Russia to Cut Oil Taxes as Production `Stagnates’

Russia will cut taxes on oil companies to overcome production “stagnation” after a decade of growth, Energy and Industry Minister Viktor Khristenko said.

“The output level we have today is a plateau, stagnation,” Khristenko said in an interview with Bloomberg Television in Moscow. “We hope the debate on tax changes will be complete within two or three months.”
Output may fall for the first time in a decade this year as producers struggle with soaring costs and aging fields. Finance Minister Alexei Kudrin said last month that the government may cut its crude-extraction tax by 100 billion rubles to spur development of harder-to-reach deposits.

Khristenko, 50, a former acting prime minister who has overseen the world’s largest energy industry for four years, said he and Kudrin have agreed on draft tax legislation. The main question is how big the cut should be, he said.

“Kudrin’s proposed change is too limited to make a difference,” said Ron Smith, chief strategist at Alfa Bank in Moscow. The government needs to make deeper cuts and speed up the process, he said. “They need to have it in place by Jan. 1, 2009.”

Lukoil, Russia’s second-largest oil producer, would save about $1.1 billion annually if the tax cuts proposed by the government were implemented, the company said in a presentation today.

Production in Russia, the largest oil supplier after Saudi Arabia, declined 1.3 percent in March to 9.76 million barrels a day, compared with the same month last year. Natural Resources Minister Yuri Trutnev warned last month that there may be a drop in output this year for the first time since 1998.

“To a certain degree, it was accounted for in the energy strategy — at first a slowdown in production growth and then reaching a constant level,” Khristenko said today.

Bloomberg