Galina Pavlova, 萨哈林地区
Release Date: 2010-05-25
Galina Pavlova, Vice Governor of Sakhalin Island, was interviewed by Oil and Gas Financial Journal to talk about the current development of Sakhalin, its ambitious energy projects and the efforts that the administration of Sakhalin takes to protect the region, its people and its unique natural resources.Galina Nikolaevna, after you left Sakhalin for Moscow, what made you accept the proposal from Governor Khoroshavin to join once again the team of the regional administration, after some time of not being on the Sakhalin scene?
In 2007, when Alexander Khoroshavin was freshly appointed as Governor, and had not even yet been through his official inauguration, he called me in Moscow and invited me to join his team to continue working in charge of oil and gas projects, this time - as Vice Governor of Sakhalin and the Head of the Moscow rep office of Sakhalin regional administration, since for a place like Sakhalin, a large part of the work for managing Sakhalin projects is based on interacting with different Federal entities. That is why my work keeps me almost constantly in Moscow. This is an important mission, and the Governor has convinced me to take the responsibilities that mainly include interaction with the federal authorities, lobbying for the region’s interests in the framework of the federal target programs, the current projects, the allocated financing and other issues. I’m also one of the main organizers of the international ‘Sakhalin Oil and Gas’ conference and exhibition that takes place every year in Yuzhno-Sakhalinsk.
The Governor of Sakhalin also spends a lot of time in Moscow due to frequent visits and meetings at all levels - from the heads of the Russian government to CEOs and representatives of different diplomatic services. Our headquarters is always a whirlpool of people!
Obviously, the relations with the Federal entities are extremely important for a strategic place like Sakhalin. How do you find the basis for those relations, mainly after changes on the legislation that occurred a few years ago, where part of the regional authorities are directly appointed by the Federal Government?
My personal position has always been very independent. Regarding the interaction with the federal authorities concerning oil and gas projects and my position, we have managed to establish partner relations with the Ministry of Energy, the Ministry of Natural Resources and the Ministry of Finance. In spite of the fact that the “two key principle” (joint and equal management of natural resources between the federal centre and the federal subjects – Editor’s Notes) has been largely eliminated, this system is kept in the framework of Product Sharing Agreements (PSAs), meaning that the local administration has equal rights with the federal government in management of PSA projects. All the decisions are taken under the signature of the Ministry of Energy, on behalf of the federal government, and that of the Governor, on behalf of the region. The two key principle allows us take decisions concerning the Sakhalin projects in the interests of the people of Sakhalin.
Sakhalin is not particularly subordinated as a region, maybe due to the importance of the Sakhalin oil and gas projects and our rich natural resources. During the earthquake on Sakhalin, the Russian government immediately allocated billions of rubles for reconstruction of the affected area; this is an example of the excellent level of our cooperation with the federal government.
Galina Nikolaevna, you were one of the initiators of PSA agreements in Sakhalin. What was the basis for this model and why was it acknowledged the best option for Sakhalin in the 1990s?
The model of PSAs and the corresponding legislation were ripening in the State Duma with the help of deputies from Sakhalin. At that time, I was the Head of the Committee of the Regional Duma for Natural Resources and Offshore Development. It was the moment when the region had to decide how to develop the oil and gas resources of the shelf. I have to note that at that time the regional government was very interested in the development of the shelf. Sakhalin’s regional deputies and the regional administration, jointly with the federal government, were discussing the possible ways to start the development of the shelf. The ‘two key principle’ was in force at that time, and the region was an equal partner of the government.
If we look at that period retrospectively, the onshore resources were almost exhausted, hydrocarbon prices were very low ($20/barrel), there was very little experience of working with big foreign investments and no technologies for LNG production and offshore development. One of the few advancing companies was Rosneft (Sergey Bogdanchikov, CEO of Rosneft, was the President of Sakhalinmorneftegaz), the pioneer discoverer of the shelf, but there was no money for the progressive projects. The favorable environment was formed by a nucleus of highly qualified specialists in the Ministry of Energy and the State Duma. It was decided on the state level to develop the shelf on the basis of PSAs according to annual tenders with the participation of the Government. We did not expect hard and protracted negotiations but it turned out to be more difficult. We had to start from scratch and we have learned a lot with our partners. However it’s not enough yet, and I’m sure that now, 20 years later, it is time to introduce a lot of changes in the mechanism of PSAs operation in Russia.
In the perspective of foreign companies, it was very important to involve the Russian government as a reliable partner to share the risks in the PSA due to unstable political situation in Russia right after Perestroika. For them it seemed to be the only way to invest in Russia…
PSAs were a remedy for all the stakeholders as the foreign investors who wanted to come to Russia needed long-term rules of the game. They could be ready for tougher conditions but Russia had insufficient experience. Sometimes we could not lobby our interests good enough in terms of the economic benefit of the projects and their profitability for Sakhalin and Russia as a whole. Nevertheless, it has become obvious that these projects have paid off and have brought a lot of benefit to the region. We’re proud to have a whole range of international companies on Sakhalin, and I personally know the CEOs of many global corporations from dozens of countries. A lot of the regions of Russia would be honored to meet them. Moreover, our cooperation is continuing!
Sakhalin is a unique paradigm for Russia however it’s not yet obvious for everybody. When President Medvedev came with a large delegation to open the first LNG plant in February 2009, he was pleasantly surprised to see what was happening there. No one expected to see such mass-scale events on Sakhalin. The choice of PSA was a conscious choice. As one of the ideologists of these projects, I can say that the current situation on the Sakhalin shelf is spiraling back to the same point with the development of the Arctic shelf – to the issue of the economic basis for the development of the complex fields.
There has been no legislation in the sphere of shelf exploration and LNG marketing…
I’m sure that if we apply PSAs or concession agreements, it would be very useful for the development of these fields. The state is interested in a full control of Sakhalin 1 and 2 as the only two Russian offshore projects where the state takes joint decisions for marketing, budgeting and involving the Russian subcontractors.
Last year, during a Moscow oil and gas conference, we were discussing the development of the Yamal offshore fields. Russian contractors were talking a lot about the absence of mechanisms to defend their interests whereas this mechanism is always clearly stipulated in PSA contracts. We have created a special joint committee for the Russian participation to discuss all these conditions. We have applied a lot of efforts to attract the maximum number of companies from the Far East and Sakhalin in these projects over many years. It’s very clear that many companies have reached a brand new level of quality and know-how, and we have realized that this is one of the important advantages of PSAs. They allow us consider conflict tenders directly together with the heads of the companies. It is only possible in the framework of PSAs. But the problem is that if the next projects in Sakhalin do not develop as PSAs, we won’t have access there. We can only ask them to attract the Russian participants but we won’t have the authority to make them accountable to us for the Russian participation as this issue is not defined anywhere as a regulation.
Obviously, the economic proof of the benefit of the PSA system is there, and the experience is also there… As a Russian citizen, what do you think enables the Russians today to accept that PSAs were particularly good to take something positive from to use it again?
The Russians should understand that the regional governments launch projects for the maximum benefit of the citizens. It does not matter if the framework is that of concession agreements or PSAs or anything else. PSAs were the best solution at that time. Now, in any case, the government will look for the economic preferences for field development. We have seen it in the case of liberalization of the export duties for the ESPO pipeline that is debated every month by Transneft over and over again. One of the advantages of the PSAs is that they define long-term conditions. I’m convinced that the Russian citizens would support us if implementation of the PSA principle with written rules of the game gives Russia maximum profits acceptable also for the investors. But today Sakhalin has been deprived of the royalties and part of the profit.
PSAs envisage a special tax regime. One of the main taxes for Sakhalin is the property tax. It was replaced, under the PSA regime, with the profitable product share and the share of oil and gas that the region would get. Now Sakhalin gets 50% of the profitable products. But the main problem is that this profit only appears after the costs are recovered. This is why cost-containment is important.
The profit tax is also one of the main sources of dozens of billions of rubles of revenue that was flowing in the region during the last two years making Sakhalin one of the most stable regions during the crisis. Thus, the profit tax is one of the main advantages that PSAs represent for Sakhalin.
The third source of profit are the royalties paid for using the region’s natural reserves. In the beginning, under the Law on Subsoil, royalties were split in the amount of 60% of profit going to the region and 40% - to the federal budget. This royalty is especially important due to the fact that it is the first to appear straight after the start of production. Currently Sakhalin gets no royalty at all; all the profit is taken to the federal budget which hinders the region to get a full compensation.
Obviously, the main task for your Administration is to create the social and industrial infrastructure for the companies working there as well as for your citizens. Do these taxes bring enough assets to create business and life environment for the people? At some moment, it would be more difficult to maintain the balance…
The Governor and his team implement programs depending on the amount of profit for the regional budget - including the share of profitable products and profit tax from oil and gas projects. Two years ago the regional administration finally gave a breath of relief when the regional budget got about 1 billion USD which is just a part of the profit tax in one (!) project. The problem is that the regional oil and gas projects pay the region the taxes only after the costs are recovered. We’re talking about oil and gas worth dozens of billions of USD. Unfortunately, due to increased prices of the hydrocarbons, such significant profits won’t arrive before a couple of more years.
In some years Sakhalin has a chance to become the second Kuwait. The island is indeed experiencing a heavy industrial load because of the industrial infrastructure that puts Sakhalin’s biological resources under a lot of stress. It will require a lot of money to finance the compensational programs aimed at protecting the natural resources and the people of the island. The royalties could be a possible solution to neutralize these negative factors, this is why the regional administration is constantly addressing the federal government. At this point, due to the situation with the oil spill catastrophe in the Gulf of Mexico, this has become a particularly alarming topic.
Do you feel that there’s room for negotiation?
This is discussed and negotiated with the Ministry of Finance, and to some extent the feedback is there. Sakhalin’s regional budget is still keeping the 50% of the profit from oil and gas production. We have to note that the Ministry of Finance also grants us a few subsidies that compensate for the lack of tax profit.
Secondly, we have managed to make the Foundation for Sakhalin Development part of the PSAs. We have received 200 million USD from Sakhalin-1 and Sakhalin-2 projects for financing the urgent social and economic issues. Besides, we have received the support of the representatives of the Government for development and reconstruction of the related infrastructure that requires a lot of assets every year. About 300 million USD have been already spent for it.
Besides, the project operators also develop charity programs. Companies invest in the development of medical services, methods of utilizing solid domestic waste, environmental programs and work with the peoples of the North.
Have the small and medium local companies benefitted from the so-called ’trickle down effect’, especially in the sphere of oil and gas services?
One of the spheres where service companies are developing is communication systems and construction of accommodation and catering for offshore platforms. Technologically, we have understood that our companies had no experience of developing in the 1990s and would not be able to compete with the foreign service companies. We were insisting on setting up joint ventures involving the Russian companies from the Far East and participating in the tenders as joint ventures.
One of our achievements is a database of the qualified Russian contractors from various industries assessed by a special Russian contractor. This knowledge allows our Joint Committee for Russian Participation recommend Russian companies for participation in the tenders and control their involvement. As a result, we have managed to get aboard the Russian companies that could be and wanted to be in these projects. Many of them have won the tenders and got highly profitable contracts.
We have also approved a program for training and involving the Russian specialists to work in Sakhalin-1 and Sakhalin-2. According to the conditions of the PSAs, companies are obliged to attract a maximum number of Russian specialists and provide them very good education. Our aim is to make sure that a maximum number of Russian specialists (over 90%) are involved during operation of the project, with the only exception for some key roles that are still allocated for the foreign managers. I’m glad to see a lot of Russian managers in the working groups of projects that we supervise at different facilities. Ten years ago there used to be only foreigners. This kind of work is paying off. Now the Russian managers that have acquired good experience with the project operators are moving to other companies. I’m proud of their high level of work.
What do you think would be, in general, the future of Sakhalin 1-6 projects?
First of all, one of the most serious issues is the prospect of developing Sakhalin. Both the Governor and myself have spent a lot of time discussing it, and during the last years we have submitted a lot of letters to the federal government offering to make Sakhalin the centre for innovation, oil and gas production and refining. It is constantly discussed with the Ministry of Energy and with the CEOs of the major Russian oil and gas companies.
The second important issue is to ensure rational development of energy and oil and gas infrastructure on Sakhalin. We encourage companies to join efforts and create a single concept to develop the infrastructure, new seaways and petrochemical refineries, maybe even a new LNG plant, given our positive experience in Asia Pacific.
It is essential for us to create a single system of preventing oil spills. We also need a system to develop Sakhalin’s economy and to protect the peoples of the North. Our aim is to consider all these issues at a highest level.
One of the important prospective issues is the gasification of Sakhalin region and the potential added value projects like setting up petrochemical refineries on Sakhalin given its favorable geopolitical position.
Galina Nikolaevna, what would you like to say to the global CEOs of oil and gas and services companies who read Oil and Gas Financial Journal?
First of all, I would like to invite everybody once again to Sakhalin to come and see the positive results of their activity. Sakhalin offers the whole range of the industry as well as things to see and places to spend the free time. Lovers of active sports are welcome for skiing and extreme tourism. I would also like to wish prosperity to all the companies and hope that Sakhalin, our goldfish, would become a real treasure island for Russia and all the friendly companies with whom we have been working for many years and have always found common ground. Some of these companies have provided us invaluable experience and support. We believe that our partners have made an important contribution in the development of Sakhalin.
Galina Nikolaevna, thank you for talking to us!
| Company: | 萨哈林地区 |
| Country: | 俄罗斯 |