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. Last Updated: 07/27/2016

Oil Execs, Lawmakers Slam Tax Code

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If the government wants the oil sector to be the locomotive that drives the economy to prosperity, it should keep the lights green and not dismantle the tracks.

This was the consensus of oil firms, legislators and industry experts Thursday at a conference about the role of the oil complex in building the economy. By far the most vexing problem facing the industry, they agreed, is the Tax Code.

"Today the situation is favorable, we enjoy high oil prices and what remains of the ruble devaluation … but on closer inspection the picture isn’t that wonderful," said Josef Bakaleinik, first vice president of No. 4 oil producer Tyumen Oil Co., or TNK.

Despite enjoying record profits and an investment boom, oil companies are cautious about the huge investments needed to sustain or increase production because of the current tax regime.

With world oil prices expected to eventually fall and the benefits of devaluation to eventually expire, oil companies have an eye on the future and are asking for greater say in the crafting of the second part of the Tax Code, which is nearing completion in the State Duma.

"If we don’t have legislation that helps investment, the oil sector won’t have anything," said Galina Antonova, vice president of No. 2 oil producer Yukos.

While capital investment in oil production grew by 25 percent last year to just under $3 billion and is on pace to be even higher this year, it is still only a 10th of what it was in 1990, according to a new report published by Expert magazine. Expert said Russia’s oil industry needs $25 billion to $40 billion in investments over the next five years.

"Oil companies can invest from their own resources," said Andrei Shmarov, director of Expert, which sponsored the conference. "But there are [some] government officials who think that these companies don’t deserve the happiness that has fallen on their heads — high oil prices — and think it should be taken away," he said. "Now is not the time to deprive oil companies of their ability to invest."

Shmarov was referring to constantly changing tax regulations, export duties and export quotas that restrict growth in the industry and deter foreign investment.

Realizing these problems eventually affect the whole economy, some lawmakers have supported the idea of a "windfall profits tax" — a device used by governments to prohibit excess corporate profits under special circumstances, such as unexpectedly high oil prices — to replace export duties that continue to climb.

Currently, these duties are regulated by the Energy Ministry and can be increased by decree, which makes them unpredictable and hinders long-term planning for companies.

"The government should not — even in a favorable situation — change the taxation regime so often," said Alexander Shokhin, chairman of the Duma’s banking committee, who supports the idea of replacing the export duty with a windfall profits tax.

Sergei Generalov, another Duma deputy and former fuel and energy minister, said he, too, backs a windfall tax.

"The export duty is an anti-investment tax for oil companies. There has to be a principally new tax — a windfall profits tax — that will replace the excise tax and export duties, and it has to be progressive in nature taking into account the volatility of world oil prices and ruble rate," Generalov said.

Generalov said it was time for major oil companies to have a professional dialogue with the government on the issue.