Government mulls Oil production stimulus through tax

Tax breaks are on the way for new oil fields, in a bid to revive production. The Russian Government is once again considering new tax proposals for the oil industry, as the cash-cow of the economy begins to weaken.

Vladimir Putin endorsed proposals to cut export duty temporarily on oil production from cost-intensive East Siberian oil fields. But he ruled out sweeping changes to the tax regime, saying that the government must also consider its budgetary and social obligations.

“It’s necessary to devise a special tax model for new oil fields. That should be based on real results of oil production. And its management should be simple and transparent. And the administration of it should be effective in supporting state interests.”

Russian oil companies say that heavy taxes prevent them from investing in new exploration to offset declining output in mature fields. But the Government has to balance the need for investment to safeguard future oil export revenues against the demands of the budget.

As economy is shrinking Russia relies as much as ever on oil money. The mineral extraction tax and oil export duties constitute around a third of budget revenues. Last year the government granted energy firms $5 Billion in tax breaks. However it doesn’t seem enough for oil companies in the face of falling production.

Last year Russia’s oil output fell for the first time in a decade despite record high investment. Energy minister Sergey Shmatko outlined the measures needed to support the development of the sector.

“We’ve discussed a range of targeted measures which can come into force in 2009. It’s the temporary lifting of custom duties on oil exported from East Siberian oilfields, optimizing the transport tariffs, imposing network tariffs for pipelines, as well as measures aimed at speeding up VAT refunding.”

The head of Lukoil, Vagit Alekperov, pointed out loans are more crucial for the sector now than tax breaks.

“The industry is not ailing, it’s healthy and it doesn’t need help. It only needs temporary support in this time of crisis. We have to continue its development, and the development of related branches which are the oil industry’s main customers.”

The Government is ready to work on a new tax regime for oil companies that develop new fields. Some officials say it will be based on the companies’ profits. However it will take several months devise the details of the new scheme.