The government has granted relief to six Western oil joint ventures from a crippling dollars 5 a barrel export tax on crude oil, removing what has for the last two years been the biggest single stumbling block to billions of dollars of Western investment in Russia's oil sector, Western oil executives said Thursday.
Prime Minister Viktor Chernomyrdin signed the decree granting the exemptions Wednesday, culminating a two-year lobbying effort for the removal of the tax by Western oil firms and the highest levels of government.
"I cannot over-emphasize the effect of this decree," Brian Lavers, chief executive officer of U.S. oil firm Phibro Energy, said at an investment conference Thursday. "It will breathe new life into the oil and gas sector."
Earl Swift, chief executive of Swift Energy, which is planning a dollars 160 million investment in western Siberia, also applauded the government decision. "I think it's very important for those of us contemplating investment," he said.
Jan Kalicki, U.S. government ombudsman for energy co-operation with Russia, said the removal of the export tax was one of the key investment issues discussed by presidents Boris Yeltsin and Bill Clinton at the recent U.S.-Russia summit in Washington.
He said it would speed the way for the investment of tens of billions of dollars in Russian oil fields, bringing cash to remote areas where it is most needed, and encourage billions of dollars of foreign investment in other sectors.
The decree grants an exemption from the tax to six joint ventures -- Conoco's Polar Lights which, at a cost of dollars 350 million, is the biggest single Western investment in Russia, Phibro Energy's White Nights, Gulf Canada's Komiarcticoil, Pennzoil's Siberian American, Andermann Smith and AmKomi.
A queue of 37 other oil joint ventures currently operating in Russia has already formed to apply for similar exemptions.
James Taylor, executive vice president of Occidental Oil and Gas, which is currently exporting oil through a joint venture in western Siberia, said the decree was also great news for his company.
"We are just wondering where we are in the queue," he said. "We have slowed down our investment until we see light at the end of the tunnel."
Since it was introduced in January 1992, the dollars 5 a barrel tax on exported oil has destroyed the economics of investing in Russian oil projects. It cut off the profit margin from Russian oil, which only fetches about dollars 15 a barrel on world markets.
It has also caused huge losses to Western firms that have gone ahead and invested in oil, believing Russian government promises over the past two years that the tax would be lifted.
For example, Lavers of Phibro Energy said that White Nights, one of the first joint ventures in Russian oil, had invested dollars 115 million in Russia and paid dollars 34 million of export taxes, leaving it with no money to repay loans.
After years of contradictory promises, the government finally created rules and a procedure for obtaining exemptions from the tax in May. It has taken five months for an intergovernmental commission to approve the first batch of cases.
The prospect that the government might grant exemptions from the tax will provide a boost for two super-projects being planned in the oil and gas sector, involving investments of dollars 10 billion each in the Timan Pechora field in Russia's Far North and on the Sakhalin shelf in the Far East.
The removal of the export tax is, however, only one of a whole series of problems facing Western investors in the Russian oil sector.
Russia's export pipelines to the West are currently full to bursting. Western firms are concerned that they will not be given their share of pipeline space. This problem will become especially acute after Jan. 1, when quotas on the export of oil from Russia lapse.
Ray Irani, chairman of Occidental Petroleum, said that Western investors want to know that they will receive the same access to Russia's crowded pipeline system as Russian producers.
He also said that Western oil firms want Parliament to pass clear laws protecting contracts they reach from changes in taxation and other regulations. Such a draft law, on Production Sharing Agreements, is currently going through its second reading.
Moreover, many Western firms will take some convincing that the Russian government will not change its mind on the tax exemption issue. Lou Naumovski, local representative for the European Bank for Reconstruction and Development, welcomed the exemptions but warned that there was still some risk.
"We have seen these things change a lot in the past," he said.
Prime Minister Viktor Chernomyrdin signed the decree granting the exemptions Wednesday, culminating a two-year lobbying effort for the removal of the tax by Western oil firms and the highest levels of government.
"I cannot over-emphasize the effect of this decree," Brian Lavers, chief executive officer of U.S. oil firm Phibro Energy, said at an investment conference Thursday. "It will breathe new life into the oil and gas sector."
Earl Swift, chief executive of Swift Energy, which is planning a dollars 160 million investment in western Siberia, also applauded the government decision. "I think it's very important for those of us contemplating investment," he said.
Jan Kalicki, U.S. government ombudsman for energy co-operation with Russia, said the removal of the export tax was one of the key investment issues discussed by presidents Boris Yeltsin and Bill Clinton at the recent U.S.-Russia summit in Washington.
He said it would speed the way for the investment of tens of billions of dollars in Russian oil fields, bringing cash to remote areas where it is most needed, and encourage billions of dollars of foreign investment in other sectors.
The decree grants an exemption from the tax to six joint ventures -- Conoco's Polar Lights which, at a cost of dollars 350 million, is the biggest single Western investment in Russia, Phibro Energy's White Nights, Gulf Canada's Komiarcticoil, Pennzoil's Siberian American, Andermann Smith and AmKomi.
A queue of 37 other oil joint ventures currently operating in Russia has already formed to apply for similar exemptions.
James Taylor, executive vice president of Occidental Oil and Gas, which is currently exporting oil through a joint venture in western Siberia, said the decree was also great news for his company.
"We are just wondering where we are in the queue," he said. "We have slowed down our investment until we see light at the end of the tunnel."
Since it was introduced in January 1992, the dollars 5 a barrel tax on exported oil has destroyed the economics of investing in Russian oil projects. It cut off the profit margin from Russian oil, which only fetches about dollars 15 a barrel on world markets.
It has also caused huge losses to Western firms that have gone ahead and invested in oil, believing Russian government promises over the past two years that the tax would be lifted.
For example, Lavers of Phibro Energy said that White Nights, one of the first joint ventures in Russian oil, had invested dollars 115 million in Russia and paid dollars 34 million of export taxes, leaving it with no money to repay loans.
After years of contradictory promises, the government finally created rules and a procedure for obtaining exemptions from the tax in May. It has taken five months for an intergovernmental commission to approve the first batch of cases.
The prospect that the government might grant exemptions from the tax will provide a boost for two super-projects being planned in the oil and gas sector, involving investments of dollars 10 billion each in the Timan Pechora field in Russia's Far North and on the Sakhalin shelf in the Far East.
The removal of the export tax is, however, only one of a whole series of problems facing Western investors in the Russian oil sector.
Russia's export pipelines to the West are currently full to bursting. Western firms are concerned that they will not be given their share of pipeline space. This problem will become especially acute after Jan. 1, when quotas on the export of oil from Russia lapse.
Ray Irani, chairman of Occidental Petroleum, said that Western investors want to know that they will receive the same access to Russia's crowded pipeline system as Russian producers.
He also said that Western oil firms want Parliament to pass clear laws protecting contracts they reach from changes in taxation and other regulations. Such a draft law, on Production Sharing Agreements, is currently going through its second reading.
Moreover, many Western firms will take some convincing that the Russian government will not change its mind on the tax exemption issue. Lou Naumovski, local representative for the European Bank for Reconstruction and Development, welcomed the exemptions but warned that there was still some risk.
"We have seen these things change a lot in the past," he said.
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