Russia's oil industry threatened by high taxes, maturing fields

Feb. 20, 2008
High taxes are threatening the future development of Russia's oil and gas industry as production growth stagnates from mature fields, speakers warned at International Petroleum Week in London.

Uchenna Izundu
International Editor

LONDON, Feb. 20 -- High taxes are threatening the future development of Russia's oil and gas industry as production growth stagnates from mature fields, speakers warned at International Petroleum Week in London.

"There is no clarity until the new government comes into power," said Tony Considine, TNK-BP downstream executive vice-president.

Russia's prospective fields in Siberia and offshore in the Arctic require huge investments and pose major development and financial risks.

Favorable tax rules make it attractive for companies to invest in refining rather than export the oil. Russia also has encouraged the creation of petroleum products because it adds value to oil. About 100 mini refineries have sprung up, but future growth is being jeopardized by a shortage of skilled personnel and a lack of financial investment, Considine said. "We are cautiously optimistic; we can be competitive with European refineries if oil prices are at $60/bbl."

Refiners are under great pressure to change the specification of petroleum products in Russia, with different requirements set for 2009, 2010, and 2013, Considine said, criticizing the timetable as "aggressive."

Mark Gyetvay, chief financial officer of Russian gas independent Novatek, told OGJ it does not expect the forthcoming government to severely increase mineral extraction taxes, as large investments are required for projects. None of the presidential candidates, who will finish their campaigns in March, has indicated that he would change the investment climate to benefit independents, which are expected to be important players in supplying oil and gas to the market in the midterm.

"Gazprom's supply will be relatively flat because a lot of these projects won't start until 2013, and they are capital intensive projects, so the growth in Russia will be driven by the independents," he added.

Novatek represents 29% of non-Gazprom production, a volume expected to rise to 40% within the next 5 years. Novatek enjoys higher-than-average gas prices on the domestic market because it does not have to sell gas at fixed prices as Gazprom does.

Gyetvay said Gazprom has purchased gas from Central Asia to supply its customers, but these countries also are pursuing strategies to export gas to Asia and bypass Russia, leaving the market unclear about the level of Central Asian gas available.

Legal risks
Although Russia is eager to attract foreign investment to its petroleum industry, it is preventing access to 40 areas deemed to be of national importance under a draft bill, according to Anatoly Andriash, managing partner at law firm Macleod Dixon. "There is draft legislation establishing quantitative parameters of 'strategic' deposits with oil field reserves exceeding 70 million tonnes and gas reserves exceeding 50 billion cu m."

Exploration companies may be encouraged by the draft bill permitting them to gain rights through a contract rather than a subsoil license, which has less flexible terms. "Companies would get greater access to the judicial system and regulator if they had a contract," Andriash said.

He warned that the legal regime for foreign investors may become less favorable than that for Russian investors if different amendments were made.

Contact Uchenna Izundu at [email protected].