Russian authorities are preparing to block foreign investors from directly holding exploration and development licences for oil and gas blocks in the country.

The upper chamber of parliament approved amendments to the Subsurface law introduced in 1992 — a year after the break-up of the Soviet Union — to contain an outright ban on foreign companies and individuals owning and operating oil and gas licences through affiliates and subsidiaries incorporated outside Russia.

The amendments expand recent legislative changes in Russia that aim to treat foreign investors differently based on whether they are incorporated in “friendly” or “unfriendly” states. Changes are expected to be signed into law by President Vladimir Putin and enacted in July.

Almost 50 countries have been designated as “unfriendly” after backing sanctions and other restrictions against Russia in response to Russia’s invasion of Ukraine. However, approved amendments also apply to investors from “friendly” states.

Once published in the amended format, the Subsurface law will explicitly demand any foreign investor or joint venture establish and operate a Russian-based subsidiary, which would be able hold licences for oil and gas acreage.

The amendments are expected to increase paperwork and expenses for companies from Asia and elsewhere that are seen as willing to increase their exposure to Russia’s oil and gas sector as Western players exit the nation.

These investors are reportedly looking to buy stakes held by exiting Western players in oil and gas developments on Sakhalin Island and the Arctic LNG 2 scheme.

The amendments also call for foreign investors and ventures to create a Russian subsidiary to hold oil and gas licences within 90 days of the updated Subsurface law is being introduced.

Should a foreign investor or joint venture fail to establish a Russian subsidiary and apply to authorities to transfer their licence, within the allocated 90 days, it faces two scenarios.

Under one scenario, if a licence is held by a joint venture of foreign and Russian shareholders, the oil and gas rights will be assigned to a Russian company that holds the largest single interest in the venture.

For example, in the case of Sakhalin projects, Rosneft, which holds a combined 20% stake in Sakhalin 1 via two of its subsidiaries, would gain the rights, while at Sakhalin 2, Gazprom, which holds a 50% interest, would gain such rights.

Under the second scenario, if a foreign-registered licence does not have a Russian shareholder, authorities will revoke the licence with no compensation for previous investments in the asset.