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23 Feb, 2008 00:03

Russia’s oil taxation to be reformed

Russia’s Economic Development Ministry says it is seeking to create different levels of export duties on refined oil products. The long-awaited announcement, aimed at encouraging domestic oil processing, is set to shake up the oil sector.

The Economic Development Ministry has suggested varying export duties for petroleum products according to the degree of refining.

Traders interpret it as the more a company spends to oil refining the lower the duty it will pay on the product.

They say the announcement may boost the market performance of most oil majors as early as next week.

Kirill Yankovsky of Unicredit Aton commented that all majors have been trading with no changes in recent years

“Right now there is a strong catalyst, which if approved can boost these names, which is what we have been waiting for. If you look at Russian oil, it's been underperforming among its peers,” he added.

Analysts believe the oil industry is currently taxed too much and say excessive taxes are holding back investment as well as profits. Current export duties are attached to the price of crude oil.

Erik Depoy of Alfa-Capital says for oil giants like Rosneft or Lukoil taxes are weighted towards upstream production. He says they make massive profits on their downstream refining.

Even so, if the Ministry implements proposals to cut duties, the stocks of the majors may rocket by 15%.

For now, he says, it's just talk. Nabiullina’s brief statement was short on details. However, for Depoy the fact that she is talking about it publicly shows promise.

“The government is very concerned about the oil industry and declining production. Nabiulina’s out just shows they're aware and are ready to take some steps to ensure the vitality of thr Russian oil industry,” Depoy observed.

The excited reaction of traders suggests they believe tax reform in the oil sector is long overdue.