TRANSACTIONAL: Upstream Developments – Russia: Russian Offshore: Addressing the Risk

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The development of the Russian shelf is essentially reserved to state-owned Rosneft and Gazprom (and their affiliates). Under Russian law, oil and gas deposits located on or extending into the continental shelf of the Russian Federation may be used only by Russian legal entities (i) with at least 50 percent state participation, and (ii) having at least five years of experience with operations on the Russian shelf.

After years of limited progress, the past two years have seen a boom in Russian Arctic development projects with companies such as ExxonMobil, Statoil and ENI entering into arrangements with Rosneft, and with other companies involved in discussions with Gazprom and its affiliates regarding potential Arctic projects. These arrangements generally envisage that Rosneft or Gazprom as license holder will remain the sole license holder and that the partner oil company will act as an operator/contractor and investor.

In an effort to address certain holes in existing Russian legislation, and following global concerns related to inherent risks involved with deep water development, as of this July an operator must provide an oil spill prevention and clean-up plan and financial security prior to commencing any new offshore subsoil operation in Russian waters.

The New Amendments to the Continental Shelf Law

On 1 July 2013, a set of amendments to Federal law No. 187-FZ "On Continental Shelf", dated 30 November 1995 (the "Continental Shelf Law") and Federal law No. 155-FZ "On Inland Sea Waters, Territorial Sea and Contiguous Zone of the Russian Federation", dated 31 July 1998 ("Amendments") came into force. The Amendments bring the laws into line with goals established by the Russian State Program for Environmental Protection for 2012 -2020, adopted in December 2012, that envisage among other things:

  1. improving regulations in order to decrease the potential negative impact of oil spills on the Russian shelf;

  2. establishing that companies operating artificial islands (including rigs) and related facilities and/or conducting drilling works on the Russian shelf ("Operators") have liability for the prevention and clean-up of oil spills; and

  3. establishing joint liability of subsoil license holders with respect to environmental and/or third party damages caused by their subcontractors.

The Amendments provide that an Operator is obliged to maintain financial security covering (i) the cost of performing the work envisaged by its internal oil spill prevention and clean-up plan, and (ii) compensation for potential damages to the environment and/or third parties as a result of an oil spill.

Financial Security

The methodology for determining the amount of security necessary is still to be elaborated by a state authority to be determined by the Government.

The financial security may be provided by means of:

(i) a bank guarantee;
(ii) an insurance agreement; or
(iii) through an Operator's reserve fund.

An Arctic operation must provide state authorities with documentary proof of the existence of the respective form of financial security.

Liability

The Amendments specifically provide that when a subsoil license holder engages subcontractors for conduct of works, that license holder is jointly liable for the damage caused to the environment and/or third parties by its subcontractor. Under Russian law, joint liability implies that a person that suffered damage can seek compensation from a license holder in case an Operator or a subcontractor (as applicable) fails to provide the required compensation. This amendment is of particular significance as Russian law does not otherwise clearly indicate who should bear the burden of compliance with (and liability for violation of) certain HSE requirements applicable to subsoil use – i.e., the license holder or Operator (subcontractor); Russian court practice in the past has been contradictory in this respect. With the new amendments any potential for liability, at least with respect to continental shelf projects, should become more clear.

 Alexandra Rotar
 Moscow
 +7 495 228 8518
 arotar@kslaw.com

 View Profile »

 

 Jennifer Josefson
 Moscow
 +7 495 228 8502
 jjosefson@kslaw.com

 View Profile »

 

Topics:  Energy, Natural Resources, Offshore Drilling, Oil & Gas, Oil Spills, Russia

Published In: Energy & Utilities Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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