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Russia: Breakthrough Agreements In Energy Sector Go Unmentioned

Washington, 12 March 1998 (RFE/RL) -- Russian Prime Minister Viktor Chernomyrdin and U.S. Vice President Al Gore said the U.S.-Russian binational commission they co-chair signed six new agreements on mutual cooperation and issued seven statements during its tenth session this week in Washington.

But a senior U.S. official said the real news of the two-day meeting wasn't even announced. Speaking to a small number of economics correspondents on the condition he not be identified, the official said the commission had finalized breakthrough agreements that will open the door to energy investments in Russia that could exceed $100 billion over the next twenty years.

"This is very big," said the official. The U.S. is the largest single investor in Russia, currently recording around $4 billion of both direct and portfolio (stock) investment. With these new prospects, he said, "you're talking about multiplying U.S. investment in Russia by 10 times just through energy projects."

The official said that while it wasn't discussed much publicly last year when the commission met in September, there was serious trouble for investment in oil and other energy resources in Russia.

Three energy joint ventures involving U.S. companies, representing investment of over $700 million, were at an impasse -- blocked from exporting the oil they produced by restrictions on access to oil pipelines, and hit by taxes that often exceeded the amount of profit they were making.

The result, said the official, was that these early oil operations were barely surviving and not recouping their investment. "What's extraordinary," said the official, "is that they didn't just close up shop" and pull out.

The official said Gore and Chernomyrdin ordered their senior energy officials to quickly address the issue and find solutions. Led by new Russian Minister of Fuels and Energy Sergei Kiriyenko and U.S. Commerce Department Counselor, Jan Kalicki, who is also the Clinton administration's ombudsman for energy relations with former Soviet states, the two sides went through several months of intense negotiations.

Their agreements were finalized in Washington and formally adopted by the commission this week.

First, said the U.S. official, there was agreement on a new governmental framework for dealing with energy joint ventures -- a more private enterprise-oriented approach. It is under that framework that the Russian government has agreed to cut excise taxes on oil by more than 50 percent and to allow joint venture oil companies full access to Russian export pipelines.

The tax agreement will reduce taxes on exported oil to the levels first agreed when the joint ventures were put together more than four years ago, and will remain low until the companies are able to recoup their investment. Then normal joint venture tax rules will apply.

But while that helps the joint ventures currently operating, it does nothing for new ventures. And there were five projects in tentative early stages that could vastly multiply the level of investment in Russia.

One thing holding them up was the supply of Russian partners -- companies which understand commercial concepts which were ready and willing to step forward and undertake significant operations.

The official said those kinds of companies are now emerging in Russia, pointing to LUKoil as one such firm.

LUKoil and the American oil firm Conoco signed a memorandum of understanding on the first of those five major ventures in Washington Wednesday -- a production sharing project in the Northern territories of Russia worth at least $25,000 million.

But right behind that, said the official, is another oil joint venture involving LUKoil and the Timan-Pechora Consortium, led by the U.S. oil company Texaco. That one, of about the same size as the Northern Territories project, will produce oil in the Timan-Pechora region.

A third energy project, Sakalin Island III (three), should also be completed before year's end, said the official. These three projects alone, he said could produce investment in excess of $70 billion. Two more huge oil projects -- Priobskoye in Western Siberia and the Central Khoreiver Depression, also in the far north -- could be ready in the next two years.

The one remaining obstacle to finalizing all of these projects is required Duma passage of new laws on production and profit sharing agreements -- required by oil companies to provide financial stability and predictability for such large projects.

The official says he is more optimistic than ever that the Duma may finally act on the PSA's, as they are known, not because there has been any change in the Duma's membership, but that there is now greater understanding of the need for these investments. "They're no longer talking about whether to approve these projects," said the U.S. official, "but deciding on what level of Russian domestic content to require."

Coupled with now strong support from regional governments which will benefit directly from the projects, the new framework between the U.S. and Russian federal governments, and the new commercial engagement of Russian companies, the prospects are good for fairly quick passage, said the official. "This has been as near a 180 degree change in the investment environment for energy (in Russia) as you can ask for," commented the U.S. official. It bodes well for both nations.