The Sticky Politics of Ex-Soviet Oil

THE United States oil industry remains confident of making money in the republics of the former Soviet Union, despite business environments that oilmen describe as chaotic.

Formal dissolution of the union on Dec. 31 cleared the way for capitalism and foreign investment in lands that hold vast oil reserves, some already discovered and waiting to be developed. But progress has been held back by the lack of relevant laws and established business practices.

"Eventually it's going to settle down," says John Lord, a spokesman for Mobil Corporation. "It's a very bumpy period now."

Evidence of that came recently in Russia's awarding of the Sakhalin Island oil development project. Some 740 million barrels of oil and 14 trillion cubic feet of natural gas are known to lie offshore the island off Russia's Pacific coast. And more potential accumulations remain to be tested.

In late January a consortium led by Marathon Oil Company in Houston beat five other bidding groups for the Sakhalin project. But after local officials on the island objected to being excluded, the Russian Parliament established a commission to review the award process. That spawned rumors that bidding would be reopened. But "as far as we know" the project still belongs to the consortium of Marathon, the engineering firm McDermott International Inc., and the Japanese company Mitsui, says Michael Dixon, a Marathon spokesman.

Russian tax law also challenges foreign oil companies. "The whole matter of taxation is badly confused," says George Hardy, a Louisiana lawyer who directs the Russian Petroleum Legislation Project at the University of Houston Law Center (UHLC). The project assists the Russians in drafting legislation to govern petroleum activities.

"They have accumulated a set of economic burdens that would cripple investment in oil and gas by foreign and domestic companies alike," says Mr. Hardy, including:

* A 32 percent income tax.

* A 28 percent value-added tax.

* Currency regulations that require 10 percent of hard-currency earnings to be turned into rubles at the state-set rate.

* Domestic companies must exchange a further 10 percent of their hard-currency earnings at an unattractive rate.

* A graduated "super-profits tax" which rises as production rises from a given oil field.

Particularly onerous is a recent export tax that would add about $5 to the cost of a barrel of oil. Russia "can't expect that anyone can come in and invest behind that kind of export tax, because it amounts to a levy right off the top," says John Kilgore, president of Texneft, a subsidiary of Houston-based Global Natural Resources that operates a joint venture in Russia. However, "we expect to be made immune, as do all the other oil companies out there."

Russia's recent "plethora of decrees," Mr. Kilgore says, "are well intentioned but not done with a very clear understanding of what the effect is likely to be."

Although much larger companies have yet to land a project in Russia, Kilgore's company got in by taking on a small project, which made the uncertainties of Russia more acceptable.

The University of Houston Law Center's Hardy notes that Russia is anxious to pass laws as quickly as possible. He first visited Moscow in August, one week after the failed coup. He was handed a draft of an "umbrella law" governing minerals and asked to work it over.

"I retired to my hotel room for four days and turned out what should have taken three to six months," Hardy says. The UHLC project furnishes drafts based on "the best of world practice." Parliament adopts whatever portions it wants. So far an umbrella law has been adopted and awaits President Yeltsin's signature.

Meanwhile, the UHLC project has turned in a draft law governing exploration licenses for oil companies. Hardy will submit a draft law covering pipelines by March 16, and one dealing with conservation and the environment by April 1.

Taxation will be the last topic he'll tackle. The key, he says, is for Russia to set policy goals for taxation. Otherwise "you're drafting [laws] in quicksand."

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