Presidium Moves to Raise Oil Output

APPrime Minister Vladimir Putin chairing a meeting of the government's new Presidium in the White House on Monday.
The Presidium of the Cabinet emerged from its first-ever meeting Monday with good news for the oil industry, approving long-sought tax benefits aiming to ward off a production slump by promoting exploration and greenfield development.

A scaled-down version of the Cabinet, the Presidium will send its proposals to the State Duma later this week and expects the resulting legislation will take effect at the start of next year, said Deputy Finance Minister Sergei Shatalov.

In a key decision hailed by the industry and analysts, Prime Minister Vladimir Putin and other Presidium members endorsed tax holidays of up to 15 years for offshore oil fields, Shatalov said.

Companies involved in the entire process would qualify for the 15-year tax holidays, while those beginning production at an already identified greenfield would have a break of 10 years before taxes kicked in, Shatalov said.

Rosneft and Gazprom, through its oil arm Gazprom Neft, would be the winners if these proposals become law, as existing legislation designates the two state-controlled companies to lead work on offshore projects.

Another proposal approved Monday calls for a tax holiday of up to seven years for the development of greenfields in the northern Yamal Peninsula and Timan-Pechora provinces, Shatalov said.

The duration of the tax-free period could be shortened in cases where companies had produced a certain amount of oil at a particular field, Shatalov said. He said the total for offshore projects was 35 million tons and that a figure for the Yamal and Timan-Pechora fields would be decided in the next 10 days.

Dmitry Dolgov, a spokesman for independent LUKoil, said production could be expected to rise by as much as 10 percent, based on a five-year tax holiday, Bloomberg reported. He did not provide an estimate for the 10- and 15-year breaks.

Tax holidays of this type are currently only in place for greenfields in eastern Siberia, where they cease once the total oil produced reaches 25 million tons.

In another decision related to the oil industry, the Presidium supported a reduction in the mineral-extraction tax for oil companies in an attempt to offset steep rises in productions costs, Shatalov said.

Finance Minister Alexei Kudrin estimated that the oil industry would save 100 billion rubles ($4.2 billion) in taxes next year if the proposal, which he announced in March, became law. Putin backed the idea during his confirmation speech in the Duma earlier this month.

Although the cuts may only represent a fraction of the industry's total tax bill, analysts have said the savings will be vital if the sector is to have the necessary funds to finance new development and battle stagnating output. A slate of investment banks and oil companies, including Rosneft, have been calling for a tax cut since last year.

The proposal to cut taxes on existing production would raise the starting point for the levy on oil revenues from the current $9 per barrel to $15 per barrel.

The other major tax for the industry, the oil-export duty, will remain unaffected by Monday's decision.

A spokesman for Rosneft, which works in Yamal and Timan-Pechora, said the company was "extremely" pleased by the Presidium's announcement. It will be able to spend the money to increase exploration and production, said the spokesman, Nikolai Manvelov.

"Thus, the company receives an extra chance to invest in the development of its business," he said.

The State Statistics Service reported last week that crude oil production from January to April in Russia, the world's second-largest exporter of the commodity, was down by 0.3 percent from the same period last year.

Deputy Prime Minister Igor Sechin, however, expressed confidence in an interview earlier this month that output would again be above last year's levels by the end of this year.

The government is hurrying to lighten taxes in the sector because it was alarmed to see a country with huge oil reserves suffer a slide in production, said Anton Konchin, an analyst at UniCredit Aton.

"Let's hope that it's still not too late to reverse the disappointing production curve," Konchin said.

The Presidium approved the oil-industry proposals as part of a discussion of tax policies for the next three years. Other decisions included raising the allowable corporate research-and-development exemption, simplifying small business taxes and offering new tax breaks for spending on education, health and housing.

The measures to promote research and development at companies, which could take effect next year, include a 50 percent increase in the amount companies can spend tax free on research and development, Putin said in opening remarks at the meeting.

Small businesses will have their work reduced by the proposal to allow them to file their accounting records once a year, instead of on a quarterly basis as at present, Putin said.

"I want to emphasize that the small business sector is especially sensitive to the quality of tax administration," Putin said. "And we need further actions to improve it."

The Cabinet is also to submit a raft of amendments reducing income tax on people raising children to the Duma later this week.

The proposed tax cuts would be tied to the portion of their incomes that people spend on education, health care and housing, Putin said.

Money spent by companies on the training and education of employees would no longer be taxed, Putin said, and the tax-free portion of employer health insurance contributions would be doubled.

A portion of loans provided to help employees pay mortgage interest will also be given tax-free status, he said.