Tax Holidays.

Russia is not a very friendly place for the oil business. The Natural Resources Ministry’s officials have discovered that in Gabon and Cameroon the tax commitments of the companies implementing various oil projects are comparable with the same in Russia. In order to attract investors to the development of new oilfields primarily in East Siberia and the Arctic Shelf the Natural Resources Ministry intends to relieve the companies of the mining operations tax for a time period from five to eight years. The Russian file has been compiled by the Natural Resources Ministry and other countries have been dealt with by McKinsey. The share of tax deductions has been calculated as a ratio of discounted taxes and charges to the sum of discounted taxes and discounted net profit. The calculations have been done basing on 30-dollar crude price and 10-percent discount rate.
Though oil prices reached a transcendental level they proved insufficient to push up Russia’s oil industry. According to the data made available by the Ministry of Natural Resources the crude oil production in Russia increased by 3 % from January to August 2005 if compared with the same period of the last year. In previous years the oil production used to grow by 9-10% though. For the nine months the best production growth has been shown by TNK-BP and Surgutneftegas, making it 8%. As for Lukoil they added up 4%, Tatneft -  1% and Sibneft reduced the production volume by 1 %. In the end of August the Natural Resources Minister Yuri Trutnev came out with a suggestion that fiscal pressure on oil companies might be a brake on the path of progress in the oil industry.
The Vedomosti has got hold of a research done by the Natural Resources Ministry in which they analyzed influence of the tax burden on Russia’s oil industry. “We undertook to do this research in order to better understand in what way the oil production could be stimulated. Therefore we are finding out in what way interact taxes and production volumes of the companies,” – said a source in the Ministry. According to this source the dependence is not yet found, however the research is kept going.
At least the Natural Resources Ministry’s officials have realized that the development of the oil resources at the Artic Shelf and East Siberia so important for Russia is imperiled because of the inadequate tax pressure. The point is that the state reductions share during the entire period of oil projects implementation is the highest in the world. At Russia‘s Arctic Shelf these reductions may hit 93 % and 87 % at the oilfields of East Siberia (the reserves both at the Shelf and East Siberia being not actively developed).
“The high reductions share makes development of new oilfields unattractive,” – concludes the officials of the Ministry of Natural Resources. Only on the land oil fields of Gabon the reductions share is higher making 93.4 %, in Cameroon it is 92,1%, in Libya -  85.5%, in Algeria – 79.6 %, in Norway – 78.7.%, in Kazakhstan – 78.5 %. In the Gulf of Mexico of the USA and at the Shelf of Canada the reductions share is lower than 45 % and 57 %, respectively.
In order to bring the companies to West Siberia and the Arctic zone Trutnev suggests that tax exemption be granted at the initial stage of developing the oilfields. He promised that within two weeks the Ministry should word their proposals on how to do it. Judging by the documents of the Natural Resources Ministry the officials are considering the possibility of relieving the companies of the mining operations tax for a time period from 5 to 8 years after a company sets about developing an oilfield.
Tatneft’s Deputy Director Azat Yagafarov agrees that the tax burden upon Russia’s oil industry is too heavy; therefore the companies are short of means which can be used to develop new oilfields. The head of Russneft Mikhail Gutseriev thinks that it is cheaper to buy a company than to undertake to develop a new oilfield. “Once  a company is bought the payback is available right away instead of huge investments required for development and future extraction,” – stressed Gutseriev last Friday at the consultations meeting at the Economic Development Minister’s German Greff. The existing fiscal procedure won’t impede implementation of on-going business projects. However with it being active developing new oilfields will be complicated, especially those requiring investments in infrastructuring as confirmed by Marina Dracheva, a representative of TNK-BP.
“Without tax remissions for new projects especially in West Siberia and at the Arctic Shelf large-scale investments are difficult, – says the Aton analyst Steven Dashevsky, - though TNK-BP is ready to invest into the Verkhnechonskoye oilfield under the current tax remissions”. For the existing oilfields the active tax treatment is rather comfortable though, assumed the analyst, adding that “oil companies would make a record profit this year”.