No. 1, 2005

Prof. Boris Klyukin,
Dr. Sc. (Law), Member of the Russian Academy of Mining


On ways of improving Russia's subsoil legislation

The subsoil legislation of Russia, for which oil and gas are important sources of revenue at all budgetary levels, is substantially lagging behind times. In the ten years of nationwide reforms it has made no progress since the adoption in 1992 of a basic law On Subsoil. In fact, this legislation needs the soonest development of its main institutions so that the relations of mining could be regulated in a modern way.

Gaps in the legislation

The drawbacks of the RF mining legislation consist, in its being undeveloped on the federal level. The federal laws On Subsoil, On Production Sharing Agreements, and several others, more specific ones, do not form a sound legislative basis for promoting the use of mineral resources.

In many cases, legal provisions are declarative and are not supported by statutory acts on the order and procedure for the application of legislative requirements. The federal legislation contains numerous gaps, contradictions, inconsistencies and inaccuracies, which hamper its enforcement.

In particular, there are substantial drawbacks concerning: regulation of the use and the conservation of mineral resources; delineation of public property rights between the Federation and its constituent members; the legal status of different types of mineral resources; the legal regime of mining property; the development and strengthening of the country's mineral resource base and meeting its requirements in such resources, privatization and transition of mining to market economic relations, integration of Russia's mining industry into the world system of mining relations, and development of mining and raw-materials export in conditions when the natural-resources relations are being globalized; ensuring a stable development of the use of mineral resources based on the principles of international conventions; development of rational, full-bodied, comprehensive and energy- and resources-saving mining production.

The country's legislative and executive authority does not have a concept or a strategy of developing the mining branches or of forming and utilizing the mineral and raw-materials base.

In going over to market-oriented economic relations, it turned out that entire sections of the legislation which were effective in Russia before had been lost - sections which are still operational and useful in the legislation of the advanced countries of the world. Above all, that concerns the absence of statutory acts regulating industrial development of mineral resources by the fuel and energy complex (FEC), as well as provisions regulating production relations at mining companies, or norms defining the responsibility of the subsoil users for violating the technological and engineering parameters of its development, as well as for inefficient management and performance of mining operations. The terms of and reasons for revoking mineral deposits that are not being worked properly have not been defined. As far as matters of responsibility are concerned, there is a serious gap in the section relating to the responsibility of subsoil users for failure to comply with the terms of licenses and contracts signed on the basis of production sharing agreements.

Effective federal law is insufficient for organizing normal functioning of all sections of the fuel and energy complex. Absent are both a basic codification law (a draft law On Oil and Gas has been at the stage of preparation for about ten years now) and regulatory acts on the application of the laws now in force. Because production of hydrocarbons is of strategic importance for the country, it would be expedient to adopt a law On State Regulation of the Operation of the Oil and Gas Complex. Speaking of this complex, no position has been worked out with regard to the development of the organizational and legal forms of mining companies and organizations. Definite progress in this respect would be achieved by the adoption of such laws as: On Natural Monopolies in the Subsoil Use, On Joint-Stock Companies in the Subsoil Use, and Consolidating the Rights of Shareholders, Including the State, in the Subsoil Use, and On Establishing Vertically-Integrated Structures in the Oil and Gas Sector of the Fuel and Energy Complex and Their Functioning.

Matters concerning the right of property to subsoil are complicated and confusing in the mining legislation. At present, the right of public property to subsoil, set forth in the RF Constitution and the law On Subsoil, presumes the federal property and the property of the Federation members as a form of public property. In my view, the concept of joint ownership, use and administration of public property leads into an impasse. And so, being increasingly recognized now is a uniform state policy of natural resources use - a policy which is not divided into federal and that of the Federation members, as well as uniform state ownership of mineral wealth as opposed to public property divided into its federal and regional components. The main problem here consists in proper assessment of the economic interests of the Federation, its regions, and the local population. This problem can be resolved by distributing incomes and profits derived from the use of mineral resources in proportions provided for by the RF Constitution.

New rules for the oil and gas industry

Because of frequent restructuring, the management of the Russian oil and gas complex is unstable. The RF Ministry of Industry and Energy, the RF Ministry of Natural Resources, the RF Ministry of Economic Development and Trade, and others are currently involved in managing the FEC. Parallel with the federal agencies; the public authorities of the Federation constituent members are also involved in that process. The functions of providing the use of mineral wealth are not clearly defined, being detached from control over the use of mineral wealth, as well as from regulating the terms of contracts on the production of hydrocarbons.

As distinct from our system of managing the oil and gas complex, the functions of public management abroad are vested in a single body (usually the ministry of mining or the ministry of the oil industry). Quite often these functions are vested in specially established public corporations, which have the state-delegated powers of managing oil and gas production on behalf of the state (such powers as elaborating the terms of concession and licensing contracts).

Regulatory acts relating to the prospecting, exploration and production of minerals should formulate the rights and obligations of the users of mineral resources in greater detail - as this is done in the mining codes, basic laws on mining and special legislative acts regulating the prospecting and production of certain minerals, or some other spheres of their utilization, abroad, including in the former CIS countries.

In the majority of foreign countries their mining legislation contains blocks of laws on the legal status and forms of incorporation of enterprises in the mining branches of industry.

Even operating under market conditions, the holder of rights to prospecting and exploration is obliged to submit a plan of operations and an annual report on the operations already carried out. The main obligations of a mineral resources user include provision of safety guarantees or compensation for possible damage resulting from the operation of a mining enterprise, including the obligation to re-cultivate the soil.

As for prospecting works proper, they are regulated by legal acts, but to a very insignificant extent. More often than not, they are regulated either by legally binding bylaws or, as this is done in our case, by scientific and practical recommendations and methodologies, as well as statutory documents elaborated within oil and gas companies.

The most important areas for improving relations in the use of mineral resources lie in the sphere of prospecting, exploration and industrial production of minerals. Therefore, it is these areas that deserve close attention first and foremost. Statutory norms and standards formulating conditions and requirements regarding the prospecting and exploration of minerals must be developed.

Now it is becoming increasingly obvious that the sphere of industrial operation of mineral resources needs to be regulated more strictly at the federal level. This sphere may require provisions on the legal status of mining enterprises, ensuring their rights and stable functioning and formalizing the legal distinctions of their status and the specific forms of their activity.

Developing contractual terms

Along with the development of various forms of administrative and legal regulation of relations in the sphere of mining, an important part should be played by civil regulation envisaging the development of contractual terms in that sphere.

A mining concession is presently the main form of production relations in the mining industry of many countries. A detailed legislation on concessions is a characteristic feature of the concession relations abroad, also founded on the legally-binding form of relations in the civil law, which equally ensures the protection of the interests of the state and of concessionaires.

As distinct from public administrative regulation through authorizations issued on the basis of a licensing system, contractual relations demonstrate an

individual approach of the state based on concrete agreements with a concessionaire, for instance, such as agreements on product sharing, leasing, the use of mineral resources, etc.

From the point of view of the state, concessions are an advantageous form of relations between the state and the mineral resources user.

For several years now the RF State Duma has been working on a draft law On Concession Agreements. Back in the 1920s, our country concluded an agreement on oil production in Sakhalin with a Japanese concession company. It is expedient to employ this form of mineral resources use even now. This, however, calls for particular laws on oil and gas concessions.

Very important besides concessions in the sphere of hydrocarbons production are production sharing contracts.

Another widespread form of the use of mineral resources is an agreement on provision of services involving a certain risk. Usually, such agreements are of two kinds: the first kind provides for the risk to be shared equally by both sides; the second provides for the entire risk involved in the prospecting and exploration operations to be borne by the contractor company. Under effective law land lease for mining purposes is also a special form of relations, particularly in the sphere of exploration and production of hydrocarbons.

All of the aforementioned and other forms of relations existing in the foreign mining law can be used in the Russian legislation as well. Under the Russian law, each of these forms has to be legalized in accordance with the RF Constitution.

To bridge the gaps in the regulation of mining relations, it is essential that a full-bodied legal framework be created to ensure effective state control and supervision over the rational use of mineral wealth and the operation of mining enterprises.

Such a framework should be formed as an integral and lucid system of mining laws supported by a necessary set of regulations which would ensure enforcement of the mining legislation and protection of the rights of the parties to mining relations. Such a system is especially important for the oil and gas industry, which is vital for Russia.

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Oil of Russia, No. 1, 2005
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