Lukoil’s Caspian Only Winner From Offshore-Tax Law, BofAML Says

Lukoil’s Caspian business will be the only beneficiary of tax breaks in Russia aimed at spurring offshore oil output after the European Union and U.S. imposed sanctions against the country, Bank of America Merrill Lynch said.

Production from the Caspian’s Filanovsky deposit should start next year, producing a 22 percent internal rate of return on investment, analysts Karen Kostanian, Anton Fedotov and Denis Derushkin wrote today in a note.

State-run OAO Rosneft, armed with a raft of Arctic licenses and deals with Exxon Mobil Corp., Eni SpA and Statoil SA, led a lobbying effort resulting in more lenient taxes for various offshore zones. Rosneft’s ability tap the arctic, however, has been limited because of sanctions from the U.S. and its allies over Russia’s actions in Ukraine.

“Western sanctions imposed on Russian offshore and tight-oil drilling last year by the EU and U.S. halted international cooperation, leaving Lukoil as the sole immediate beneficiary of the new tax law,” the analysts wrote.

Output from the Filanovsky field should reach 160,000 barrels a day, about 7 percent of Lukoil’s production, by 2017, according to the research. That will allow the oil company to maintain production and pay dividends, according to the note.

Russia’s second-largest oil producer should deliver almost $5 billion in free cash flow this year, the analysts estimated.

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