Kudrin: Tax Breaks for East Siberian Oil Fields Hurting Budget

VedomostiDeputy Prime Minister Igor Sechin greeting someone at a meeting.

The Finance Ministry is pushing to revoke a tax break won by the oil industry last year that eliminated export duties for 13 fields in eastern Siberia, a waiver that is taking an unexpectedly high toll on budget revenue.

During a meeting with Deputy Prime Minister Igor Sechin on Friday, Finance Minister Alexei Kudrin, who also holds the rank of deputy prime minister, proposed reinstating the export duty for eastern Siberian oil, a participant at the meeting and an Energy Ministry source told Vedomosti. The zero rate for the duties on crude from the fields has been in effect just two months.

Production began at three major fields in eastern Siberia in late 2008: Surgutneftegaz's Talakanskoye, TNK-BP's Verkhnechonskoye and Rosneft's Vankorskoye. But the main lobbyist for the duty-free export of "new" oil was Surgutneftegaz, sources told Vedomosti.

In any case, Energy Minister Sergei Shmatko announced that the government supported the idea immediately after Prime Minister Vladimir Putin visited a Surgutneftegaz refinery and met with oil industry executives. Shmatko said the measure should be in effect for at least three years for the projects in eastern Siberia to become profitable.

The government ordered that the duties be eliminated for the 13 fields in December. A separate customs code was needed for the "discount" oil, but as it turned out, oil from the Vankorskoye field — the main source of crude for the East Siberia-Pacific Ocean pipeline — did not meet the stated criteria, an official at a state agency working on the problem and employees at two oil companies told Vedomosti.

If the criteria were changed to correspond with oil from Vankorskoye, up to 22 fields could end up qualifying for the duty-free exports. The Federal Customs Service has proposed making those corrections to the government's order, but the Finance Ministry is categorically opposed.

The budget would lose about 80 billion rubles ($2.6 billion) this year because of that "hasty and uncalculated" decision, a high-ranking source in the ministry said. When the duties were eliminated, the budget losses for this year were estimated at 40 billion rubles, but now it looks like they will be much higher. 

Additionally, the Energy Ministry only recently presented its detailed report on falling production at older oil fields, which also bode ill for the budget. Troika Dialog has estimated that production will fall by 2.5 percent to 2.7 percent at old fields this year, but overall output will rise by about 1.5 percent.

No decision was reached at Sechin's meeting, the sources told Vedomosti. But one of them described a compromise option that had been reached. From Jan. 19 through March 1, oil exports from the 22 fields will remain duty-free, but by the spring a special working group will reassess the situation at the fields and propose ways to compensate for the falling budget revenue.

If the number of fields were reduced, they would have to develop another new customs code, which is difficult. Another option is to reintroduce the duty for eastern Siberia but at a discounted level from the standard rate (from Feb. 1 the duty should be $270.7 per metric ton), the source said.

That would be a blow to the oil industry, said Denis Borisov, an analyst at Bank of Moscow. With an oil price of $80 per barrel, they would make about $60 per barrel in eastern Siberia (if export duties and the mineral-resources extraction tax are reduced to zero), while in western Siberia they make about $12 per barrel — and those figures do not take into account capital expense.

Production at working fields will continue, Borisov said, but the industry won't take any risks to bring new projects on line.

TNK-BP chief financial officer Jonathan Muir has estimated that with a price of $60 per barrel for Brent crude, the eliminated duties and tax on mineral extraction would save the company between $2 billion and $2.5 billion over three years.

Putin's press secretary, Dmitry Peskov, declined to comment on Sechin's meeting, but he noted that the prime minister has repeatedly discussed "the sense in discounts for eastern Siberia." And now the necessity of those measures is "indisputable," Peskov said.

Spokespeople for Rosneft, TNK-BP, Surgutneftegaz, the Energy and Finance ministries and Sechin declined comment.

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