Oil Tax Cuts Passed In Key 2nd Reading

The State Duma approved tax cuts for oil producers to encourage exploration and development in a crucial second reading Wednesday.

Prime Minister Vladimir Putin urged an easing of the oil industry's tax burden to reverse an output decline as crude prices trade near a record.

The proposed changes should compensate oil companies for increasing costs and encourage the development of new fields, said Alexander Morozov, chief economist at HSBC Bank in Moscow. "The Russian economy still heavily depends on the oil and gas sector," he said.

The level at which the oil extraction tax kicks in will increase to $15 per barrel from $9 now, according to the bill. The changes also include extending so-called tax holidays for new deposits in the far northern Timan-Pechora area, where LUKoil is working with ConocoPhillips, the Arctic peninsula of Yamal, which is being explored by Gazprom Neft, the Caspian and Azov seas and the offshore continental shelf.

The tax changes create exemptions from the mineral extraction tax for oil fields that are no more than 0.05 percent depleted, according to the bill. On Russia's offshore continental shelf, where Rosneft works, and in Arctic areas, tax holidays would last 10 to 15 years or until total output reaches 35 million tons of oil.

In the Caspian and Azov seas, the holidays would last seven to 12 years or until total output reaches 10 million tons. Onshore fields in the northern Timan-Pechora and Yamal peninsula regions would last seven to 12 years or until total output reaches 15 million tons.

The government is set to lose 104.1 billion rubles ($4.45 billion) in 2009 and 112 billion rubles in 2010 because of the changes to the mineral extraction tax, according to estimates by the Duma's Budget and Taxes Committee.

Revenue losses from the tax cuts will be "insignificant" for the budget because they were taken into account when the Cabinet approved government outlays for 2009-2011, Morozov said.

In May, Economic Development Minister Elvira Nabiullina called the country's oil industry "the foundation of the Russian economy, the foundation for its competitiveness," adding that even a slight stagnation would be "alarming."

The government expects to have a budget surplus of 707 billion rubles, or 1.5 percent of gross domestic product, in 2009. The surplus will shrink to 610 billion rubles, or 1.1 percent of gross domestic product, in 2010, according to the budget.

The tax bill must pass in a third reading in the Duma and a single vote in the Federation Council before it is sent to President Dmitry Medvedev for his signature.

n Gazprom said in a statement Wednesday that it held talks with Rosneft on the companies' strategic partnership. Gazprom deputy chairman Alexander Ananenkov met with Rosneft first vice president Sergei Kudryashov at the gas giant's headquarters, the statement said. The two state-run rivals also discussed gas sales from the Sakhalin-1 project, which Rosneft operates with ExxonMobil. They signed a strategic partnership agreement in November 2006.