Putin Entices Oil Investors to Bankroll Kremlin Return: Energy

President Vladimir Putin has begun revamping Russia’s petroleum taxes to increase government revenue in his third term and maintain oil and gas flows that underpin his power atop the world’s largest energy exporter.

He proposed the first tax breaks for pumping unconventional reserves such as shale oil at a meeting with energy officials four days before being sworn in yesterday. While shale is booming in the U.S., such harder-to-extract unconventional reserves in Russia provide just 4 percent of total production.

The incentives boost ventures planned with Western oil companies whose technology is needed by state-owned oil producer OAO Rosneft (ROSN) to help Russia’s $1.5 trillion economy grow. As these projects may take years to deliver their first crude, Putin proposed a separate tax change to bring in more immediate income -- raising taxes as much as fourfold on natural gas, hitting the thousands of wells that are already producing.

“The increased gas taxes and fiscal incentives for unconventional oilfields are all geared to one end -- to get the maximum out of the energy sector for the state coffers both in the short and long term,” Lilit Gevorgyan, a Russia analyst at IHS Global Insight in London, said by e-mail.

Last month, as premier, Putin granted a separate group of tax breaks to offshore energy projects that have since coaxed Exxon Mobil Corp. (XOM), Eni SpA (ENI) and Statoil ASA to form alliances with Rosneft, whose stock trades below its 2006 sale price.

While international oil companies may gain more access to Russia’s natural resources in Putin’s new administration, his return to the Kremlin pushed thousands of protesters onto the streets of Moscow a day before the inauguration, which opposition leader Sergei Udaltsov called “illegitimate.”

Wave of Protests

The protests followed a wave of rallies against the results of the Dec. 4 parliamentary election, which was marred by complaints of vote-rigging. Putin won the vote on March 4 to return to the presidential office for a third term.

Oil and gas together contribute about 17 percent of gross domestic product and half of Russia’s federal budget revenue, according to government estimates. Oil production increased less than 2 percent annually during the last two years after rising 3.1 percent in 2009, according to Energy Ministry data.

Putin, 59, returned to the Kremlin seeking a balance between carrying out social promises made during the election campaign and luring new investment into energy assets as Soviet- era fields and infrastructure mature. New fields in the Arctic and harder-to-extract reserves in Siberia are more costly and need newer technology.

Exxon, Eni Deals

Within the past month Rosneft, Russia’s biggest oil producer, signed exploration deals with Exxon, Eni and Statoil, putting stakes in foreign projects within reach for the Moscow- based producer that wants international reserves to boost value.

Rosneft’s shares traded in Russia have lost 9.7 percent this year, compared with gains of 14 percent and 16 percent respectively for Russian and Chinese oil companies OAO Lukoil and Cnooc Ltd. Italy’s Eni advanced 3.2 percent in the period, and Exxon lost 1.9 percent. Repsol YPF SA, whose Argentine unit was expropriated, fell 42 percent.

“Now that Russian electioneering is done, international deals appear to be the first order of business, offering more hope for international oil companies in offshore development,” Julia Nanay of PFC Energy said in a May 3 research note. “Russia may need even more foreign oil investment now to generate revenues for the populist pledges of Putin’s campaign.”

Social Spending

Putin may seek to boost social spending to fulfill promises made during his campaign that coincided with a wave of protests following parliamentary elections won by his party United Russia. He vowed to boost pensions and salaries for state workers and the military, pledges that will contribute to a 4.8 trillion- ruble ($160 billion) increase in spending through 2018, according to estimates by Capital Economics Ltd.

With petroleum prices high, oil and gas revenue amounted to 5.64 trillion rubles of the budget revenue of 11.37 trillion rubles last year, according to the Finance Ministry.

In his push for tax incentives, Putin said in May 3 the measures will help Russia “play even bigger role on global energy markets.” Putin’s predecessor, Dmitry Medvedev, has called reliance on raw materials “humiliating” and “primitive,” in his four-year push to focus on development of high-technology industries.

Crude oil, refined products and natural gas made up 67 percent of Russian exports last year, up from 49 percent in 2000, according to a presentation by the Agency for Strategic Initiatives prepared for the government.

Levy Quadrupled

With aging traditional fields in western Siberia and production at Rosneft’s new offshore ventures years ahead, the government shifted the tax burden on the gas sector by doubling the mineral extraction tax for OAO Gazprom, state-run gas exporter, and quadrupling the levy for its smaller independent rivals from July 1, 2015.

“This will help Putin in the short term,” Gevorgyan said.

Gazprom’s tax rate will reach 1,062 rubles ($35) per 1,000 cubic meters of gas, or about $1 per 1 million of British thermal units. That’s nearly half of U.S. natural gas prices, which dropped to an intraday low of $1.902 per million British thermal units on April 19 and traded at about $2.34 yesterday.

Proposed measures, while convenient at the start of Putin’s new six-year regime, may not be sufficient to overhaul the energy sector and maintain production levels.

“It is unclear if the returning president will initiate a long overdue reform of the energy sector’s tax regime,” Gevorgyan said. “One of the changes needed in this respect is a move from production-based tax to profit-based tax.”

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

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

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