Audit Chamber criticizes Energy Ministry management of PSAs
MOSCOW. Oct 28 (Interfax) - The Audit Chamber, Russia's budgetary watchdog, said the Energy Ministry is doing a poor job as the government agency responsible for managing production sharing agreements (PSA).
"The Energy Ministry did not sufficiently effectively carry out the functions of the authorized government body for development and implementation of government policy and regulation in the area of the development of hydrocarbon deposits on the basis of PSAs," the Audit Chamber said in a statement following an audit of the PSA activities in 2010.
"In particular, the ministry's annual work schedule, including measures to implement duties in the area of PSAs, is still not being approved according to established procedure. The positions of government representatives in management committees are not sufficiently active. Even their meetings are held less often than required by PSA provisions. There is no procedure for reconciliation with company operators of citations resulting from the independent audit," the Chamber said.
"As a result, citations totaling $868 million were not reconciled and the effectiveness of budget funds spent on the audit is reduced," the watchdog said.
However, the Chamber found that the operation of the PSAs themselves in 2010 was more effective than in the previous year.
Total government revenues from implementation of PSAs in 2010 rose by 55% from the previous year to $2.2 billion, the auditors found. Royalty revenues increased by 39% to $873 million, while revenue from profitable product declined by 26%.
The Chamber said that the issue of underpayment of royalties on the Sakhalin-2 project, which exceeded $56 million as of December 31, 2010, remained unresolved. Furthermore, the amount of the underpayment will continue to grow in future if the authorized ministries and the project operator do not work out a common approach to its calculation and payment, the watchdog said.
Oil production by PSA project operators declined by 3% to 14.4 million tonnes of oil and condensate in 2010, while gas production jumped 59% to 17 billion cubic meters. However, on the Sakhalin-1 project, two-thirds of the gas produced is being pumped back into the stratum. Production targets for some fields are being overshot, while for others they are not being met, and the discrepancies are not always within allowable limits, the Chamber said.
LNG production nearly doubled from 2009 to 10 million tonnes, and the LNG plant reached design capacity.
The Audit Chamber also pointed to the low share of Russian participation in contracts for work on implementation of PSA projects. On Sakhalin-2 it amounted to only 54%, which does not comply with the agreement, and on Sakhalin-1 the record keeping is formal and does not reflect the true picture of Russian participation, the watchdog said.
The audit also found a number of violations of environmental legislation in the implementation of PSAs, including handling of production and consumption waste without the required licenses, as well as failure to comply with industrial safety requirements in operation of facilities. In addition, Exxon Neftegas did not pay fees for negative environmental impact in 2010.
The issue of exempting the government's share of profitable oil and gas from export duties remains unresolved. The form and content of schedules and spending plans do not make it possible to verify whether goods are imported for PSA purposes or not, the Chamber said.
Government agencies and PSA operators have repeatedly faced delays for approval of annual budgets. The authorized government agency for the Sakhalin-1 project, for example, could not approve the 2008 budget for nearly all of 2009, and project operator Exxon Neftegas even threatened to halt work on launching the Odoptu field.
In addition, the authorized government agency for several years could not get Exxon Neftegas to provide an updated technical plan for the development of Sakhalin-1.
In September, sources at the Energy Ministry said that the ministry plans to establish a more effective system of working with PSAs. The ministry aims to hold regular meetings of authorized government agencies and supervisory boards, and approve annual budgets before the beginning of the year.
There are currently three PSAs in effect in Russia: Sakhalin-1, Sakhalin-2 and Kharyaga.