Russian Tax Break for ‘Oil Sands’ Backed by Finance Ministry

Russia’s Finance Ministry is putting its weight behind an plan to cut the export duty for extra-heavy crude for the next 10 years to stimulate output in the world’s largest oil producing nation.

The proposal to tax exports of the hard-to-extract crude at 10 percent of the standard levy, made by the Energy Ministry, could become law by July 1, Deputy Finance Minister Sergei Shatalov said by phone late yesterday.

OAO Lukoil, Russia’s second-biggest crude producer, and OAO Tatneft would benefit most from the tax break as they seek to develop large resources of super-viscous oil “similar to Canada’s oil sands,” said Valery Nesterov, an analyst at Moscow-based Troika Dialog.

“Extra-heavy oil could eventually add 1 to 2 percent to their production figures and help compensate for falling output at mature fields,” Nesterov said by telephone today.

Prime Minister Vladimir Putin, set to return to the Kremlin as president for at least six years, has called for oil production to remain above 500 million metric tons a year, or 10 million barrels a day, for at least a decade. The government is looking to stimulate output to compensate for declines at mature fields in western Siberian. Oil and gas provided about half the state’s budget revenue last year.

$2.5 Billion Investment

In October, the government lowered the rate used for calculating the crude export duty, which is based on prices for Russia’s Urals benchmark export blend, while raising the tax on low-quality oil products. The duty is $411.20 a metric ton, or $56.10 a barrel, this month. Heavier crude grades tend to be more expensive to extract and yield lower amounts of lucrative products such as gasoline and diesel than lighter oil.

The law will define extra-heavy oil as having at least 10,000 centipoise, which is a unit to measure viscosity.

Investment in two Lukoil extra-heavy oil projects could reach $2.5 billion, according to a investor presentation last month. The Yaregskoe field and Lyaelskaya area in the northern Timan-Pechora region could peak at 25 million barrels a year in 2025, Vladimir Semakov, a spokesman for the company, said today.

If tax breaks are granted, Lukoil could use the savings to boost output at the two structures to 10 million barrels a year in 2016 from about 4 million barrels last year, he said.

The discounted export duty would save companies around $52 per barrel at current export prices, Evgeny Solovyov, an analyst at Societe Generale SA in London, said in a note published Feb. 29.

Tatneft (TATN)’s oil is heavier than Russia’s average and the company holds significant resources of extra-heavy oil, most of which is currently uneconomic to produce,” Solovyov wrote.

Tatneft’s production costs for using steam-assisted gravity drainage, an enhanced recovery technique for extra-heavy oil, are $58 per barrel, Solovyov said. Canadian experience shows that the per barrel cost could drop below $30, he said.

To contact the reporters on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net; Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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