LEGAL UPDATE: E&P Legislation in 2010 Presentation to the Energy Committee of the Association of European Businesses 4 February 2011 Natalia Kozyrenko, Partner CMS Russia

2010: Overview by MNRE and Minenergo Reserves increase achieved: oil million ton; gas bcm 45 new deposits discovered Exploration financing: RUR20 bln - state; RUR169 bln – licence holders Interest in new licences remains low: 288 auctions held, 84% failed (against 78% in 2009) Oil production remains stable due to growth in regions with special tax benefits (including PSA); production in traditional provinces falling Source: MNRE; Minenergo; RBC-Daily

2010: Key Topics Support for continental shelf and other mega projects (Yamal; East Siberia) Taxation and tax incentives for the industry Ecology, energy efficiency and energy saving Use of innovative technologies Incentives for exploration

Exploration Incentives (1) Strategy for development of geological industry until 2030 passed in June 2010 Main legal issues remain: access to data; access to new licences; securing of E&P rights in case of discovery; tax incentives Free use of state-owned data introduced from 1 January 2011 Bigger issues: state secrecy; export - unresolved MNRE proposed amendments in respect of privately-owned data: become publicly available in 4 years

Exploration Incentives (2): Grant of E&P rights Right to refuse grant of E&P licence/right to terminate in case of discovery of strategic field remain No much progress on cost recovery regulations MNRE proposed amendments: Cost recovery by next licence holder (not state) RFG confirmation of E&P right before discovery in “exceptional cases” Applies to entities under “control” of foreign investor only Special rules for offshore areas

New Incentives for Offshore Projects MNRE Proposal (Dec 2010) : Prospecting licences to be available to any investor In case of discovery, private investor may form JV with state-owned company or recover cost from next licence holder For “combined licences”, same requirements apply (RLE; 5-year experience of any offshore projects; more than 50% RF participation) 50% increase of royalties under prospecting licence PSA revival?

Strategic Industries Law Developments 56% of requests under SIL relate to natural resources “First package” of SIL amendments approved by Govt on 2 Feb 2011 No fundamental changes - some activities to be excluded from “strategic” list; procedural amendments For natural resources – exemption for transactions where percentage remains the same More expected of “second package”

“Environmental Revolution” Basics of Environmental Policy until 2030 developed by MNRE and submitted to Govt; approved by Duma NR Committee in December Six draft laws prepared by MNRE: On improvement of system of establishment of emission limit values On economic incentives in waste management On organization of state environmental monitoring, auditing and control On environmental audit On specially preserved territories On protection of sea waters and facilities against oil pollution

Draft Law on Protection against Oil Pollution –Alternative drafts developed by MNRE/Duma –Special requirements to design, construction, commissioning and decommissioning of facilities; plan for prevention or mitigation of damage and liquidation of oil spills; emergency response measures –Financial security Bank guarantee; insurance policies; special fund; list of assets available for sale to be provided by “exploiting organization” Alternative draft: Fund for compensation of damage caused by oil spills to be created by owners of oil production facilities –Liability issues (including distribution of liability between licence holder and operator)

Tax Incentives –Minenergo: under current tax system, production is uneconomic for 90% of newly discovered reserves and 30% of currently producing fields –Changes to current tax system (including tax on additional income) still discussed; Minenergo propose to reduce tax burden on oil producers to 65% by 2020 from current 73% –Mineral extraction tax benefits already in place for certain territories –Tax benefits to be granted for mega projects (e.g. Yamal: MET at 0%; 0% custom duties for gas condensate and LNG; VAT exemptions) –Tax benefits to enhance production on small or deplenished fields

Conclusions – E&P legislation in 2010 –No much progress achieved in 2010 in terms of actual amendments/passing new legislation although proposals are promising –Liberalization of access to licences of foreign/private investors not priority; special attention to mega projects & partnering with state- owned giants –Incentives on tax front viewed more important than stability of legal rights –Special arrangements for particular projects (including tax) – return to PSA concept? –Greater emphasis on environmental issues

CMS, Russia Gogolevskiy blvd Moscow Russia Т F