Extraction and refining the focus as industry mulls taxes

Maintaining oil extraction is a priority for the government, which is also looking to increase the tax take from refiners. They say this may make some downstream operations unprofitable.

Tatneft spent $5.5 billion to build a state of the art oil refinery in Central Russia. In terms of efficiency in the Russian oil industry it is unique, making usable product from 97% of the crude coming in.

Analysts warn such expensive projects may stop making economic sense, if the government increases export duty on refined products up to 90% of the tax on crude.

Aleksey Kokin from Uralsib says the government is thinking about the country's deficit and which areas of the oil industry it most wants to develop.

“They might be just looking for the sector, that it’s not yet taxed enough and that is generating cash. So what they see, what they are observing is that there is a lack of cash for reinvestment in the upstream. So perhaps the burden could be shifted off the upstream segment.”

At the moment the average export duty on refined products, such as petrol and kerosene, is about 55% of that on crude.

The Prime minister says there are about 250 of oil refineries in Russia producing a very low quality product, but making a lot of money on preferential taxation. Putin wants the government to introduce a new tax regime for the oil sector by the end of this year. But Kokin warns against an indiscriminate rise for refiners.

"The best way to encourage complex refining to boost secondary capacity would probably be to increase it slightly, so that companies producing too much heavy fuel oil will be penalized."

The biggest problem for the oil sector is the lack of new oil field projects and massive underinvestment in extraction. The government wants to ensure there's no tailing off in the country's crude output, even if that is done at the expense of refiners.

The Russian government has unveiled its proposed General Plan to develop the oil industry until 2020.

Speaking at a conference in the Samara Region, Prime Minister Vladimir Putin stressed the need to increase oil extraction to maintain current levels.

“The main potential lies in the increasing the efficiency of oil extraction, as well as the development of small and medium sized oil fields, especially as many of them are located in already developed areas. As a result of increasing reserves and the development of new fields and improving the efficiency of old and existing oil fields we can anticipate that the current level of oil extraction of 500 million tonnes of oil per year will continue for the next 10 years.”