Putin quickens tax cuts to revive oil flow

Putin quickens tax cuts to revive oil flow

By Catherine Belton in Moscow

Published: May 26 2008 19:31 | Last updated: May 26 2008 19:31

Russia’s government took its first steps on Monday towards $4bn of tax cuts to boost investment in the oil industry, amid warnings the country’s output could fall for the first time in 10 years.

Vladimir Putin, the prime minister, told a cabinet sessionthe proposed cuts to the mineral extraction tax would be fast-tracked for parliamentary review this week in order to increase oil production and boost refining.

The measures would allow oil companies to save up to $4bn (€2.5bn, £2bn) annually by raising the tax-free threshold for the mineral extraction tax from $9 per barrel to $15.

Sergei Shatalov, deputy finance minister, said his ministry was also proposing seven-year tax holidays for development of remote oil fields in Yamal and the Arctic region of Timan Pechora.

But analysts said far greater cuts could be in the pipeline and would have to be implemented if Russia’s oil industry was to put flagging production back on a growth track. The minister for natural resources has warned that output could this year suffer its first decline in a decade, prompting fears over Russia’s role as an international supplier. Output growth has averaged 2.5 per cent since 2005.

Industry executives have blamed Russia’s stiff tax regime, in which the government takes about 80 per cent of revenues, for putting the brakes on investment just as fields in western Siberia start to peter out and additional funds are needed to tap more remote regions.

“We believe this is just the first spate [of tax cuts] because this does not give enough money to make a difference,” said Chris Weafer, chief strategist at Uralsib, a Moscow investment bank. “This is more a statement of goodwill . . . it is not going to address the problem of decline.”

Mr Weafer said a second phase of tax cuts toadjust for inflation and the rouble’s appreciation was in the pipeline and could free up as much as $20bn for the industry, while a further $5bn to $10bn could come from changes to export tariffs.

Analysts said the further cuts were being discussed by the government and the oil lobby and could be forwarded to parliament in late June, in time to amend next year’s budget. Mr Weafer warned oil stocks would fall sharply if the government failed to agree the cuts.

Ronald Smith, chief strategist at Alfa Bank in Moscow, said the tax holidays were “good for long-term fields, but what we need to see is breaks for existing fields”.

With oil prices at record levels of up to $130, Russia’s government could afford to give money back to the oil industry, Mr Weafer said. An average oil price of $110 per barrel this year would, he estimated, give the government $60bn to $70bn more than the revenues it was currently projecting.