Yukos CEO Shrugs Off Russian Govt's Tax, License Reviews

The tax regime and oil field license reviews that Russian authorities have undertaken aren't cause for concern, the chief executive officer of OAO Yukos said Monday.

Simon Kukes said authorities know that if disincentives to investment in the sector are created, President Vladimir Putin's goal of doubling the country's gross domestic product in a decade may become hard to reach.

The government is currently reviewing oil field licenses to see "how well companies have followed the rule of law in developing oil fields," Kukes told an audience at New York's Council On Foreign Relations. "There are very strict procedures."

If authorities discover any violations, fines are possible, he suggested.

Some critics have contended that the reviews are an attack on oil companies or a new way to extort money out of them, but Kukes said he sees "just the opposite: If anything, it's a step in the right direction."

By following the rules, companies are protected and stability created, he argued.

Yukos is currently being investigated by Russian authorities.

Kukes took over Yukos, Russia's second-largest oil producer, late last year after its previous chief executive, Mikhail Khodorkovsky, was arrested last October on fraud and tax evasion charges. Khodorkovsky denies the allegations, and said they are politically motivated.

Kukes declined to comment on the matter. Instead, he said Yukos now has a board of directors independent of major shareholders, unlike other Russian oil companies. The government has frozen the 44% controlling stake that Khodorkovsky and his allies have in Yukos through their holding company, Group Menatep, Ltd.

Yet last week, a Menatep official, not Kukes, signed a document to sell OAO Sibneft back to its original owners. Yukos had bought 92% of Sibneft last October.

In any event, Kukes took an equally sanguine view of government moves to increase taxes on oil companies, which he said have been subject to "relatively low" income taxes. Higher taxes won't "discourage investment" either from domestic companies or their potential foreign partners, he said. That's because an aggressive expansion in taxes might undermine capital investment in the sector, which remains the lifeblood of the Russian economy.

And that, in turn, could foil the goal of doubling GDP in a decade, Kukes suggested.

The oil executive may have taken heart from a statement last week by Economic Development and Trade Minister German Gref, who said taxes on oil companies will rise between $2 billion and $3 billion, a far cry from projected hikes of up to $10 billion according to some reports.

Kukes said "there will be no dramatic (tax) changes." Rather, the review will result in a "stable" tax regime that creates incentives for downstream investment, which Russia needs to upgrade given the poorer quality of its refined oil products.

Instead of a weaker sector, the Yukos chief said he expects Russia's oil output to increase 9% this year after an 11% expansion in 2003. He added that by 2009, Russian oil production should hit 10.5 million to 11 million barrels a day, which would make it the largest producer in the world. Estimates of Russia's oil reserves, meanwhile, should increase 30%, given that previous assessments "were on the low side," he added.

On prices, Kukes said he expects oil to continue to trade at more than $25 a barrel for some time.

The Yukos chief also noted that state-owned oil pipeline operator AO Transneft is on track to expand its pipeline capacity by about 400,000 barrels a day this year.

To relieve export bottlenecks and pave the way for production increases, Kukes said a pipeline from oil fields in eastern Siberia south to China would be "more advantageous" for Yukos. But the government is also considering an export pipeline crossing eastern Siberia to the Pacific mainland port of Nakhodka for oil exports to Japan.

"What's important for us is to build the pipeline, the sooner, the better," Kukes said. He expected authorities would decide on the matter in the next four to eight months. Kukes said Transneft, not private companies, should control the future pipeline.

Separately, Kukes said Yukos isn't now considering any international projects, but mighy look beyond Russian borders in five to seven months.