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Uzbekistan introduces a new legal mechanism for hydrocarbon production

09 October 2020
Relatively recently, the Cabinet of Ministers of Uzbekistan adopted Resolution No. 448 "On implementation of the mechanism for hydrocarbon production on the basis of contracts with retained risks" (also known as risk service contracts ("RSCs")) ("Resolution").

What is a Risk Service Contract (RSC)?

RSC is defined in the Regulation as a work agreement, pursuant to which a service provider undertakes to perform, at its own expense and risk, works (services) to increase the production of hydrocarbons in return for the right to acquire a part of the share of incremental volumes of hydrocarbons as compensation for its costs and remuneration. The service provider does not receive any other compensation. 

In effect, the aim of the Resolution is to promote a model where the service provider will only recover its costs in the event that its employer receives a benefit from the service.   

The Resolution: key provisions

Subsoil users
  • RSCs can be used by subsoil users, including: state enterprises, legal entities with 50% or more state enterprise shareholding and legal entities that are owned 50% or more by a legal entity with 50% or more state enterprise shareholding; 
Oil fields
  • A list of oil fields that can be contracted out through RSCs is determined by the Ministry of Energy of Uzbekistan on the basis of proposals received from subsoil users and with the approval from the Cabinet of Ministers of Uzbekistan;
Service provider selection process
  • A winning bidder, unless it is a local company, will need to establish a wholly-owned subsidiary in Uzbekistan. The Resolution does not set out any limitations on the jurisdiction of potential bidders. Therefore, both international and local companies are expected to be able to participate in the bidding process;
Minimum requirements 
  • Addendum 1 to the Resolution sets out the minimum requirements for RSCs to comply with, including the following obligations on service providers: 
  • implementation of a procedure aimed at prevention of harmful effects of the works on the environment;
  • use of modern technologies and effective work management; 
  • procurement of goods and services on a priority basis from local organizations; and 
  • employment and training of Uzbek citizens.
Term
  • RSCs can be entered into in relation to one or more fields for a term of up to ten years with an option for extension for up to five years by mutual agreement of the subsoil user and service provider;
    Remuneration
  • The service provider shall have a right to a part of the incremental volumes of hydrocarbons, which shall be calculated as the difference between the actual production and estimated base production volume. The estimated base production volume shall be determined by the subsoil user as the starting conditions for the increase in hydrocarbon production, based on developed technical and economic calculations for the relevant fields;
  • The service provider's share in the incremental volume of hydrocarbon production shall be set out in the contract and determined by technical and economic calculations, taking into account the costs of subsoil user in relation to such share, including taxation;
  • The service provider's share of oil and gas condensate may either be sold on a contractual basis as a raw material in the domestic market or processed in Uzbekistan for further sale in the domestic market or for export;
  • The service provider's share of natural gas must be sold domestically but can be partly used for the service provider's own needs;
  • The service provider shall have the right to convert any proceeds received from the sale of its share of hydrocarbons in local currency into hard currency on the domestic currency market and remitted to its bank accounts abroad.

Conclusion

The effect of the Resolution is yet to be fully felt. The expectation is that it should attract further investors who are not in direct competition with the IOCs currently operating in Uzbekistan. The move is also on the back of last year's Presidential Resolution (PP-4388) which sets out the framework for the oil and gas sector until 2030. 

Many questions remain as to the effectiveness of the RSC. For example, does the RSC attempt to (at least in part) replicate Schlumberger's Production Management model? If so, why would the RSC be more successful than a model that Schlumberger agreed to discontinue? 

Whether the model is successful or not will be tested in the near future. However, it is clear that the Uzbek government is taking steps to give further options to investors looking for opportunities in Uzbekistan.

Contact Slava Kiryushin for more information.

Further Reading

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