Foreign Strategic Investment Law: Basic Regime / Practice to Date; Impact on the Oil & Gas Sector

1. Foreign Strategic Investment Law:Basic Regime / Practice to Date; Impact on the Oil & Gas Sector AmCham Investment Conference March 24, 2010 Moscow Darrell Cordry – Chevron Jon Hines – Dewey & LeBoeuf

2. Overview • Not in itself a “negative” • a real step toward regularizing the process • analogous to US / OECD country regimes • Political / economic elements • subject to these winds… holding off or encouraging foreign investment • and will be interpreted / adjusted accordingly • FSIL as new law – plus FIL / SL / CSL / GSL amendments • Applies to certain investments by foreign companies or persons (including through Russian-owned companies)

3. Overview (cont’d) • Advance approval needed for investments, above stated threshold percentage interests, into Russian “strategic sector” enterprises (“SEs”) – 42 categories, 12 or so sub‑categories, including: • mineral resources E&P (on “fields of federal significance”) • some power gencos (OGKs / TGKs) – a tricky area • ports / shipyards, airports, railroads, trunk pipelines • aviation / aerospace industry • some telecoms / media companies • specialty metals, nuclear/radioactive, weapons/military, cryptography, geophysical processes; biological agents • fishing

4. Overview (cont’d) • General thresholds for “control” • over 50% • 10% for mineral resource E&P (but 49% per FSIL art. 2.7) • Special / stricter rules for foreign gov’t controlled cos. • general 25% threshold; 5% for minerals E&P • 25% for investment into any Russian company (special practice here) • and can’t have control, or blocking rights • interplay with FSIL art. 2.7: 5% or 10% → 49%?

5. Overview (cont’d) • Scope / Range of Deals Covered • direct or indirect control • by shareholding or otherwise • wide scope of arrangements is caught • onshore / offshore deals (no matter how far removed) • positive / negative controls (veto rights) • even involuntary / passive occurrence situations • no exemption for Russian-owned foreign companies (this is most of the action so far) • don’t be tempted by / into apparent “loopholes” • Particular situations: • GDR / ADRs – nominal holders • if investor already has >50% • treaty (or special law)

6. Overview (cont’d) • Notification requirements: • 5% SE stake acquisition – prospective • 5% SE stake acquisition – retrospective (deadline long past) • Penalties • voiding of transaction • lose shareholder vote • for notice-only violation – small fine, etc. • no cases yet reported – but FAS is now threatening

7. Application / Approval Process • FAS as Authorized Agency; special dep’t, rules • Acts under / in coordination with new Gov’t Commission • FSB role – checks re threat to national security (including per stated indicia) • Procedure / practice for inquiries • to FAS – formal procedure under FAS • to MNR (re minerals E&P) – informal practice • Two types of application • for proposed new control • for already-established (involuntary) control • Time period: 3 to 6 months • FAS communicates Commission decision (and other possible actions)

8. Actions to Date • Commission meets every few months – 6 times so far • Nearly 30 approvals so far • Most are Russia-to-Russia offshore / onshore deals (and restructurings of holdings) • Some interesting new foreign investments • A few foreign-gov’t-controlled company investments • Possible outcomes • approval without conditions • approval with conditions (investment agreement) • rejection

9. Actions to Date (cont’d) • Examples: • Telenor and Alfa – to restructure / merge Vimpelcom and Kyivstar stakes • DeBeers – 49.99% of Arkhangelsk Diamonds • Alenia (Italian state-owned) – 25% of Sukhoi JV Co. • Barrick Gold – 50% to 79% increase of stake • Khartron (Ukrainian state-owned) – up to 49.74% of aerospace co. • Lisin offshore cos. – for controlling stakes in ports/shipyards • Polyus gold – various shareholding deals • Itera – up to 49% of Sibneftegaz • UK / UAE co. – for purchase of software producer • EBRD – for 11.75% stake in Promsvyazbank • Dubai World (UAE state-owned) – for 25% stake in large Nakhodka container port co. • Timchenko-controlled co. – up to 23.42% stake in Novatek • Kolbin-controlled co. – for 25% stake in Yamal LNG Co. • Usmanov / Tavrin TV media assets merger – into UTV Russian Holdings • Some rejections (or postponements) – various reasons

10. Attracting Investment for Exploration • There have been ongoing discussions between “Ministry of Natural Resources” and “Industry” on how to encourage additional investment in exploration • There are a number of under-explored basins within the RF: Black Sea, East Siberia, Northern Arctic • Focus in recent years - optimizing existing production/development of discovered fields • Investment in new exploration now should be a priority

11. Industry’s Concern with New Regime • There are a number of areas of concern with the current Regime: • Low threshold on size of fields requiring “strategic” approval; • Low limit on participation (10%); • Limited participation in exploration of the Continental Shelf ; • However, there is a critical problem which will impede exploration investment • No guarantee of rights to develop once discovery has been made. • “Strategic” review and decisions are made after considerable risk and cost of exploration already undertaken

12. New Regime – Payback of Costs • Law provides for recoupment of costs (with uplift) if E&P license is not issued due to “national security” consideration • IOCs invest to develop and produce reserves, not act as an exploration “service” provider • Repayment mechanism is not sufficient • Even with a fixed uplift, recoupment of costs doesn’t provide sufficient returns, particularly for exploration in new, complicated basins

13. New Regime – Payback of Costs • Due to high risk nature of the business, IOCs manage their exploration activities from a portfolio approach • Upside from successes need to cover costs of dry holes elsewhere

14. Recommended Solution • Government authorization before exploration period commences • “National security” issues considered at time exploration license is granted • Issue E&P license earlier rather than later • Subsoil Law – to clarify that the Government's right to refuse full E&P rights for the strategic field would not apply if the discovery is by a licensee company that is directly or indirectly controlled by the RF