Rosneft Oil Profits to Narrow When Vankor Loses Tax Breaks

OAO Rosneft, Russia’s largest oil producer, may see profits narrow in line with rivals by the third quarter of 2011 when tax exemptions for the Vankor deposit are expected to be lifted.

Output from Vankor, Russia’s largest new development, will likely reach 25 million tons, the limit for exemptions from the mineral extraction tax, or MET, in August, according to Bloomberg calculations confirmed by a spokesman for Rosneft who declined to be identified by name.

Separately, discounts to Russia’s export duties for Vankor will last until the end of April, Prime Minister Vladimir Putin said last month.

Third-quarter profits at Moscow-based Rosneft more than doubled from a year ago, compared with a 25 percent increase in earnings for TNK-BP, Russia’s third-largest oil producer. Production from Vankor, which started last August, allowed Rosneft to produce more tax-free oil.

MET and export duties claimed 48.3 percent of revenue in the third quarter, according to Rosneft, which currently pays a discounted export duty on Vankor output and no MET on the field.

“Rosneft’s net will come back to earth,” Alexei Kokin, an oil and gas analyst at UralSib Financial Corp., said by telephone from Moscow. “They will probably still be more profitable than peers in the upstream because of lower costs.”

Clash

Russia’s oil industry has clashed with the Finance Ministry over taxation. The industry wants tax relief as spending on remote fields and flagging Soviet era wells hurt margins. At the same time, the Finance Ministry is seeking a greater tax take to help meet the nation’s spending plans in coming years.

The tax breaks have enabled Rosneft to keep more cash for the initial investment phase, Kokin said. Even so, there won’t be incentives to explore until tax programs become systematic rather than the result of lobbying, as with Vankor, Kokin said.

Vankor, which reached production of 15 million tons earlier this week, currently pumps at a rate of 36,000 tons, or 263,000 barrels a day, according to Rosneft’s website. That’s the equivalent of more than 11 percent of the company’s 2.33 million barrels a day of overall output.

Rosneft and TNK-BP are partners in an east Siberian venture producing oil with MET exemptions at Verkhnechonsk. OAO Surgutneftegas’s Talakan producer in East Siberia also qualifies for both MET and export duty breaks.

To contact the reporter on this story: Stephen Bierman in Moscow sbierman1@bloomberg.net.

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.

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