Sept. 2 (Bloomberg) -- Russia's oil production declined in August as companies struggled with costs and maturing fields, bringing the world's second-largest crude exporter closer to its first annual drop in output since 1998.

Production fell to 9.82 million barrels of crude a day (41.5 million metric tons a month), 0.9 percent less than a year earlier, according to figures released by the Energy Ministry's CDU-TEK unit.

``We probably won't get more oil produced this year than last year,'' Artyom Konchin, an oil and gas analyst at UniCredit SpA, said by phone in Moscow. ``By the end of the year, however, we should see a gain in the daily output rate because of new projects.''

Production in Russia's oil heartland of western Siberia is flagging as older fields mature, and companies are investing in harder-to-reach regions in search of growth. In July, parliament approved tax breaks urged by Prime Minister Vladimir Putin to spur investment in national production, which rose 0.4 percent in August compared with July to the highest level this year.

The sliding crude export duty, which rises when oil prices are higher, reduces the impact of expensive crude for companies, leaving less money to develop harder-to-reach deposits. Putin said in May taxes took as much as 80 percent of companies' profit, while Citigroup Inc. said today development drilling in western Siberia accounted for 26 percent of the increase in total upstream capital expenditures in the past two months.

Increasing Burden

It ``is becoming increasingly more expensive and burdensome for the oil companies to maintain output growth,'' Citigroup analysts Alexander Korneev and Ildar Khaziev said in a note to investors, cutting their price estimates for companies including the country's two biggest producers, OAO Rosneft and OAO Lukoil.

Rosneft plans to begin output from its Vankor field in eastern Siberia in the second half of this year, while Lukoil started producing at the Arctic Yuzhno-Khylchuyu field in July.

Lukoil Chief Executive Officer Vagit Alekperov said last week that the industry needs 400 billion rubles ($16.3 billion) in tax cuts next year to boost output. Energy Minister Sergei Shmatko later told reporters that tax proposals will be submitted by the year-end and the amount generated will be ``far from those sums.''

The world's largest crude supplier is Saudi Arabia.

To contact the reporters on this story: Greg Walters in Moscow gwalters1@bloomberg.net; Torrey Clark in Moscow at tclark8@bloomberg.net.

Last Updated: September 2, 2008 05:20 EDT