the RUSSIA oil & gas competitive intelligence report - Report Buyer

Russia Oil and Gas Competitive Intelligence Report 2010
While the policy shift would reduce the profitability of the fields, it is unlikely to have an impact on the
progress of East Siberian upstream developments in the short term.
To stimulate projects in the Caspian Sea, Russia has exempted the first 730mn bbl of oil produced in the
region from mineral extraction tax. However, Lukoil's president, Vagit Alekperov, has also been calling
for an export tax holiday for offshore fields, the fiscal incentive currently enjoyed by operators in East
Siberia. At the Yuriy Korchagin opening ceremony, Prime Minister Vladimir Putin said he would
consider Alekperov's request and in July 2010 Lukoil said that it had reached a preliminary agreement
with the finance ministry to halve export duties on North Caspian oil. Any lasting fiscal concessions,
however, are unlikely. First, the Russian finance ministry is strongly opposed to any further loss of state
revenue through concessions to oil companies. Second, the shallow waters in the North Caspian do not
present the same logistical and technological challenges as the remote East Siberian deposits. Third,
Lukoil, which would stand to be the main beneficiary of any further tax breaks, does not enjoy the same
influence in the Kremlin as its state-connected rivals Rosneft and Surgutneftegaz, both of which are big
East Siberian players.
On January 1 2009, the Russian government reduced MET to encourage the reinvestment of corporate
profits into E&P. The amendment to the tax code, agreed in May 2008, increased the tax-free MET
threshold from US$9/bbl to US$15/bbl. According to the country’s Finance Minister Alexei Kudrin, this
would allow oil producers to save over US$4bn annually.
According to the Ministry of Natural Resources and Environment (MNRE), the MET and export duties
account for about 95% of oil producers’ tax payments, with the tax burden exceeding 68% of their gross
revenue. Such a revenue-based system is effective for rent collection and works well for mature projects
with low finding, development and lifting costs but fails to encourage new developments. The ministry
estimates that if Russia implements the new fiscal measures, the country could increase production to a
sustainable 10.2mn b/d by 2013. If it does not reform its tax framework, however, its own projections
show production falling to 9mn b/d by 2013. The structure of the tax regime was partly responsible for
the fall in the country's oil production in 2008, the first annual decline in eight years, which occurred
despite a 30% increase in upstream capex.
In July 2009 the Russian government announced that it would not increase gas production and export
taxes as had been earlier suggested by the Finance Ministry. Russia has been assessing ways to source
extra cash to offset declining revenues in the recession. The Finance Ministry had therefore proposed to
increase the tax on gas production from RUB147 (US$4.6) per thousand cubic metres (mcm) to
RUB162/mcm and to increase the gas export duty from 30% to 35%. It was estimated that the
government would yield an additional RUB60bn (RUB53bn via export tax and RUB7bn via extraction
tax) through the suggested tax increases, most of which would be paid by Gazprom.
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