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. Last Updated: 07/27/2016

OPIC Urges Cut to Oil Tax

A U.S. agency has offered up to $60 million in financing and guarantees for a Western Siberian oil project conditional on a reduction in the oil export tax, a source familiar with the project said Thursday.

Dallas-based Petro-Hunt Corp. and Dresser Industries have entered into a protocol agreement with the U.S. Overseas Private Investment Corp., or OPIC, for an oil and gas exploration project in Western Siberia that is expected to yield up to 100,000 barrels a day.

The protocol calls for $50 million of OPIC investment in the project and $10 million of political risk insurance, Dresser said in a press release.

President Bill Clinton announced the project in Moscow last week.

But the accord and the start-up of the project "are contingent upon obtaining all necessary agreements, licenses and approvals," the statement said.

According to the source, who asked not to be named, one of those approvals is a reduction in the $5 per barrel oil export tax that most foreign investors have claimed makes investment in the Russian energy sector nearly or completely unprofitable.

"My understanding is that the OPIC guarantee in fact has verbiage in it to the effect that it is only effective when the export tax is reduced to make it a profitable project," he said.

The sharp fall in oil prices over the past year has brought pressure on the Russian government to lower or eliminate the tax. With oil now around $15 per barrel on world markets, the tax now takes up to one-third of revenues.

But Mikhail Sarafanov, director of the National Market Research Institute, a leading adviser to the Russian Ministry of External Economic Relations, said it seemed unlikely that the export tax would be changed soon.

He said the $5 a barrel tax was calculated to take about half of the extra profits companies make by exporting Russian oil, as compared to selling oil locally.

"The change in oil prices and the value of the ruble have not changed that ratio substantially," Sarafanov said.

OPIC, however, is not alone in insisting on the condition that the tax be lowered before lending or guaranteeing.

"This is a common condition of aid organizations who provide assistance to the oil industry," said Vladimir Lelekov, project manager with the Russia Project Finance Bank. "A lot of projects are simply unfeasible without an exemption."

Lelekov said he knew of only one joint venture project that is profitable at the current tax rates.

The European Bank for Reconstruction and Development, or EBRD, for example, insists that projects be profitable before it lends money. If the project will not earn money, which can be determined by the export tax, then the EBRD will not lend.

"It is a factor in the deals we have done," said Lou Naumovski of the EBRD office in Moscow.

In the project, a joint venture called KhantymansiysknefteHunt, Petro-Hunt Cyprus and Dresser will split a 50 percent interest. The remainder will be held by Khantymansiyskgeologiya and Khantymansiyskgeofizika, two Russian companies.

The project is expected to cost $1.4 billion over 13 years and could involve additional financing from OPIC of $200 to $300 million, Dresser said.