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. Last Updated: 07/27/2016

Oil Project in Need of Tax Relief, Official Says

A Russian official has said that his government would push for tax breaks for the largest proposed foreign investment project in Russia to date.


Leaders of the consortium of five major foreign oil companies had called earlier this week for reductions on Russian export taxes, warning that without tax breaks they would not invest any of the planned $10 billion in the exploitation of two huge oil and gas fields off the coast of Sakhalin.


"Without reductions of the export taxes and customs duties, the project will not be profitable", said Nikolai Nemchenko, deputy to one of the members of the Russian delegation negotiating with the consortium in Houston this week. "Even now the project is only marginally profitable".


He said the government would push for tax breaks, adding it had awarded such privileges to foreign oil companies before.


But Nemchenko admitted that such concessions to foreign investors may be difficult to get approved by Russia's conservative parliament.


Nemchenko is deputy to Mikhail Tolkachev, who heads the state commission for natural resources under the Ministry of Environment and took part in the negotiations.


The consortium of foreign investors unites Marathon Oil, McDermott International Inc. , Mitsubishi Corp. , Mitsui & Co. and Royal Dutch/Shell Group.


He said Russian delegates to a round of negotiations with the consortium in Houston were to return late Thursday.


At stake are the production sharing agreement, he said, crucial because it will decide how much of the oil and gas will be claimed by the Russian government and how much can be exported by the foreign partners. Nemchenko said that both sides were close to an agreement on this part of the venture.


Although the consortium had hoped to get the rights to the exploitation by April 1, Nemchenko said the Russian side would try to reach an agreement soon and was confident the Russian government would opt to award the rights to the consortium.


"They will lose another year if we do not decide quickly", he said. The two fields, located in the Sea of Okhotsk, will freeze over with thick ice in the fall, forcing drillers to wait till spring.


If the Russian government decides not give the exploitation rights to the consortium, the companies may lose the $80 million which they say they spent on a feasibility study for the project last year.