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Oil Industry Groans at New Tax Plan

The Finance Ministry wants to apply a tax on excess oil profits to several selected fields for a trial before making any broader moves, a senior ministry official said Monday, drawing complaints from the industry.

If conducted, the experiment would seek to determine how collectable such a tax would be, said Ilya Trunin, director of the Finance Ministry's department for tax and customs rates.

The current system, he said, will not change in the next three years, allowing the government to skim most of the profit that it collects from oil producers through hefty export duties.

"We need to learn a lot in order to administer the tax," he said at an investment conference organized by Renaissance Capital.

Oil executives complained at the conference about high tax pressure on the industry, saying their companies were unable to decide on investment plans because of the government's lack of will to shepherd through a promised change of the current tax system.

Without full clarity on taxation, state-run Rosneft cannot decide on its investment in remote fields in East Siberia, vice president Peter O'Brien said. Rosneft has said it could invest up to $1 billion in roads, pipelines and power lines in the area.

"We can produce oil at lower costs than in some other areas of the world, but for some of that — we can't make the investment decision yet," O'Brien said.

TNK-BP, Russia's third-largest crude producer, is not ready to invest in its similarly remote Yamal fields until it is completely clear how much it will have to pay in taxes, chief financial officer Jonathan Muir said. The company relies on brownfields for 90 percent of its output, he said.

TNK-BP has said it plans to invest $500 million in the area in the medium term.

"We need to wait for clarity to make significant investment in Yamal," he said.

LUKoil, the country's largest private oil company, shared the concern.

"The issue of changing the tax system is long due, if not overdue," said Andrei Gaidamaka, an executive at LUKoil. "It's absolutely necessary to have changes that will give us a chance to invest in new, large fields."

The problem is to combine the simplicity of the current tax with the easing of the burden, he said.

"This hides a conflict that is difficult to resolve," he said.

Norway charges a 78 percent tax on petroleum production but levies the fee on the profit rather than sales, said Bengt Lie Hansen, chief of StatoilHydro in Russia. He suggested that Russia might want to study the practice.

The Finance Ministry, which has been looking to raise taxes on the industry to cover a budget deficit, was characteristically defensive of the current situation, however.

"Moving from a simple system to a more complex one would not be a good policy measure from our point of view," Trunin said.

The discussion touched upon the introduction of a duty on oil exports from East Siberian fields, which the government is planning to introduce next month.

The duty, while still much lower than for other fields, is a compromise between the oil lobby and the Finance Ministry.

"It's quite an elegant solution," said Rosneft's O'Brien.

Rosneft's chairman is Deputy Prime Minister Igor Sechin.

The duty will grow to full size once oil producers reach a certain rate of return on their investment in the area — and the industry seems to have gained some ground against the Finance Ministry in a quest for profit from their East Siberian fields.

Trunin said Monday that the rate to trigger a full duty would be 17 percent, while Cabinet debates earlier this month revolved around the figures of 15 percent and 16 percent.

The MICEX Oil & Gas Index gained 1.1 percent on Monday, in line with the exchange's benchmark index. Rosneft outperformed, rising 3.3 percent, while LUKoil slid 1.1 percent.

President Dmitry Medvedev said he would give a major budget address to Cabinet officials and the Federal Assembly on Tuesday that will include changes to state arms spending.

In previous years, the Kremlin's budget address was simply sent to lawmakers, but Medvedev said in April 2009 that he intended to present the sweeping plan personally.

Speaking at a meeting with defense officials, Medvedev said Monday evening that he had been hammering out details of the address for the past several months.

The federal budget had a deficit of 5.9 percent of gross domestic product, a figure the Finance Ministry is seeking to close gradually in the next few years.

Earlier this month, Medvedev ordered the government to study a Finance Ministry proposal on reducing the number of federal officials by 20 percent to help cover the shortfall.

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