Sticky Issues in the Crude Business of Oil and

Gas: A Case of Hot Air?

Nish Imthiyaz
David Humphreys
Chris Mallon

Introduction: A Survey of the Russian Oil

and Gas Industry

Company Law in Russia

Law traditionally echoed Communist party policy

Law subordinate to party diktat

Primarily based on statutes

Relatively little case law

Specific provisions:

The Stock Register

Stockholders Meetings and Voting Procedure

The Board of Directors

The Audit Committee

Delegated Committees

Directors Duties

Soft Law:

The Russian Code of Corporate Conduct (2002)

Corruption
Kleptocracy
Ineffective judicial processes

Ties with organized crime syndicates

Chernogoneft litigation

Self-dealing

Cyclical

Possible intervention of equitable doctrines (Code of Corporate Conduct)

Issuance of licenses

Use of a tendering as opposed to an auction process

Tendering invites conflict

Winning contract may be annulled for political incorrectness

Pipeline access
Incentives to pollute?

Can a fine become a price?

Transfer Pricing
What is transfer pricing?
A valid a useful business tool?

Transfer pricing, for tax purposes, is the pricing of intercompany transactions

that take place between affiliated businesses.
A form of tax avoidance?

Transfer pricing is a tax minimisation technique involving the manipulation of

the price of goods and services such that profitis transferred between
entities.

Major problem for the Russian oil and gas industry:

The World Bank (2004) reported that the countrys oil and gas exports accounted
for 25% of the countrys GDP rather than 9% reported in the official data.

Russian gas company Gazprom created Itera, an affiliated company based in

Jacksonville, USA. Gas, priced domestically at $2 per thousand cubic metres, sold
to Itera, and sold back to Russian Republic at up to $90 per thousand cubic
metres. The profits were recognised in USA.

Lost tax or capital flight through transfer pricing was the primary legal basis for
the prosecution of Yukos, Russias biggest privatised energy company.

Is it a socially acceptable practice?

Depends on a number of factors, viz.

The definition of transfer pricing

The corporate objective

The definition of corporate social responsibility

Corporate Governance and the Financial

Crisis of 1998

Corporate Governance prior to 1998:

Prior to 1998, Russian corporations suffered from poor corporate
governance. According to Heinrich The absence of reliable and
socially accepted institutional rules of the game, as laid out in
proper corporate governance regulation, meant therefore that
one of the most important conditions for a market economy was
not being met.
International financial organizations and intermediaries focused
their attention only on the resource base of the companies in the
Russian oil and gas sector and not on their business behaviour.

Corporate Governance and the Financial

Crisis of 1998

Corporate Governance after 1998

Corporate governance in the sector improved slowly but surely after the
financial crisis of August 1998.

Russian oil and gas companies improved the disclosure of financial information
by publishing company reports in an international accounting standard. Other
improvements included the introduction of independent directors and
representatives of minority shareholders.

Sibneft and Yukos upgraded their status from the bad boys of the sector to its
model pupils. These changes in behaviour were acknowledged by investors,
and the share prices of Sibneft and Yukos increased more rapidly than those of
their domestic peers.

However, problems do remain. While the introduction of legislation and

soft law (in the form of voluntary codes) has the potential to be a
confident march, one beating toward the goal of an investor friendly
corporate governance environment. This will only be effective where
problems of enforcement are addressed.

Conclusion

Bibliography