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In a blow to foreign oil companies,

  • Russia says it has decided not to grant special legal protection to dozens of energy projects in which large western oil companies had planned to invest billions of dollars.

    Russia says the oil companies should trust their investments to the country’s existing legal regime. BP’s decision in February to pay US$6.75bn for half of a Russian oil company appears to have delivered a death blow to PSAs, allowing Moscow to argue that it could attract big investments without offering the tax breaks and other perks of a PSA.

    But BP claims it would still be disappointed by the cancellation of the PSA regime, under which it had been planning to develop a giant gasfield and other capital-intensive projects. Deputy prime minister Viktor Khristenko says the government would later this week propose amending legislation to preserve five existing PSA projects but scrap the majority of 33 additional projects still in the planning stages. Russia’s soaring oil production, along with the BP deal, appears to have given the government the confidence to abandon production-sharing agreements.

    The contracts never enjoyed much support in the government or parliament but were tolerated in the mid 1990s, when Russia’s oil production was falling because of a lack of investment. Seeking to attract foreign money, the state approved four PSAs for the oil and gas sector and one for a gold mine. Thanks to the political stability that has set in since President Vladimir Putin came to power in 2000, Russia’s own oil companies have dramatically boosted investment and sent output climbing. But many foreigners argue that cancelling PSAs would be a mistake if Russia is to keep production growing over the long term. Most of the production growth over the past three years, they note, has come at relatively little cost and during a period of high oil prices.

    “PSAs should play a role in the investment mix in Russia for large, capital-intensive projects that require long lead time,” says Peter Henshaw, a BP spokesman in Moscow. The company was confident enough in Russia’s investment climate to buy half of a new company called TNK-BP, but says it wants a PSA in hand before tapping a giant Siberian gas field. BP and its partners have “invested and carried out activities on the basis that any development would take place under PSA” and would be disappointed by the regime’s cancellation.