Trillions necessary to maintain Russia's oil production

Oct 29, 2010 12:00 AM

Keeping up Russia’s oil output will cost RUB 9 tn ($ 292 bn), according to Vladimir Putin.

The prime minister called for that level of investment over the next decade to maintain crude oil production levels at 500 mm tpy. And he admitted that tax regimes needed to be reformed before new reserves can be exploited fully in the vital resource sector.


New oil targets

An agreement on developing Russia’s oil sector was reached in Samara and anticipates a small increase of 2.2 % in oil production until 2020. The new figure of 505 mm tpy will largely be met by existing production regions, according to energy minister Sergei Shmatko.

But come 2020 further growth will only be possible through new deposits and technologies, Putin warned, raising the spectre of peak oil production in the mid-term future. However, the investment necessary is the industry is to keep up with the current production levels is more than RUB 8.6 tn, Putin said, admitting that the tax regime had to be changed.

The target of 505 mm tons based on current oil price predictions and a proposed drop in taxes from 73 % to 65 %, Shmatko said. Tax help for the industry Finance and energy ministries must find a “nice balance” between the interests of the budget and the industry, said the PM. Putin said that precise tax rates must be agreed at the levels by the end of the year and all the necessary projects should be in the State Duma next summer.

Energy minister Sergei Shmatko also said that the industry’s development also depended on a “smart and balanced state [fiscal] policy,” it was reported. “The state, as well as oil companies, should hardly look at oil production as the main parameter. The main thing is the amount of money that the country receives from oil production,” said AFK Sistema chief vice president Alexander Korsik.

It was also decided that low-quality refining will be shut down and only plants with at least 70 % depth of refining will be allowed to open. It was also announced that all the refining plants will only produce petrol no lower than Euro-3 standard since Jan. 1, 2012.

A positive step towards stability It is generally seen as a positive step for the sector, as it should attract investors and create stability, thinks Ildar Davletshin an oil and gas analyst at Renaissance Capital. “Uncertainty about the tax regime has held back the investment plans of Russian oil companies and led to generally weak sentiment in the investment community, in our view,” Davletshin told. “We believe state companies, specifically Rosneft, would stand to benefit most from the new tax regime, since they have traditionally enjoyed preferential access to new strategic reserves in Russia.”

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