Amendments to the law on subsoil in Russia

Once approved, the amendments will significantly alter the distribution of regulatory power between federal and regional authorities, effectively depriving the latter of much influence over the grant of subsoil use rights. The constitutional principle of "joint" authority over underground resources, also known as the "rule of two keys", has been re-defined so that the federal authorities are only obliged to consult with their regional counter-parts prior to taking a final decision. Although the regional authorities will still be entitled to participate in the process, they will no longer have the right of veto over a federal decision (until now the "second key").

Not surprisingly, the amendments have faced strong opposition from the regions. Some members of the Federation Council announced recently that they would quickly initiate "amendments to the amendments" to protect their regional rights. The issue will most likely be raised again in the context of drafting the new subsoil law this autumn.

Under the legislation currently in force, an E&P licence is issued by a joint decision of the Ministry of Natural Resources ("MNR") and the regional authorities. After the amendments come into force, a decision to grant an E&P licence will be made by a tender/auction commission appointed by the MNR. The commission will include representatives of the regional authorities although their role remains unclear. The law does not prescribe that the regional members be given equal representation with the federal members of the commission. The composition of the tender/auction commission will be at the discretion of the MNR which may see the regions marginalised. Similar commissions using regional participation will decide whether or not to issue geological study licences which can be granted without a tender/auction. Under the current subsoil law, a geological study licence is issued by the MNR with the approval of the local authorities.

The re-distribution of the licensing authority is bolstered by the re-allocation of fees relating to subsoil use. Tender/auction fees, licence fees, expert fees and payments for geological information will now be made to the federal budget (currently distributed between the federal and regional budget). The MNR will also be given exclusive powers to determine regular payment amounts required for subsoil use which are set for each licencing area in accordance with statutory requirements.

The amendments will also change the procedure for holding tenders/auctions for the use of subsoil. The MNR will no longer be obliged to agree the conditions of the tenders/auctions with the regional authorities. The time periods for holding tenders/auctions and submission of the documentation will be substantially reduced. Under the current regulations, a tender cannot be held earlier than 3 months (for major subsoil deposits – 6 months) after the date of the announcement. When the amendments are signed into law, the time period will be reduced to 45 days for auctions and 90 days for tenders. This amendment may have wider implications if proposed changes to the subsoil law are passed that will impose a requirement for foreign investors to have a Russian registered subsidiary in order to participate in a tender.

When the amendments are finally approved some important, although less widely publicised, changes will be made to other licensing regulations. For example, the law will provide for an obligation upon the licensing authorities to renew a geological study licence or an E&P licence at the licence holder's request. Although such renewal will still be subject to certain conditions, previously renewal was at the authorities' discretion.

If a discovery is made by a holder of a geological study licence, the law will also impose an obligation on the investor to reimburse the exploration expenses paid by the government (if any), as a pre-condition for granting an E&P licence. It may be difficult to determine with any certainty how much these expenses will be because most of the government-financed exploration activities, were carried out in the 1970's and the 1980's. This may cause problems for investors who have made a discovery where the issue of an E&P licence does not require a tender/auction to be held.

The amendments were approved by the Federation Council (the upper chamber of Parliament) on 8 August and are to be signed into law by President Putin.