A Government meeting


“In addition to our previous decisions on assistance for people affected by the disaster, we have drafted two more government resolutions on the allocation of federal budget subsidies worth 4.1 billion roubles and up to 320 million roubles for the budget of the Krasnodar Territory.”


Dmitry Medvedev: Good afternoon, colleagues. Let’s get down to work.

I see they’ve written here, “The agenda is extensive.” Was it ever not extensive? Frankly, I don’t remember, but I think that this agenda is nothing out of the ordinary. It is even shorter by three or four issues, so this is not an extensive but an ordinary agenda.

However, there are a few major issues on additional support measures, including for the relief operation in the Krasnodar Territory. Obviously, the sooner we normalise life there, the better for the people. We must provide assistance to everyone who has been affected, and I’m talking about thousands of people. The simplest of our tasks is to facilitate the issue of financial assistance for people and other measures which the federal government and local authorities are working on. I would like to hear reports on them. It is very important that people do not have to stand in long lines or negotiate other bureaucratic obstacles to receive compensation payments. I believe that this process has gathered momentum. According to the Ministry of Labour and Social Insurance, as of July 30, 54,000 people had received a one-time payment of 10,000 roubles and about 20,000 people had received financial assistance of 150,000 roubles each. At the same time, 59 people were issued 400,000 roubles each in health allowances and 74 people received 200,000 roubles. Bereavement payments have been issued to 117 families. Of course, we have yet to complete this work.

In addition to our previous decisions on assistance for people affected by the disaster, we have drafted two more government resolutions on the allocation of federal budget subsidies worth 4.1 billion roubles and up to 320 million roubles for the budget of the Krasnodar Territory. The former is to be spent on the construction or purchase of housing to replace lost property, major repairs of damaged houses, as well as emergency measures to clear the river channel and strengthen the riverbed.

I’d like to remind you that the construction of new housing began yesterday in accordance with the government-approved schedule. We discussed this issue with Dmitry Kozak yesterday. The main task now is not only to build quality housing, but also do it within the approved schedule, so that the people can receive new comfortable housing by mid-November – that is, those who will build housing. Those whose housing will be repaired will move in sooner. We must rely on an objective and fair assessment of the lost property when providing this assistance. I know that not only state agencies but also a public association are dealing with this issue. I hope that we will monitor these processes in a constructive spirit, including the cost of construction materials – unfortunately costs are being jacked up, which is a very cynical approach.

The funds to be allocated under the second resolution will pay for the medical and resort rehabilitation of the most vulnerable groups such as pregnant women, mothers with children, children, older people and people with disabilities, in all about 14,000 people. The resolutions have been drafted and the decisions on them are to be taken soon. We understand that the disaster has not only damaged personal property, but also small and medium businesses, including farms.

Our agenda today also includes the distribution of federal budget subsidies for regions to support small and medium businesses in 2012, which concerns all regions, including, of course, the Kuban.

The next issue concerns the drafting of a long-term programme for exploration of the continental shelf and the development of its mineral resources.

This is a strategic issue. According to expert estimates, the Arctic’s continental shelf may contain about a quarter of the world’s shelf hydrocarbon reserves, but for the time being these enormous investment and economic opportunities are not being utilised, and the structure of the raw material base has not been analysed in detail. This concerns not only this shelf but all geological prospecting in this country.

The development of these territories is being impeded, of course, by poor infrastructure, persistent social issues and a lack of proper funding. The Arctic problems in general cannot be resolved through the federal budget alone. It is necessary to make the most active use of the mechanisms of the public-private partnership and develop modern investment projects.

The programme proposed for the period until 2030 is designed to resolve these issues. I hope that by the time of its completion (this time is still far off), annual production of oil on the continental shelf will be raised to 66.2 million tonnes (as compared with 13 million tonnes in 2011), and of gas to 230 billion cubic metres (as compared with 57 billion cubic metres last year). On the whole, the economic effect should reach eight trillion roubles (this is a very tentative figure), and the socio-economic or indirect effect should amount to more than 1.1 trillion roubles. But this does not mean that we should sit around and wait for the year 2030. We must start working now, not in 2030, all the more so since we know that our competitors, all shelf developers, are working much more quickly than we are. This is why we need to act now. We must not forget that every 50-70 years the world experiences an energy revolution, and nobody knows where we will land with our hydrocarbons in the future, whether we will be of interest to anyone. We must get down to business now.

During the meeting we will review a package of amendments to the Criminal and Administrative Codes on liability for violations in the production and selling of alcohol. I think that toughening punishment in this sphere is absolutely the right thing to do. According to Rospotrebnadzor (the Federal Service for Supervision of Consumer Protection and Welfare), out of 10 million youths from 11 to 18 years of age, more than half regularly drink alcoholic beverages or beer – and this refers to all teenagers, not just those deserted by their parents. Of course, this is primarily a question for their parents, but that said, normative acts must be adopted at the legal level. We must punish those who are directly or indirectly involving juniors in systematic drinking. The amendments envisage for them, as the bottom limit, a sentence of two to six years in prison, which is a tougher sanction of the criminal law.

We must also increase the fines for the production, acquisition, storage, transportation and sale of unmarked alcohol products. We have a lot of this junk in this country. Despite the adopted measures (and they have produced an effect, and acknowledging this is only fair), more than 23,000 people die from fake alcohol each year. If I remember correctly, the figure for five to seven years ago was 30,000-40,000. We have reduced this number by almost twice, but it is still a mind-boggling figure if we compare it to the record of other countries. It is truly horrible. It shows how many die not simply due to alcohol consumption, but due to fake alcohol consumption. The fines will increase from 200,000 roubles to 500,000 or 800,000 if an organised group is involved.

In addition, the amendments suggest higher administrative fines for violating the regulations for selling and consuming alcohol, for teenagers who will also pay more for appearing in public while intoxicated, and other offences. 

Today, we’ll also discuss amendments to the law On the Central Bank of the Russian Federation. The amendments will give the Bank the right to limit permanently the interest rate that is determined by a credit organisation in a bank deposit agreement. This norm was introduced at the beginning of the crisis as part of the anti-crisis package. It existed until December 31, 2010, making it possible to regulate the operation of the banks that attracted private money for unreasonably high interest rates, and to reduce payments from the Mandatory Insurance Fund for each occurrence. On the whole, this norm exerted a positive influence on the domestic banking system, and this is why it is suggested that it become permanent.

Second, the amendments propose expanding the list of organisations in which the Bank of Russia may have its authorised representatives. This measure will help the Bank to maintain stability of the banking system, monitor the use of state support funds by the banks and, let’s hope, to reveal instances of poor management of banks at an early stage, which is always topical and is especially important for this country, where we have so many of them. We have a lot of everything – many credit organisations and many universities. Maybe this is a good thing, but we must keep an eye on credit organisations, all the more so in conditions of global financial instability.

Let’s start on our agenda. Naturally, we’ll begin with the additional measures on eliminating the consequences of the disaster in the Krasnodar Territory. I’ll give the floor to the minister of regional development.

Oleg Govorun: Mr Medvedev, colleagues, disaster relief efforts in the Krasnodar Territory have been mostly completed. Search and rescue operations and top priority emergency recovery work in the flooded area has been carried out in full. Electricity, gas and water supply in the affected communities has been fully restored; houses and streets have been cleared of debris. The recovery work continues at socially important facilities: contractors have been identified, building materials delivered and repair plans approved. School repairs are under special control and are scheduled for completion on or before August 25.

In accordance with the presidential executive order No. 1015 and the decision of the Russian government, individuals and families affected by the flood will be paid compensation; 132 families will be compensated for loss of family members. Some of the people who died in the flood didn’t have close relatives. Accordingly, no compensations will be paid. So far, payments have been made to 119 surviving families. Some surviving relatives are restoring documents. One-time financial assistance in the amount of 10,000 roubles has been paid to 58,942 individuals each. This covers all eligible flood victims; 19,085 people were paid 150,000 roubles each as compensation for all or part of their lost property; 10,630 lawsuits have been filed by individuals to establish that their permanent residence was in the flooded zone. To date, 2,327 claims have been considered, all of which were approved, and people are receiving compensation.

Dmitry Medvedev: What are these claims about?

Oleg Govorun: These suits were filed by people who had no residence permits, and courts are now trying to establish whether they resided in the area before the flood or not.

Dmitry Medvedev: In order to establish the fact of residence in respective towns and villages. I see.

Oleg Govorun: Fast-track procedures to review applications are being used in Krymsk. They have attracted additional staff from district and municipal courts from across the Krasnodar Territory to do so. However, a portion of filed claims causes doubt, and thorough checks are being performed with the involvement of law enforcement officers. As of August 1, 2.658 billion roubles have been transferred to the Krasnodar Territory from the federal budget for paying compensation to flood victims. The damage assessment commission identified 1,653 houses as fully destroyed, including 1,614 in Krymsk. These are preliminary data, since courts are still working on claims. It is quite possible that their number will increase, but not significantly.

Individuals who have lost their houses in the flood have access to several types of government support. Their first choice is to have a new house or flat built for them. They can also go ahead and find a house or a flat on the secondary market. As of today, 1,150, or 68% of the homeowners, have decided on the type of the government support they want to receive: 71% opted for new construction and 29% chose to have an existing house or a flat bought for them on the secondary market. According to preliminary estimates, 98,000 square metres of housing will be needed to relocate those in need. The total cost of new construction and acquisition of new housing will amount to 3.318 billion roubles. Flood victims have already been provided with 927 flats, primarily in Krymsk, Krasnodar, Novorossiysk and Gelendzhik. The first 200 flats in the military community district in Krymsk will be ready for occupancy in mid-August. The rest should be commissioned no later than November 1. The construction of the new housing has already begun. A parcel of ​​52 hectares of land off the Krymsk-Dzhiginka Highway has been set aside for building. The area has been properly developed and the foundations are ready for filling. The site is flood-safe. Thirteen houses, a school for 500 students, a kindergarten for 290 children and maintenance facilities are planned to be built there. The construction is scheduled for completion on November 15. The work is being performed by a single contractor, the Krasnodar company OBD-Invest.

With regard to major repairs, we surveyed the housing stock and made a list of 6,532 buildings that need major repairs; that’s 531,000 square meters. The funds going into repairs will amount to 2.7 billion roubles. The payment procedure has been approved: the money will be transferred through social protection authorities to personal accounts. To help the people, the regional administration has prepared a list including more than 20 contractors specialising in major repairs.

A standard contract has been developed and measures to help elderly people and people who live alone have been identified. People will be accommodated at hotels for the time it takes to complete major repairs and the construction of new housing. So far, 3,000 rooms have been reserved and 120 people have moved in; 384 people are living in makeshift shelters. The territorial administration has taken additional measures to assist flood victims. A washing machine, a gas cooker, a refrigerator and basic supplies will be provided to each household as a housewarming gift. Krymsk residents will be exempt from water bills until November.

Per the presidential executive order, relevant federal executive bodies in conjunction with the administration of the Krasnodar Territory are drafting a programme for relocating residents from flooded areas in the Krymsk District. To date, research work has been carried out and potential hazards in the local hydrological situation have been identified. The work was carried out by the Kubanvodproekt Institute, Water Institute of the Russian Academy of Sciences, Moscow State University employees and research institutions and organisations. They are also assessing the effectiveness of existing engineering protection of areas intended for construction, infrastructure facilities and the throughput capacity of existing bridges.

Based on this work, the scientists will put together recommendations regarding the diversion of peak flows, building protection dams, including new construction and renovation of existing facilities, by August 10. Based on scientifically based recommendations, engineering solutions will be identified, and appropriately financed requisite organisational and engineering measures defined. In addition, urgent riverbed clean-up measures have been identified. They are designed to keep up rivers’ throughput capacity, including by dredging.

The allocation of 153 million roubles from the federal budget to carry out this work has been agreed with the Ministry of Natural Resources and Environment and the Ministry of Finance.

The Krasnodar Territory authorities have decided on the contractor, which is a road transport company. Work on the Adagum, Bakanka and Neberdzhay rivers has already begun; 200 units of equipment are being used. Outbreaks of acute infectious diseases have been staved off and the epidemiological situation is under control due to measures implemented across the ​​emergency area.

The incidence of infectious diseases is average and typical of this time of the year. Nine fixed-site and 21 mobile primary health stations have been set up, including at entry and exit points of the Krymsk District. More than 100,000 houses have been visited by health workers to vaccinate people; 436 healthcare workers were involved in providing medical assistance to the victims. In all, more than 36,000 people sought medical help, including nearly 5,000 children. More than 1,500 people were taken to the hospital. To date, 294 people remain in hospitals, including 39 children. Special support measures have been provided to children, people with disabilities, elderly people and pregnant women. Overall, 4,500 children, nearly 3,000 people with disabilities, 7,000 elderly people and 175 pregnant women have been affected by the disaster. All of them will get the chance to be treated and to recover at health resorts in the Krasnodar Territory. Following an agreement with their parents, more than 2,000 children have left for summer recreation camps.

Skilled psychologists and guides are working with them. Another group of 544 children will leave in the near term. According to a poll, almost 3,000 elderly people and about 2,000 people with disabilities wish to go to health resorts. Their departure schedules have been drawn up. They will be able to be treated and rehabilitated at health resorts in Anapa, Sochi, Goryachy Klyuch and Gelendzhik. Regarding pregnant women, 115 expectant mothers (everyone who expressed the desire) have left for health centres: five have left their district, 38 have been hospitalised, 22 have refused rehabilitation, 56 women have given birth to children including two sets of twins since the tragedy. It is planned to offer trips to health centres and resorts to a total of over 8,000 people.     

We have developed measures supporting small and medium-sized businesses that suffered losses from the natural disaster. The list of entrepreneurs includes 1,624 people. A preliminary estimate of their damages stands at 2.8 billion roubles. The Ministry of Economic Development has elaborated a decision on additional allocations to the Krasnodar Territory budget. Total support will include 377 million roubles in subsidies to specific categories of small and medium-sized businesses; as well as 110 million roubles to cover part of the expenses for the first payment under a finance lease contract. Jointly with the administrations of the Stavropol Territory and the Rostov Region we have worked through the issue of extending small loans to businessmen with a favourable 0.5% interest rate up to one year with an option to extend for a total of 200 million roubles. 

Mr Medvedev and colleagues, two draft directives on extending additional allocations to the Krasnodar Territory budget have been introduced in the Russian government. These directives have been approved by all interested authoritative bodies. I ask you to support this. That concludes my report.  

Dmitry Medvedev: Thank you, Mr Govorun. Any questions? Any comments? Mr Belousov, go ahead please.

Andrei Belousov: I wish to add something. Mr Medvedev and government members, the presidential executive order, On Measures to Remedy the Consequences of Natural Disaster – the Flood in the Krasnodar Territory, instructs the Ministry of Economic Development and the Krasnodar Territory administration to allocate 470 million roubles from the federal and territorial budget for grants to business people who have experienced losses and to compensate for the costs of their lease contract. To date this figure has been exceeded. It will amount to 487 million roubles due to additional allocations extended by the Krasnodar Territory. Why do we consider this task to be so important? Not only because some 2,000 business people have been affected, but also because it is impossible to resume normal life in Krymsk without launching the market where almost half of these business people have their jobs, and without launching commerce and personal services, and this is basically small businesses. Guided by this concept, we have prepared everything; an agreement on federal budget allocations between the Ministry of Economic Development and the Krasnodar Territory administration has been practically signed. It will be published tomorrow or the day after tomorrow after we discuss and approve a relevant governmental directive on subsidy distribution under the third agenda point. How will these funds be spent? As I said, our priority is to resume commerce in the city, primarily the operation of the central market and the network of personal services. The businessmen will be able to get two types of support.

The first is grants for purchases of basic means, commodities, raw materials, equipment and equipment repairs, as well as for repairing homes and movables. One beneficiary can get up to 300,000 roubles. According to this morning’s data (this figure is changing hourly, and now we are seeing a reduction, so I’ll adjust this figure a bit), we have registered 1,532 people who have requested this support. The average grant is 246,000 roubles. Many business owners are requesting less – 50,000, or 70,000 roubles because there a strict accounting rules on beneficiaries, and people are actually requesting funds to re-launch their businesses. I want to underscore that this subsidy is not meant to cover the losses; it is financial support enabling business owners to resume operations. 

And the second – this is compensation of expenses under lease contracts. Here the lease contract subsidy for a businessman is up to one million roubles or up to 50% of the contract price. This is especially important for those who have lost their cars or refrigeration facilities or any other expensive equipment in the disaster. A businessman can request both forms of support, that is, a grant and a lease contract subsidy. How is this work organised? To get support a business owner must produce only his or her passport, and all work will be organised on a single-window basis; as for the confirmation from the Federal Tax Service and from the Ministry for Civil Defence, Emergencies and Disaster Relief – this is the task of the authorities that will provide for this work. All a business owner must do is go to the special consultative centre set up by the territorial administration, the Rus cinema, everybody knows its location, and get assistance with writing an application, photocopying documents and choosing a leasing company.  

Next, business owners’ applications for support will be accepted starting tomorrow, August 3 for two weeks. In two weeks, or on August 17, this list will be closed, and then the money will be distributed according to this list. Our task is not only to transfer the funds to the Krasnodar Territory but also to make sure that these funds reach every individual claiming this support with adequate justification. To this end we are creating an oversight system for the transfer of funds to each business owner and their targeted spending.

Yesterday, my deputy Mr Simonenko, while visiting Krymsk, reached an agreement with non-profit organisations and volunteers on setting up independent monitoring. Volunteers on site will ask those individuals on the list whether they have physically received the money or not. In addition, the Ministry of Economic Development will create a hotline on its website and post verified lists. These lists will be posted on three websites – the site of the Ministry of Economic Development, the site of the relevant ministry of the Krasnodar Territory and the site of the organisation providing this support. Complaints concerning subsidies will be considered on the hotline. I want to highlight the active work of the Chamber of Commerce and Industry of the Krasnodar Territory, which transferred three million roubles to halve lease payment for entrepreneurs on the central market, as well as to cover a 2-month lease payment on two other markets in Krymsk. Thank you.     

Dmitry Medvedev: Thank you, Mr Belousov.

This is indeed important information and important measures of support because our current task is not only to rebuild housing, homes, and social institutions – although this is probably the priority – and to resume normal life; our current task is also to create jobs, to reinvigorate businesses, and, of course, to ensure the operation of shops and the market. This is only possible if small businesses resume their normal activities; therefore we will discuss the issue of distribution of subsidies extended in 2012. Here is some information on small businesses in Krymsk…   

Do you want to say anything? Go ahead, please.

Dmitry Kozak: I’d like to say a few words. I want to back the report that was presented by the Ministry of Regional Development. We went to Krymsk the day before yesterday. As a result of adopted measures, life there is coming back to normal. The ruins of collapsed buildings have been removed as well as construction debris that was scattered in the streets. There are radical improvements compared to three weeks ago when we first visited this city.

I’d like to draw your attention to another problem that we must resolve at the federal level. We must protect lands against water damage all over the country, including the Krasnodar Territory. This is a federal responsibility that was transferred to the regions in 2008. It must be funded by transfers from the federal budget. In 2012, the budget allocated 2.17 billion roubles for anti-flood measures in the entire country or about 26.5 million roubles per region. By comparison, the Krymsk District of the Krasnodar Territory has requested 720 million roubles for dredging and bank revetment of its three rivers in a well-grounded application that was coordinated with the Ministry of Natural Resources and Environment. 

We must seriously review this issue because all regions with alpine rivers are facing this task. In the near future, the Krasnodar Territory (it has 7,000 alpine rivers that people live by) must develop a programme to protect lands from water damage and determine sources of funding. Let me recall that this is a liability of the federal budget – regions can only allocate additional money from their budgets if need be. We must analyse this issue and do the least we can in the near future to be prepared for spring.

Dmitry Medvedev: Absolutely. Every region must review this issue. Our regions are very different. For some, 26 million roubles is next to nothing, whereas others don’t even have this problem. The main thing is not to use our favourite one-size-fits-all approach and evenly distribute the funds across the entire country. The regions must be getting ready for any eventualities. I cannot but support this.

Who else would like to add something? Is that all? Then we are adopting a decision on additional measures on eliminating the consequences of the disaster. Submit it to me today for signing please.

Now let’s switch to the programme for the exploration of Russia’s continental shelf and development of its mineral resources up to 2030. Let’s hear about this from Minister of Natural Resources Sergei Donskoi.

Sergei Donskoi: Mr Medvedev, ladies and gentlemen. The Ministry of Natural Resources and Environment presents for your consideration the programme for the exploration of Russia’s continental shelf and development of its mineral resources. It was drafted under the Federal Law on the Continental Shelf and in line with the instructions of the prime minister and the Security Council. According to the main approved strategic branch documents (this is the general model for the development of the oil and gas industry), the exploration of the reserves of the Russian shelf will allow us, in the long-term perspective, to stabilise oil production and prevent its decline. Implementation of shelf projects is the main reserve for the growth of gas production. Therefore, development of shelf hydrocarbons is critical for the national energy balance.

Today, our major oil and gas bearing provinces are becoming mature, which necessitates the accelerated development of new regions that have not been seriously explored so far. Out of these regions, the shelves of seas in the Arctic and the Far East are the most promising ones. In fact, the shelf is the only oil and gas bearing province where unique hydrocarbon deposits can still be found.

The Russian shelf is the biggest in the world. It occupies more than six million square kilometres and contains over 110 billion tonnes of oil and gas in terms of reference fuel. However, Russia is far behind other oil and gas producing countries in prospecting for hydrocarbons on its continental shelf. Here are some figures to illustrate the point. As of June 2011, 3,366 exploration wells were drilled on 130,000 square kilometres of the British sector of the North Sea. The relevant figure for 150,000 square kilometres of the Norwegian sector is 1,101. Brazil drilled 246 wells in its deep-water shelf in 2008-2010 alone with the success rate fluctuating between 40% and 65%. Russia has only 257 exploration wells on its six million square kilometre shelf. This is what has been done during the entire period of its exploration.   

This slide shows the main reasons why Russia, which was one of the first to embark on shelf exploration, is now lagging so far behind other states. There are not enough economic incentives; the shelf is located in the hard natural and climatic conditions of the Arctic; the infrastructure is either inadequate or altogether non-existent, especially in the remote parts of the East Arctic; there is no technology for effective and safe development of Arctic oil and gas deposits; finally, the existing legislative and institutional instruments are not conducive to attracting enough investment to the shelf. We cannot remove some of these difficulties for objective reasons, but we can facilitate others by adopting targeted programmes and managerial decisions.

The current pace of shelf exploration is obviously too slow. We need much more resources and funds to exploit its potential at least in medium term. The state invests one billion roubles per year into the initial stages of geological prospecting. By comparison, mineral developer companies invested a bit more than 30 billion roubles into this last year. To illustrate what these figures mean, I will quote one example – last year only 11 exploration wells were drilled on our shelf in 2008-2010. This slow pace of geological prospecting is affecting the results. During this period, only four deposits were discovered, while in Norway, 110 production wells – or 10 times more – were drilled during the same period, with 44 fields discovered. In Brazil, 246 exploration wells were drilled in the deep marine shelf, or just 11 fewer than the total number of the wells drilled in Russia’s shelf during all the period of its exploration. The lack of efforts aimed at developing shelf exploration makes the risk that it will not be explore in the foreseeable future more likely.

Today, global hydrocarbon markets are facing considerable changes which are significantly altering the conditions for exporting and the competitive positions of Russian-produced hydrocarbons. On the one hand, a further increase in consumption is being forecast. On the other hand, reputable Russian and international organisations are forecasting growth in global production of hydrocarbons, including production based on non-traditional sources. In these conditions of increasing competition, a major challenge is to ensure the competitiveness of Russian shelf hydrocarbons on the world market. The introduced projects and programmes for exploring the continental shelf and developing its mineral resources from 2012 through 2030 are aimed at securing the safe development of Russian energy and strengthening our competitive advantages on world energy markets. This can be achieved by establishing the tax, administrative, infrastructure and legal conditions that will facilitate a considerable increase in geological exploration on the continental shelf.

While preparing the draft programme, we considered two possible models for exploring and developing the continental shelf resources, namely inertial and innovation options. When considering the first option, we assessed the resources and time we would need to reach the indicators set in the programme in the current conditions, with the shelf explored exclusively by two state companies and the present taxation system.

The second model is based on our proposal on adjusting tax legislation, as well as the proposal on creating conditions to attract private investments in Russia’s continental shelf exploration and passing legislation defining geological exploration as a separate kind of mineral resource use. Currently, only geological survey and extraction work are permitted on the continental shelf, meaning that exploration is conducted under a combined license.

We estimate that these proposals will allow us to attract considerable private funding for shelf projects. Without such funding, the use of shelf hydrocarbon resources in the foreseeable future is simply impossible. Calculations show that implementing our proposals as part of the innovation model will make it possible to considerably improve the programme indicators as compared to everything remaining as it is.

The innovation scenario would double the number of exploration wells in the shelf, a considerable growth in seismic exploration work, and a significant growth in hydrocarbon reserves, with 14.5 billion tonnes of oil equivalent. The planned cumulative shelf production volume growth is estimated at 380 million tonnes of oil and 1.76 trillion cubic metres of natural gas. These figures do not take into account the projects that are being implemented under the terms of the production sharing agreement.

It should be noted that full-scale implementation of the innovation scenario will significantly increase these indicators by attracting private investment. We are talking exclusively about private investment. We estimate that this programme will allow us to study the offshore area as much as is necessary to make a correct estimation of the oil and gas availability without the need for increased state funding for exploration work.   

We hope that state funding for geological exploration will be sustained at the level stipulated in the long-term programme for reproduction of mineral resources, which was approved in 2008, and the draft state programme for reproduction and use of natural resources.

The implementation of the institutional and administrative incentives provided for by the innovative scenario will reduce the minimum value of cost-effective resources to develop 55 million tonnes of offshore oil and 150 billion cubic metres of gas; and will help reduce the share of unprofitable off-shore fields in the discovered and inventoried state deposits from 73% to 27%.

Under this scenario, the development of offshore areas will require a fundamentally different level of government spending on exploration, if we are to achieve by 2030 the level of geological knowledge necessary to ensure the country’s mineral security. Under this scenario, nearly half of the discovered and inventoried state oil reserves and more than two thirds of the gas reserves will become unprofitable.

What mechanism is proposed in the programme to increase economic efficiency? First of all, we are proposing to establish a new tax and customs regime for offshore development. Its basic features and principles have already been outlined in Government Resolution No. 443-r of April 12, 2012. It provides for the adaptability of taxes to changes in world energy markets, which is especially important in conditions of increased price fluctuations. This is ensured through the application of an ad valorem rate for the mineral extraction tax.

Second, the tax burden is not based on gross income, but is allocated between the gross income and financial results. We need to determine a rate of export duties that would allow an investor to receive a guaranteed financial result from the development of offshore deposits.

Finally, we need to ensure a stable taxation environment for investors who invest in exploration and development of offshore deposits. The introduction of the proposed tax regime will significantly boost offshore production, increasing state revenues by more than 45% compared with the current tax regime. This is a substantial amount, about 7 trillion roubles (over the entire period of the field development). The increase in state revenue through the introduction of this special tax regime will total about 2 trillion roubles during the implementation of this programme.

However, we believe that economic incentives alone will be insufficient to fully realise offshore development potential. Currently, the exploration of offshore deposits is hindered by the existing scheme under which all three phases of offshore development (regional, exploration, and production) are controlled by the government and state companies.

The government allocates only one sixth of the funds needed for the initial phase of the exploration (regional surveys), while state companies are granted licenses under which they are not obliged to conduct regional surveys. As a consequence, the lack of funding for regional studies amounts to almost 100 billion roubles. This means that a significant portion of the shelf will remain undeveloped.

The next phase of geological prospecting, including the most risky appraisal drilling and the most capital intensive – exploration and production – are currently carried out exclusively by state companies. Considering the size of our continental shelf and the cost of its development, the two state companies will hardly be able to ensure full-fledged exploration and development of the shelf in the foreseeable future.

This leads to insufficient exploration and deadline extensions for the execution of license obligations, which is fraught with insufficient reproduction of offshore hydrocarbon resources and might result in a failure to ensure the hydrocarbon production levels planned in the policy documents. We believe and will insist on the need to increase the volume of exploration work, including under the existing licenses, and will tightly monitor companies to ensure that these volumes are met.

In turn, under the innovative scenario it is suggested to legally divide geological prospecting into phases and stages by distinguishing the search and estimation and exploration and production phases. In this case, in addition to state companies, a wide range of qualified private companies can be allowed to participate in the search and estimation projects on the shelf. They will conduct geological prospecting subject to commercial risk with reasonable profitability safeguards for their offshore activities.

It is also proposed to allow specialised service companies on the shelf. These will include Russian-owned companies that will produce geological information at their own expense and transfer it to the government while preserving the right to sell it to interested parties, including state companies and their potential minority stake holders. The total government expenditures under this scenario will stay at the level of 22.5 billion roubles, as prescribed in the long-term programme.

The main advantages of this scenario include the intensification of offshore exploration by attracting a larger number of companies, involving a wide range of service companies on the basis of multi-client surveying, and creating a geological information market for the Russian shelf, which will help increase its attractiveness for a wide range of investors and maintain state control through the involvement of state companies in all projects.

Implementing the innovative scenario will create a foundation for the reproduction of mineral resources through the development of offshore deposits as the reserves of onshore mineral resources are gradually exhausted. It will also accelerate the development of offshore projects in the foreseeable future.

Apart from the obvious economic benefits in the form of budget revenues from taxes and fees, these measures will have an indirect positive impact on the socio-economic situation, especially in depressed areas and in areas with difficult climatic, demographic and environmental conditions.

The increased exploration will have a positive multiplier effect on the development of basic sectors of the Russian economy and, consequently, will help create new jobs and improve working conditions. It will also help various demographic and social groups adapt to new economic relations and improve their living standards. The draft programme has gone through all the approval procedures and I ask you to support it.

Dmitry Medvedev: Thank you, Mr Donskoi.

Are there any comments? Go ahead please. 

Andrei Belousov: Thank you. Mr Medvedev, colleagues, the Ministry of Economic Development supports this programme. We have agreed and have approved it, and we support the draft resolution. I would like to draw your attention to just two aspects which, in our opinion, will require some changes to the programme.

The first aspect is the pronounced bias towards spending in this programme. The programme, after all, is called Exploration of the Continental Shelf and the Development of Its Mineral Resources. As regards exploration and spending, and even putting the reserves on the balance sheet, the programme is comprehensive. As for the development of these reserves, Sergei Donskoy and I were sitting together yesterday, looking for indicators of an increase in oil reserves in the body of the programme, and we did not find them.

Dmitry Medvedev: Pardon me, where were you looking?

Andrei Belousov: In the body of the programme.

Dmitry Medvedev: Oh, in the body of the programme. I understand.

Andrei Belousov: Yes, that's the term for it, it sounds a bit like jargon, perhaps. It is written in the passport…

Dmitry Medvedev: The body of the debt, yes, but the body of the programme is new to me.

Andrei Belousov: The programme passport has the figures, but I would like to point out that we are supposed to bring output to 66 million tonnes by 2030. Is that a lot or a little? Considering that in Russia as a whole we extract and are planning to extract about 510 million tonnes, and this will be the standard level, this means, considering that we are already extracting offshore oil, that within 20 years (let's say from 2010 to 2030), less than 10% of the resources will be extracted offshore. That is very little considering the investments (more than 9 trillion roubles) that we are planning. My first proposal is to have another look at the indicators of returns from this massive spending programme and exploration that the current version of the programme envisages. And my second and probably more important remark is that the key novel feature of this programme is that it allows private investments, private companies to be part of the “exploration-extraction” cycle, especially at the exploration stage. But if we say that we are letting in private investors, we must answer the question of how these investments will be recouped for private investors? That is the key question.

Dmitry Medvedev: Correct.

Andrei Belousov: As of today there is practically only one mechanism for returns on these investments, which is that the company that has prospected for and discovered certain reserves must enter into an alliance, must create a joint venture with one of two state-owned companies that currently have access to the development of offshore resources, and they must develop these reserves together. Obviously, this mechanism creates very high risks for the investor, because it is not certain in the first place whether a state company will join the venture, at what price and so on. So there must be a certain mechanism in place to reduce these risks for private investors. There are ideas for such a mechanism, I will not speak about them now, Sergei Donskoy and I were discussing this topic. And that is another issue which should be taken into account in finalising this programme. Thank you.

Dmitry Medvedev: Thank you very much.

Alexander Novak: Thank you. Colleagues, the Energy Ministry has also been studying this programme. On the whole, we support the approach set forth in this programme, because it is true that since the 1980s, when there was a boom in geological prospecting, the amount of geological prospecting dropped by almost ten times. Urgent measures need to be taken to increase the incentives to conduct geological prospecting.

I would like to say that one of the key aspects mentioned in the report by Sergei Donskoy has to do with economic stimulus, as the potentially huge offshore reserves are not being developed because investments cannot be recouped due to taxes. For operating fields, the current tax system ensures that investments are recouped, but for new fields it does not encourage economic agents to invest in the development of fields, nor even in geological prospecting. The decisions taken early this year – Government Resolution No 443, which has been mentioned here – do provide such a system. Today the Energy Ministry and the Finance Ministry are working unremittingly to draft relevant regulations and laws. We are supposed to prepare these documents and submit them to the government and the State Duma by October. The tax incentives will help to ensure investments, including in geological prospecting.

Regarding the programme that is being discussed by the government today – we want to add several points to the programme that have not yet been taken into account, which have to do with adjustments. We believe, for example, that the programme should provide for comprehensive commitments of investors to transfer new technologies, commitments concerning localisation and compliance with high environmental standards, and industrial safety requirements in bringing in private investors. The programme should also seal the principle of responsibility of the legal entities that express a desire to take part in offshore prospecting, including ensuring the availability of financial resources to cover possible environmental and man-made risks during the course of exploration and development of the continental shelf. The programme should also address the need to organise tenders to attract private investors in order to produce the maximum economic effect for the state and ensure transparency in the process of attracting private investors.

Please take these proposals into account in finalising the programme. Thank you.

Dmitry Medvedev: Thank you, Mr Novak.

Arkady Dvorkovich: Colleagues, the programme that has been prepared in accordance with the government’s instructions is thoroughly developed and only a short time is needed to polish it up, taking into account the remarks and proposals made just now. They have to do with the development of the economic model that would make exploration and development of the continental shelf profitable both for the production companies and for the state, for the country as a whole. They have to do with minimisation and, if necessary, compensation of environmental risks. This mechanism is part of the Russian initiative put forward in the framework of the G8. And naturally we should be the leaders and the first to apply the pertinent mechanisms. The programme must provide for such mechanisms.

And the third point is the possible increase in the number of users of subsoil resources, but that can be done only if there is an approved economic model that provides the basis for the activities of companies, and that does not exist in legislation at present – neither tax nor corporate legislation. This gap will be filled within two or three months. To this end, in accordance with your directive, a working group will be formed and we will complete this job quickly together with the executive bodies and the companies that take part in the development of Russia’s offshore resources. Thank you.

Dmitry Medvedev: Very well.

Well, let us wrap it up. I agree with what the Economic Development Minister has said, that 66 million tonnes is not all that much as compared with the total production of oil and gas and the goals set forth in the programme. We should understand to what extent the development of prospecting work and offshore exploration, and subsequent production and use of the reserves that are there, is a priority. This is the key point, in fact. And I repeat that in general we should think about the structure of our energy policy, not for the next 5-7 years, not only in the context of various crises, not only in connection with the decisions taken by various international organisations, but looking ahead 20, 30, 50, 70 years, if we are to call it a programme.

Now as for what to do next. In order to complete the work on the programme, a working group should be set up. I would like this working group to be headed by Arkady Dvorkovich as the Deputy Prime Minister in charge of the energy sphere. What additional points require further work? Naturally, a number of ideas that have been suggested here, including the expansion of the number of actors taking part in offshore development. There are five points that must be kept in mind: first, the environmental consequences of the work and responsibility for possible environmental damage. This is the initiative that I put forward some time ago within the G8, and since we are the initiators we must ourselves be impeccable if only in terms of developing the legal framework.

Second, an equally important theme is tax incentives, an economic model that must be attractive, because what we are saying now is, “Let's broaden it out, let's call in private investors, let's form the basis for a public-private partnership.” We should create a model that would be enticing to them. Not in order to report the increase of hydrocarbon reserves and thus increase our capitalisation (incidentally, this is the reason why many are trying to go offshore, but this is not our goal), but in order to make offshore development appealing to them.

Thirdly, we should pay attention to geological prospecting issues. Indeed, we have neglected this theme. It has been neglected not only with regard to the continental shelf (as a matter of fact, there has not been any normal exploration on the continental shelf), but nationwide, and so far the incentives that have been offered are not working. Therefore the topic of stepped-up geological prospecting remains key for our country.

Fourth, it is necessary to establish proper control of the licenses issued. We issue licenses but we do not properly monitor how they are carried out by companies – both state-owned and private.

And finally, it is necessary to pay attention to state security. The working group must prepare proposals within three months. And indeed state companies are nervous, they have been writing letters to me. Please, include them in the working group, let them contribute to finalising the programme.


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