New Oil Production Tax Law Benefits OAO Tatneft

On July 28, 2006, President Vladimir Putin signed the Federal Law "On Amendments in Chapter 26 of Part II of the Tax Code of the Russian Federation and Considering Certain Legislative Acts of the Russian Federation Expired" that was passed by the State Duma on July 8, 2006 and approved by the Federation Council on July 14, 2006.

The law introduces a differentiated taxation of natural resources production that is tied to the level of depletion of reserves (discount will apply to oil fields with the depletion ratio above 80%). Differentiated taxation will allow OAO Tatneft and other companies producing oil at fields with high level of depletion to extend the term of economically viable production from such oil fields. According to evaluations of Tatneft's experts, oil production at Tatneft's largest oil field Romashkinskoye which is one of the oldest will be subject to the reduced rate (with application of the discount tied to depletion levels).

In addition, the new law establishes zero tax rate for production of viscous (heavy) oil produced from resources containing oil with high viscosity over 200 cp (in layer conditions). Currently OAO Tatneft conducts active works for exploration of bitumen reserves on the territory of Tatarstan. Tests of technology for pilot production of bitumen whereby steam is pumped with horizontal pass through wells were conducted this year on Ashalchinsky oil field. According to certain evaluations, there are from 1.5 bln up to 7 bln tons (approximately from 10.8 up to 50.4 bln barrels) of natural bitumen in Tatarstan with average occurrence at 80 up to 200 meters (from 262.47 up to 656.17 feet). Zero rate for production of bitumen would significantly improve economics of production from such fields.

The Federal Law "On Amendments in Chapter 26 of Part II of the Tax Code of the Russian Federation and Considering Certain Legislative Acts of the Russian Federation Expired" will come into effect on January 1, 2007.

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