope.
Sibneft Begins Offshore Seismic Work in Chukotka’s Anadyr Bay
Moscow, July 19, 2005

Sibneft has begun carrying out geophysical exploration work on the Tumanskiy license block, located in the Anadyr Bay section of the Bearing Sea. The company plans to collect 3000 kilometers of seismic data at the site. The data will shed light on the geology of subsurface structures previously determined to be promising, thereby helping to design a program of exploration drilling on the field for 2006.

Sibneft-Chukotka received a five-year geological exploration license for the Tumanskiy block in November 2003. The block covers about 13,000 square kilometers in water that is 25 to 60 meters in depth. There are five localized structures within the license area, with total geological resources estimated to exceed 1 billion tons of oil equivalent.

Geological work likewise continues at other Sibneft license sites in the Chukotka region. At the Telekaiskoye oil and gas condensate field, testing is underway on a well that, in 2004, produced industrial flows of oil. Sibneft has also built geological models of the offshore portion of the Anadyr oil & gas basin based on drilling and seismic work carried out in the region, identifying several more promising structures.
Sibneft now Russia's fifth largest oil company
04-03-02  Vremya Novostei via NewsBase 

The oil company Sibneft became the fifth largest company in Russia in terms of  production in February, leaving behind Tatneft. By the end of the year, the company will boost  output by 26 % to 20.7 mm tons, compared with last year, and double output by 2005.  Company leadership notes that the company may invest annually the required $ 1 bn if the world  oil price is not below $ 16.5 per barrel. 

As output grows, Sibneft management will increase the credit portfolio, which currently stands at  $ 840 mm.
Nearly 48 % of the company's total oil export is used as a security for credits.  Company leadership is holding talks on credits with several foreign banks: West LB, ING Bank,  Societe Generale and others. 

This summer, Sibneft intends to borrow $ 200-300 mm for capital investment. In addition, the  company will solicit another credit to take part in the privatisation of a 19.68 % stake in Slavneft  by the end of the year. This year, Sibneft's main investment will be committed to the Sugmut  deposit in the Yamal-Nenets area, the Priobskoye and Palyanovskoye deposits in the  Khanty-Mansi area. 

 In addition, around $ 100 mm will be invested in the Sibneft-Yugra joint venture between Sibneft  and Sibir Energy, which develops the Yugorskoye deposit. Last year, the company extracted  80,000 tons of oil at the deposit and aims to produce 500,000 tons in 2002. 

Russian oil at a glance
The latest financials and  operating performance ratings for LUKoil, YUKOS, Sibneft, Surgutneftgaz and Tatneft.

Operating performance Production soared 17 percent last year to 1.24 million barrels per day (bpd) due to the inclusion of Komitek and three fully controlled joint ventures into consolidated production reporting. Including all Russian joint ventures and subsidiaries, production was up 2.8 percent at 1.56 million bpd.

Organic growth was low at 1 percent due to the stagnant production in the company’s core western Siberia region, which currently accounts for 72 percent of total production (the region produced 83 percent in 1999). So far, the Komitek acquisition appears to be paying off – production at the three Timan-Pechora subsidiaries (Komitek, Nobel Oil, Bitran) was up 5.7 percent last year and accounted for 9.2 percent of LUKoil’s total output.

Production at international projects continues to increase at a rapid pace (39 percent last year). Major growth was recorded at the Azeri-Chirag-Guneshli (the Azerbaijani part of the Caspian) and Tengiz (Kazakstan) oil projects.
Crude oil exports fell 2.6 percent to 594,000 bpd and amounted to 38 percent of production, putting LUKoil more or less in line with the sector average. Product exports, however, jumped 37 percent to 174,000 bpd.

Financial performance
For 2000, we estimate that LUKoil will report a 129 percent increase in net income and a 118 percent increase in earnings before interest, taxation, depreciation and good will amortization (EBITDA) on a 75 percent revenue increase.
First half of 2000 U.S. GAAP accounts published last December indicated a rather strong performance from LUKoil, driven primarily by oil prices and recent acquisitions. 
Revenues rose 116 percent in the first half of 2000 versus a 63 percent increase in production costs and a 70 percent rise in total operating expenses. As a result, the operating margin jumped from 11 percent to 30 percent.

The balance sheet appears healthy, with an estimated $2.8 billion in total debt, $1.2 billion in cash and equivalents and equity of $9.8 billion.

Operating performance Production rose 11.5 percent last year to 992,000 bpd, the best record in the sector and an astonishing performance given Yukos size. This growth was mainly driven by rapid output growth at the Priobskoye oilfield, as well as by increased utilization of new recovery technologies in the older fields.

Crude oil exports soared 23 percent to 438,000 bpd. The export/production ratio increased from 40 percent to 44 percent, the highest in the sector. Clearly this high share of exports in a period of record oil prices had an extremely beneficial impact on the bottom line.
Volumes refined at the company’s four principal refineries – Achinsk, Samara, Syzran and Novokuybishev – fell 15 percent to 434,000 bpd as Yukos re-routed some deliveries to Angarsk refinery in eastern Siberia, with which it signed a strategic partnership agreement in March 2000.

Financial performance 
We estimate that Yukos revenue grew 73 percent in 2000 to $7.7 billion due to a combination of growing volumes, higher prices and increased exports. The company’s EBITDA margin will probably have remained unchanged at 44 percent. Yukos boasts the highest EBITDA and operating margins among the U.S. GAAP reporting oil companies in Russia, which we attribute to large-scale optimization of operating taxes. 
In 2001, continued above-average volume growth should cushion Yukos from falling export prices. We estimate that revenue will fall only 2 percent year on year to $7.5 billion but forecast the EBITDA to fall by 12 percent, as rising costs will lead to declining margins.
The balance sheet improved dramatically in 2000 as Yukos moved from a net debt of $310 million to an estimated net cash position of $1 billion at year-end.

Despite generating an estimated $2.4 billion in operating cash flow last year, Yukos’ CAPEX amounted to only $500 million. Note that after subtracting a $1.3 billion improvement to the balance sheet, described above, we still could not allocate $600 million. Company executives cited long-term supplier advances and various investments (Eastern Siberian Oil Company being one) as the uses of extra cash flow.

Operating performance Production rose 5.4 percent in 2000 to 344,000 bpd, the first year of rising production in a decade. Production at the Sugmut field rose 45 percent to 48,000 bpd.

Sibneft exported 32 percent of its oil production and 21 percent of refined product output last year, largely unchanged from 1999 levels. Refinery throughput was unchanged at 250,000 bpd. Light products amounted to 80 percent of output, which is by far the highest percentage of any major refinery in Russia and is a further improvement from the 78 percent achieved in 1999.

Sibneft acquired a 40 percent stake in Orenburgneft last year for $250 million to $300 million. We expect this equity to be used as a bargaining chip to increase the utilization of Omsk refinery (64 percent at present) by securing additional oil supplies from TNK, Orenburgneft’s majority shareholder; but it is also possible that management may either sell the stake or insist on a joint operation with TNK.

Sibneft has also formed a 50/50 joint venture with Sibir to develop the southern part of the Priobskoye field. 

Financial performance
Sibneft skipped publication of semi-annual US GAAP numbers last year over a dispute with its auditor. On a full-year basis, we expect the company to report 70 percent revenue growth and 152 percent EBITDA growth in 2001, due to a combination of higher volume and prices. Margins are forecast to expand by 1,000 bp-2,000 bp.

Operating and net margins are below the sector averages due to high depreciation charges. Sibneft carries its U.S. GAAP books in dollars, which has made depreciation expense immune to the ruble devaluation. As a result, Sibneft’s depreciation equals that of LUKoil and Surgutneftegaz, despite production being 72 percent lower.

On a cash basis, margins are traditionally slightly below those of industry peers, due to higher exposure to the domestic market. This, however, should work in Sibneft’s favor this year as domestic prices outperform exports. 

Sibneft’s financial position is very stable.
The company repaid its $150 million Eurobond issue last August, but subsequently had to raise $375 million in new debt financing.

Operating performance Surgutneftegaz delivered another year of strong operating performance in 2000. Output rose 8 percent to 812,400 bpd due to another increase in development drilling, the introduction of several new fields and continuing deployment of new oil recovery methods and technologies. Crude exports rose 13 percent year on year and amounted to 34.4 percent of output, up from 33 percent in 1999.

Refinery throughput at the Kirishi refinery fell 7 percent in 2000 to 320,000 bpd after the management decided to stop processing third-party oil. At the same time, Surgutneftegaz deliveries to Kirishi rose 8 percent. Due to an excellent optimization of product output, the refinery’s light-heavy product ratio improved sharply to 68 percent-32 percent from 50 percent-50 percent in 1999. The refinery currently operates at 84.2 percent of capacity, among the highest levels in Russia, and exports approximately two-thirds of its output.

Financial performance Surgutnefetgaz’s own forecasts for 2000 are for revenue of $5.6 billion (up 70 percent year on year), gross profit of $3.5 billion (up 82 percent) and pre-tax income of $3.16 billion (up 82 percent). Although Surgut’s RAS accounts are not directly comparable with U.S. GAAP, we believe that Surgut is the most profitable company in the sector due to tight cost-control. The pre-tax margin stood at 57 percent in 2000, up 400 basis points from 1999.

Kirishi refinery, which is not consolidated in Surgut’s performance, posted a 48 percent gain in revenues to $571 million. Due to a drop in refining volumes, however, its pre-tax margin shrank 900 basis points to 35 percent, and pre-tax income rose only 12 percent to $199 million.

Operating performance Production rose 1.1 percent in 2000 to 486,000 bpd, the first gain since 1995 and actually quite an achievement given the company’s poor reserve quality.

In order to capture downstream margins, Tatneft processed 50,000 bpd at the refining unit it leases from Nizhnekamskneftekhim and marketed the resulting products. As a result of this processing activity, deliveries to Nizhnekamskneftekhim (NKNH), commonly transacted at a 30 percent discount to market prices, fell to 60,000 bpd last year.
Tatneft’s gas-station network expanded from 60 to 183, mostly in Tatarstan and the Moscow region. Jointly with LUKoil, Tatneft also acquired a 45 percent stake in the Moscow Refinery last year, its major domestic crude customer after NKNH.
Operating performance has also improved at Nizhnekamshina. Total tire production rose 4 percent and gross margins were reportedly positive.
Oil exports rose from 32 percent of output in 1999 to 40 percent as Tatneft exported additional volumes it bought from independent Tatarstan producers.

Financial performance
For 2000, we expect Tatneft to report 96 percent growth in revenues, 88 percent EBITDA growth and 122 percent earnings-per-share growth. In addition to high oil prices, the improved exports ratio and successful marketing of oil products boosted performance.

The balance sheet continued to improve due to the company’s ongoing debt reduction program. Total debt fell by $275 million to $620 million at year-end 2000, and the net debt/equity ratio has improved from 0.52 percent in 1999 to 0.21 percent.

For 2001, we expect a 33 percent drop in EBITDA on a 13 percent decline in revenues. In the absence of downstream business, Tatneft’s performance is inherently more sensitive to oil-price volatility. But a moderate reduction in working capital needs, combined with higher depreciation expense, should still allow Tatneft to generate operating cash flow of $617 million. 

Draft law on production sharing ignores investors

Several pieces of legislation have been adopted recently that will help form a special tax regime for projects operating under production sharing agreements.

The draft law "On Direct Production Sharing" is awaiting the president’s signature. It was adopted by the Federation Council and establishes a simplified procedure for production sharing between the government and investors.

It is well known that the law "On Production Sharing Agreements" (PSA) basically substitutes some taxes and duties for production sharing. In other words, an investor running a PSA project is exempt from taxes and duties, except royalties, profit tax, universal social tax and duties on the use of land and natural resources.

A special taxation system for PSA needs to meet the following two basic requirements. It must fit in with the principles established in the law "On Production Sharing Agreements" and be compatible with the Russian Tax Code and other legal and executive acts concerning taxation.

The State Duma Committee on Budget and Taxes, together with representatives of the fiscal structures, drafted a relevant document that was submitted to the Duma on January 23, 2001. But on April 26 the Finance Ministry refused to cooperate and put forward its own draft. Finally, it was decided that the latter document should be finalized and submitted to the government by June 20, 2001.

The Finance Ministry’s draft provides for a dramatic increase in the number of taxes (from four to 22) and, what is worse, establishes that investors’ expenses cannot be reimbursed in excess of the limits set by the agreement. This means that it will not be long before such "limits" appear in every PSA. And the larger the number of taxes the less production is left to be shared between the parties of a PSA. This is a step back toward the existing taxation system that we have been trying to put straight for six years.

On April 13, 2001, the Consultative Council on Foreign Investments in Russia, the European Business Club, the American Chamber of Commerce’s Russian branch, the German Economic Union and the Oil Consultative Forum, who represent the interests of foreign investors in Russia, sent a letter to Economic Development Minister German Gref where they clearly stated that the Finance Ministry’s draft law was not in line with the law "On Production Sharing Agreements." They said it "will not help create any adequate conditions for investments," that it "undermines the foundations of the production sharing principles and ideas," and "leaves no opportunity for any long-term economic assessments."

The letter, which definitely deserved serious attention, was shown little respect by the government. As if deriding it, the government meeting that convened shortly after it was received resolved "to uphold the main principles of the Finance Ministry’s draft." 

Without waiting for the deadline of June 20, the Finance Ministry finalized the draft and submitted it to the government on May 11. Compared with the initial draft, the final version showed some improvements as well as some changes for the worse. For example, a number of purely conventional payments, such as "compensation to the state for exploratory and prospecting work," were classified as taxes.

In their letter, the investors gave a highly positive appraisal of the draft law prepared by the State Duma Committee on Budget and Taxes. The letter said that the adoption of this draft "with some amendments and appendices would be a major step forward and … would signal the improvement of Russia’s investment climate in the oil and gas industry."

The investors’ opinion was ignored, and the Duma’s Committee’s proposals were rejected right away.

Another dangerous provision in the government’s draft substitutes "royalties" for "extraction tax." As things stand, the "royalty" rate varies between 6 percent and 16 percent and is specified in a PSA license, while the government’s draft calls for setting the "extraction tax" at 16.5 percent. Obviously, this may push some of the PSA projects out of business.

According to estimates made by the head of the YUKOS oil company, Mikhail Khodorkovsky, the substitution of "royalties" for "extraction tax" will nearly double the tax burden.

The cost of oil production and operational efficiency of an oil company strongly depend on the deposit’s location, depth of the oil layer, deposit’s capacity, and so on. The proposed "extraction tax" does not take these differences into account.

So, the "extraction tax," if introduced, will cause numerous problems and require existing licenses to be revised. What is worse, the tax will destroy the present rational use of natural resources and provoke social and political destabilization in a number of regions. For many oil provinces, especially the old ones located in Tatarstan and Bashkortostan, the tax may well turn out to be too much.

In other words, the government’s draft law will stimulate operations at the richest oilfields and will force companies to abandon deposits as soon as oil production costs increase, leaving the problems to future generations.

Meanwhile, the adoption of the draft law "On Direct Production Sharing" has made both the Duma and Finance Ministry drafts obsolete. This gives all interested parties – the State Duma and the government – one more chance to draft a sensible version of the Tax Code’s article "On Production Sharing" to make it possible for Russia to take part in serious talks with potential investors. (The author is a member of the Expert Council, part of a State Duma commission in charge of Production Sharing Agreements)             By MIKHAIL SUBBOTIN / Special to Oil, Gas and Energy 

exploration history
ARCO has signed preliminary agreements with two local governments covering E&P in the Soviet Far East.
ARCO's protocols with regional councils of Magadan and the Chukotka Autonomous Area pave the way for ARCO to negotiate for exclusive rights for onshore and offshore E&D. Target areas will be identified in subsequent negotiations. The councils will help ARCO obtain required legal approvals of the Soviet and Russian Federation governments.

Chukotneftegasgeologia January 12, 1993

In a deal that could lead to a joint venture agreement, IPC and Chukotneftegasgeologia have a joint study agreement covering an area in the Chukotka region. The two will assess the technical and economic feasibility of producing small onshore oil fields in the ANADYR ANDKAHTYRKA BASINS,aimed at yielding exports for western markets.

Crude from the two basins has a high wax content, but it is low in sulfur and the fields are close to the Pacific Coast.

 IPC said depending on results of the study, it could enter a production agreement with Chukotneftegasgeologia in the next 2-5 years.