Russia Proposes Easing Oil Sector Taxes From 2009

MOSCOW, March 25, 2008 (Dow Jones Newswires)

Russia's Finance Ministry Tuesday said it would propose a 100-billion-ruble ($4.2 billion) cut in oil sector taxes from 2009, sending shares in major producers higher.

The ministry said it plans to make the proposal to the government by the end of the week, the Prime-Tass news agency reported.

Other details were scarce but the news pushed the benchmark RTS oil and gas index up 0.4%, ahead of a flat wider market as investors bought shares in OAO Lukoil and OAO Surgutneftegaz.

Russian oil companies have long complained heavy taxation makes it impossible for them to make large capital investments in new fields. The country's overall oil production has stagnated in recent years after impressive spikes of up to 9% annual growth at the start of the decade.

Last year, Russia produced 9.87 million barrels of crude oil a day, up 2.3% on 2006.

"This is definitely good news for the oil producers as it shows the government now actually wants to do something about it," said UBS analyst Dmitry Loukashov.

He highlighted Russia's existing tax rules force producers to pay 90 cents of every dollar they earn over $27 a barrel of crude.

UniCredit estimates the so-called mineral extraction tax burden for the industry at around $50 billion, and thus calculates that the proposed changes, if implemented as a straight-cut annual tax reduction, are likely to reduce tax payments by 8%.

State-controlled OAO Rosneft, the country's biggest oil producer, recently proposed introducing tax holidays and new subsoil legislation, which - it said - would encourage companies to invest in new projects. It has also asked for tax breaks for certain refined products to encourage downstream investments.

Observers have said any move by the government to revise oil sector taxes would likely boost shares in the country's producers, which have been underperforming for the last year.

"This could be a real catalyst for the entire Russian oil industry," said analyst UBS' Loukashov.

MOSCOW, March 25, 2008 (Dow Jones Newswires)