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. Last Updated: 07/27/2016

LUKoil: Taxation Stifling Oil Sector

Mounting taxation on Russian oil companies is stifling further industry growth and making them much less competitive than their Western counterparts, LUKoil vice president Leonid Fedun said Monday.

Calling on the government to decide on a course for the oil industry's future development, Fedun said the sector needed $200 billion in investment to develop new oil-producing regions.

"We could increase production to 11 million barrels per day. But to do that we need a different tax regime," he told reporters on the sidelines of a Moscow investment conference organized by Renaissance Capital. "The state needs to decide which scenario for developing the oil sector it wants. ... Now it's heading for a period of moderate growth that will be followed by a moderate fall."

"The more the government takes from oil companies in taxes, the less there is left to invest," Fedun said during a speech to investors at the conference. "Russia faces the task of developing new fields, and this requires huge amounts of money."

The country's "energy security and economic progress are closely linked to the tax burden on the industry," he said.

The sector needs $200 billion in investment into developing new oil-producing regions to keep production growing, he said.

"We need to double, even triple investments," he said. To do this, he said, the government could either lower the tax burden or companies would have to bring in foreign partners. Last September, LUKoil teamed up with the U.S. major ConocoPhillips, which has bought an 11.1 percent stake in the company. ConocoPhillips has said it may invest $1.5 billion in a joint venture in the Arctic with LUKoil.

Even as world oil prices reach new record highs, the nation's oil boom is starting to sputter out after nearly five years of rapid growth. Oil production increased just 2.9 percent on May, the smallest gain this year, to bring overall production to 9.33 million bpd.

Investment in the sector is falling amid industry fears following the state's partial takeover of Yukos as compensation for massive back tax claims, rising taxation and gridlock in export pipelines.

Last year, LUKoil's output was up 8 percent, not including gas. Fedun said Monday production this year would grow by 8 percent, but he said that would include gas output. He declined to give a figure for crude output. The company's oil production for April stayed flat at 1.75 million bpd.

TNK-BP CEO Robert Dudley told the conference that his firm, Russia's No. 2 oil major by output, expected to pay $11.5 billion in taxes, tariffs and excise duties this year, nearly double the $6.5 billion it paid last year.

He said the company was still negotiating an audit finding by the Federal Tax Service, which said TNK-BP owed nearly $1 billion in unpaid taxes for 2001. "There are no deadlines" for this process, he told reporters on the sidelines of the conference.

Fedun said rising transport costs were another way for the state to seize the oil sector's windfall gains. "Again this is the state monopolies which are redistributing a significant part of oil incomes for their own gain," he said. "You can't separate the tax burden from transport costs."

The growing tax burden is making Russian companies much less competitive than their western counterparts, he said.

Fedun insisted that LUKoil would be able to hold its own in the faltering environment. Unlike other companies, LUKoil has invested significant sums into developing new oil fields in the arctic Timan-Pechora area and in the northern Caspian, he said. "In the next seven to eight years, our main growth will come from these regions," he said.