MOSCOW (ResourceInvestor.com) The government lifted a three-year moratorium on issuing new licenses for the exploitation of Russia's natural resources this week. The Natural Resources and Economics ministries have finally approved a schedule for the license application process in 2004-05.
In all 181 licenses are up for grabs over the next 18 months for both mineral and hydrocarbon resources. The decision to restart the sell off is part of the Kremlin's broader privatisation strategy.
Although the state has taken tighter control of what analysts have been calling the "commanding heights" of the economy - such as the creation of an energy giant with the merger of state-owned Gazprom and Rosneft - it is also actively courting investors to play an expanded role in the bringing Russia's mineral wealth to account.
As a result licensing procedures have been streamlined to allow the allocation of combined exploration and production licenses. More importantly, new rules make it easier to transfer or sell license rights.
Previously licenses were pegged to an owner which negated their transferability. That made it difficult to collateralize credits, affecting conventional project financing.
Russian companies are just beginning to explore the possibility of cutting project financing deals which would reduce the cost of borrowing (project financing special purpose vehicles can win higher ratings than their parent companies) and significantly extend the maturity of the loans.
However, licenses cannot be transferred from the license owner to the special purpose vehicle in order to ring fence risks. So only a handful of project financing deals have been cut.
Several large mineral deposits are on the slate for sale this year. The biggest license on the new list is for the exploration and development of the Sakhalin 3 bloc on the oil- and gas-rich Sakhalin island in the Far East.
The license for this bloc was originally awarded to ExxonMobil and ChevronTexaco ten years ago but was withdrawn in January after the Natural Resources Ministry said the companies had failed to start work on the bloc in accordance with the terms of the license.
The Sakhalin 3 licenses is due to be assigned in three months after the amended "Law on Subsoil Use" has been adopted, a draft of which will be ready by end October according to Natural Resources Minister Yuri Trutnev, and the law should be in place by mid 2005.
Increased transparency in the whole licensing process will be welcomed by both Russian and foreign investors. Licenses are normally issued with a long list of norms that specify the conditions of production. However, once work on a specific deposit begins companies typically find it is more profitable to alter their plans that don't always tally with the terms of the license.
In the past the Natural Resource ministry, which regularly checks companies' compliance with the terms of the licenses, has been cooperative and changes to a license's terms have been a matter of routine.
Russian oil companies say that the Natural Resources Ministry has been dragging its heels in approving technical changes since the start of the year. A six-month backlog has built up, introducing new risks for natural resource extractors.
These dangers have been highlighted in recent weeks by the Natural Resources Ministry's threat to nix five of Yukos' main production subsidiary's licenses "on technical grounds." Yukos management said in a conference call in the summer that the compliance of these fields with their licenses have been inspected and passed multiple times by the ministry in the past. The ministry is due to rule on the issue this week.