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. Last Updated: 07/27/2016

Kollek Says Taxes, Costs Holding Back Projects

Russian oil firms should focus more on maintaining output from mature fields to prevent production from stagnating because tax rules and rising costs make it difficult to launch new projects, a senior executive said.

Jonathan Kollek, vice president of TNK-BP, told a seminar Thursday that the government should lower the tax burden to stimulate development of new fields in untapped regions.

"If today we cannot do greenfields, what will happen in five years time? The way to avoid stagnation is to optimize what we already have," Kollek said.

"That is the best option under today's circumstances to create value with no risk," he added.

TNK-BP, half owned by oil major BP, is struggling to maintain output at its mature west Siberian fields, including Samotlor. The company says its output will remain flat at around 1.4 million barrels per day for another two years, before it starts developing new fields in east Siberia. Other Russian oil firms also rely on east Siberia for future growth.

The country's overall output growth has slowed to 2.2 percent in 2006 and is not expected to exceed 2.5 percent this year after impressive spikes in previous years, which made it the world's second-largest exporter after Saudi Arabia.

Production is expected to plateau at the current level of 10 million bpd as new production in east Siberia offsets declining output in west Siberia.

But Kollek said expectations of big production increases from east Siberia might not materialize in the near future because the biggest players in the region -- state-controlled companies -- are heavily in debt.

"State companies have taken debt to a maximum and global credit turmoil is causing difficulties in further raising capital for our industry," Kollek said.

A shortage of oil servicing companies in Russia is another challenge, he said.

Gazprom has debts of over $30 billion while state-controlled Rosneft has amassed a debt of over $25 billion to buy assets of bankrupt oil firm Yukos.

Both companies say their debt level is safe and is not hampering their production plans in any way.

Apart from Gazprom, Rosneft and TNK-BP, private oil firm Surgutneftegaz, with over $10 billion in free cash, is also an active player in east Siberia.

"The government has to give new tax exemptions to greenfield developments," said Kollek. The tax system had not been amended since 2003 despite rising costs and inflation, squeezing profit margins, he said.

East Siberia is the country's only region where oil producers are given tax breaks for new developments.

A sliding scale for the rest of the country's production means that export duties and mineral extraction tax have increased sharply with the rise of global prices over the past four years.

Kollek said oil firms' net income from the barrel produced fell to 13 percent now from 20 percent in 2004, when prices were at $40 per barrel, compared with $90 per barrel now.