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№ 1 (January 2010)

Sechin: East Siberian Oil Tax Breaks Still Undecided

Russian Deputy Prime Minister Igor Sechin warned delays could come in repealing the zero rate export duty on crude produced at 22 fields in East Siberia. The Russian Finance Ministry has sought the tax breaks to encourage development of fields whose production would point east to Asian markets where demand is rising. But Sechin, speaking at the A ceremony to celebrate welding the first joint of the Purpe-Samotlor pipeline, said that agencies debating the tax holiday have yet to agree a final unified position. Sechin suggested further that even if the export duty is abolished, other duties might take its place. Experts agree that Russia needs to quickly put East Siberian fields on stream to boost its own production and to provide sufficient throughput for the recently opened East Siberian Pacific Pipeline.

By Peter Geltishchev

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Sechin said that based on a request from the Federal Antimonopoly Service (FAS), the government is reviewing the possibility of introducing clauses under which oil companies would be obliged to sell crude and oil products on exchanges if they win licenses to large fields. Moreover, the deputy prime minister supported another FAS initiative – limiting the share of domestic oil companies on regional markets to 35 percent. “Fighting monopolies is a good thing. And besides, a 35 percent share of a market is not that severe a share; we just need to get it sorted out”, Sechin said.

However, losses from any new limits could easily be compensated with current discounts. “After unsuccessful attempts to use fines in establishing rules on trading oil, FAS has decided to undertake structural changes in the sector. But this can only affect pricing in the long-term, while companies are already getting real money from the effects of privileges”, Finam analysts Aleksandr Yeremin said. Besides this, experts say that the limits proposed by FAS and supported by Deputy Prime Minister Sechin will not affect all oil companies. “The 35 percent limit will hit only those companies which had ambitious plans to enlarge their retail business. Specifically, this means Gazprom neft, which had been counting on increasing the number of its own filling stations by 50 percent”, Yeremin said noting that Lukoil and Rosneft which already have significant shares of the oil product market in most regions have no need to further increase their position in retail. Burdening field licenses with the requirement to sell oil and oil products on exchanges will more likely only result in lost time rather than lost money, since making the move to new trading floors could take some time to complete. “In the end, the result is that the breaks the government is giving to the oil sector are huge compared to the losses they could sustain from the government introducing some limits”, Yeremin said.
Still, Sechin said that subsoil companies working at East Siberian fields will invest 150 billion rubles into them in just 2010. “Our experts have calculated that these investments will result in direct revenue to the federal budget of 53 billion rubles”, Sechin said.

Oil industry observers note that the zero-rate tax is needed as throughput capacity on the pipeline is not yet high enough to make the project profitiable.

Copyright 2010, Vremya Novostey, All right reserved.

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