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. Last Updated: 07/27/2016

Oil joint ventures receive export tax breaks

Western oil joint ventures are applying for and receiving full or partial exemption from a controversial $6 per barrel oil export tax that has made most investment in Russia's oil sector unprofitable, industry sources said Monday.


While it has been the Russian government's stated policy that it will grant concessions to foreign investors, the export tax had loomed as a major deterrent to investment, with little apparent action in the past by the Russian government to repeal it. New concessions, reportedly available only for joint ventures, may give oil companies cause for celebration.


Conoco Overseas Oil Co. , which this month announced plans to develop Russian oil fields near the Arctic Circle through its joint venture. Polar Lights, is reportedly the first company to benefit. James Tilley, Conoco's head of representation and director of energy affairs, said that tax concessions were made, but would not specify which taxes. Other sources close to the deal named the export tax as paramount.


"There have been many taxes and decrees issued over the past several months, and when you put them all together business becomes uneconomical", Tilley said. "As a result of talks with the Russian government, we have worked out a tax regime we can live with. The Russian government still has a lot of problems, but we have found that they are willing to work with foreign investors".


Conoco's exemption came after more than one-and-a-half years of negotiations for its oil deal, although Tilley said it only took several months to reach an agreement on the physical tax regime.


Other oil companies expressed interest in similar actions Monday, although representatives of several major oil companies, who declined to be named, said they had not applied for exemption.


Most Western oil ventures have yet to export or even produce, with many taking a wait-and-see attitude, given that full production is years away. Most that apply, however, expect success.


"Any joint venture that makes a good enough case can get partial or full exemption", said one Western oil industry representative in Moscow.


George Reese, managing partner at Ernst & Young, said that companies were applying and that others in addition to Conoco, had received exemptions. Reese would not give specifics, because of the accounting/consulting firm's direct involvement in negotiations.


But one company, Phibro Energy Inc. , whose joint venture White Nights has of late been mired in Russian bureaucracy, will probably receive exemption soon, according to a source close to the deal. White Nights, based in Russia's Tyumen oil region, recently fell victim to the Russian press, which accused the Western partners of frivolous spending and other abuses.


White Nights, one of the first Western oil joint ventures to actually produce oil, delivered its first Western cargo of crude -- valued at more than $1 million -- this month. Thus, full or even partial tax exemption would significantly benefit the project.