WE HAVE NO DOUBTS IN THE CORRECTNESS OF THE CHOSEN WAY

A SOURCE FOR THE NEW CENTURY

We Are Sure in the Chosen Way

Igor Farhutdinov,
governor, Sakhalin Region

        On the 24 of July 1994 the Sakhalin Oblast (Region) and the whole of Russia made the first step towards putting into practice the principle of division of production when developing raw mineral material deposits. On that day the government of the Russian Federation and the administration of the region signed an agreement with "Sakhalin Energy Investment Company Ltd" concerning the exploitation of Piltun-Astokhsk and Lunsk deposits of oil and gas on the conditions of division of production.(Sakhalin-2 project).
        A year passed and another agreement was signed. That time - about division of production of Chaivinsk, Odoptinsk and Arkutun- Daginsk oil-and-gas condensed deposits on the Sakhalin island shelf ("Sakhalin -1 project) with the consortium, consisting of the following companies: "Exon" (USA), "SODECO" (Japan), NK "Rosneft" (Russia) and OAO "Sakhalinmorneftegas".
        These agreements stimulated the adoption of the federal law "About agreements of division of production" in December 1995. The administration of the Sakhalin Region and the Sakhalin Regional Duma took the most active part not only in its elaboration but also in its passing through the Federal Congress of the Russian Federation. The regional Duma adopted the laws concerning the taxational regime, based on our two projects, to develop that law and to create legal foundation for realization of the "Agreement of division of production" according to "Sakhalin -1" and "Sakhalin-2" projects.Investors were released from local taxes owing to those laws.
        Further events showed that one federal law was not enough for realization of the principle of division of production. Federal laws about the inclusion of some changes and additions in it were adopted last year. The administration of the Sakhalin region and Sakhalin regional Duma in conference with the Ministry of fuel and power engineering of the Russian Federation were the initiators of the working out and adoption of these bills.
        Besides, the regional administration not only ensured the adoption but also worked out a number of decrees and orders of the federal government, some normative statements on taxation, customs and frontier control.The work in this direction is being carried out at present as well.
        A detached observer may have questions about the principle of division of production: What is the gist of it, what makes it necessary to use this principle, what relation does it have in drawing investments and the upsurge of the economy?

The gist of the principle

        In general its contents is as follows.
        On the one hand, the state, as a rule on the competitive basis, grants the right to develop mineral and raw materials resources to an investor or a group of investors and releases it from the greater part of federal and local taxes. In return the state gets a certain part of the extracted raw materials. Furthermore all the infrastructure objects created by the investor to provide the extraction of the raw materials finally become its private property.
        On the other hand, the investor, at his own risk, using borrowed and ownership capital, is bound to organize both extraction and sale of the raw materials. Due to the sale of this extracted raw materials investor gets compensation for his expenses and gets a certain profit.

Necessity of use

        As a rule, the development of raw materials resources is connected with the investment of considerable funds and usage of the latest achievements in technique and technology. It especially concerns the projects dealing with oil and gas deposit development, sea deposits in particular.
        Unfortunately, our country is unable to provide all the funds necessary for the realization of such projects. Besides, we still lack experience and technologies required for exploitation of sea deposits, all the more those located in the region with severe climatic conditions.
        Business cooperation with the world-wide known oil companies permits us not only to make up all the deficiencies, to acquire the necessary experience and technologies, but to train specialists that meet the demands of the highest international standards.

Investments

        The total volume of investments, necessary for the realization of the projects "Sakhalin-1" and "Sakhalin-2" alone is estimated at 25 billion US dollars. Since the starting point of its realization the companies-participants have already invested approximately 1.5 billion. US dollars. Part of these sums is received by Russian enterprises which take part in the work fulfillment and render services as contractors and subcontractors.
        Administration of the Sakhalin region and Ministry of Power engineering of the Russian Federation (this is what the Ministry of Fuel and Power engineering is called nowadays), which represent the interests of the Russian Federation in these projects pay a special attention to the participation of the Russian enterprises. One of the most prospective directions for the activization of Russian partnership is the creation of joint-ventures with foreign partners, the application of other forms of cooperation. The Russian enterprises, thus preserve their working places, and budgets of all levels get deductions from profit.
        Notwithstanding the fact that the full-scale extraction of oil and gas has not started yet, Sakhalin region gets a bonus owing to the project and gets various kinds of contributions to the Fund for Development of the Sakhalin Region, and when the extraction of oil and (or) gas has started the region is due to receive payments for the use of the displaced earth.
        Administration of the Sakhalin region and Sakhalin Regional Duma take measures for regulating the collection and use of these assets.
        Thus in 1996 in accordance with the local law and for the purpose of accumulation of means for financing special (mainly investment) programs for socio-economic and cultural development of the region the extra-budget of the Sakhalin region was founded. The above mentioned payments are received here. The assets are at the efficient disposal of the administration of the region, and the Sakhalin Regional Duma exercises control over receipt and special-purposes expenditures.
        And in 1998 the local law "About foreign investments in the Sakhalin region" was adopted. It protects both the rights and interests of the foreign investors.
        We realize that all which has been done presents the first steps and it is still far from the creation of the harmonious system of measures that would secure a favorable investment climate. Although we are not afraid of difficulties because we are sure of the correctness of the chosen way.