Kudrin Seeks Lower Taxes for Oil Firms

The Finance Ministry is proposing a cut of $4.2 billion in annual taxes for oil companies from next year, Finance Minister Alexei Kudrin said Tuesday.

The cut would reduce the industry's tax burden by a fraction but would still spur much-needed investment into stagnating production, analysts said. Several investment banks and oil companies have been calling for such a cut since last year.

Kudrin also said the current low taxes for gas production would stay in place until at least 2011 to allow Gazprom to carry out an ambitious investment program.

Putting off a decision on changes to gas taxes would be a victory for Gazprom lobbying. Taxes for gas production are about half that for oil production, the Finance Ministry has said.

The ministry will submit its oil-tax proposals for changes to the mineral-extraction tax at the end of this week, Kudrin said at a meeting of officials from the Economic Development and Trade Ministry, which he oversees.

Under the ministry's plan, the level at which the mineral-extraction tax would begin to be levied would be raised to $15 per barrel, Kudrin told reporters after the meeting. The tax is currently levied on oil revenue above $9 per barrel.

Such a change would allow oil producers to pay 100 billion rubles ($4.2 billion) less in taxes, Kudrin said.

High oil taxes have brought huge windfall revenues to the government, which has salted about $170 billion into the stabilization fund.

The other big earner for the federal budget has been the export duty on oil, which will be unaffected under Kudrin's proposals, said Konstantin Batunin, an oil analyst at Alfa Bank.

"There will be an alleviation but an insignificant one," Batunin said, adding that the reduction, however small, would boost investment in the sector anyway.

Russia collected about $40 billion in taxes and $45 billion in export duties from oil companies in 2007, said Artyom Konchin, an analyst at UniCredit Aton brokerage.

Oil field service companies will benefit from the potentially higher spending by oil producers, said Chris Weafer, chief strategist at UralSib.

The proposed cut is only a prelude for more tax leniency by the government, Batunin, Weafer and UBS analyst Dmitry Lukashov said.

Kudrin was getting "the ball rolling," Weafer said in a note to investors Tuesday afternoon. "It is a very positive development and paves the way for further cuts."

More cuts can be expected if the oil price stays above the $74-per-barrel level currently assumed in the federal budget, Weafer said.

The government has moved to reduce the tax take from the industry, because it realized the threat of a production decline, Batunin said.

Surgutneftegaz, the country's No. 4 oil producer, posted a "menacing" forecast recently, stating that its annual output would fall 7 percent by the end of this year, Batunin noted.

Rosneft, the country's leading oil producer, praised Kudrin's proposal. "It would have a positive effect on the development of the oil industry," company spokesman Nikolai Manvelov said.