As it was expected, a decision was taken at the first meeting of the government chaired by Putin about tax benefits for the oil sector. In particular, non-taxable cost of the barrel of oil during calculation of the tax for extracting the minerals will be increased from $9 to $15 in 2009. Besides, exemption from tax will be applied with the field development: 10-15 years for those working on the shelf, and 7 years for those developing the oilfields in Yamal and Timano-Pechorskaya province.    

At first sight, it might seem strange such favorable attitude by Putin towards the oil industry, the tax load on which he increased during all the eight years of his office. But first, as was stated by Putin himself addressing the deputies who were going to elect him to be prime minister, today the state takes away 70-80% of profits from oil companies, which is quite enough. And second, an oil lobbyist has appeared in the government - that’s the first deputy prime minister Igor Sechin. Finally, the industry itself has shown the production decline in the first quarter this year which has occurred for the first time in the recent years. So something must be done about that.       

“Remember the recent statement by Leonid Fedun, the LUKOIL vice-president, saying that Russian oil extraction has passed its peak” said Vladimir Feigin, the director of Institute of Energetics and Finance. “That was a loud statement intended to attract attention to the fact the oil production is going to decrease. And even such a large company as Lukoil would not be able to increase the petroleum production”. 

However, the decision about oil tax lowering might have been caused with political reasons. “Putin realizes his relations with business are not very good” explains Evgeny Yasin, the academic adviser at the High School Of Economics. “So he would like to take some steps to meet it halfway, but along with that he wouldn’t like to come back to unpleasant questions related to protection of property rights, including the YUKOS case. And the tax lowering is always welcomed by business anyway”.  

At the same time, tax reduction done in such a limited format cannot be considered to be panacea. Insufficient investment into geological exploration and developing new fields and oil processing during all these favorable years is one of the main reasons for the oil production decline. Instead, the existing fields have been exploited intensively. Theoretically, the industry might have accumulated enough money to make large-scale investments now. But the money has been collected in the Stabilization Fund by the state. There is no guarantee that even with these tax remissions the oil companies would be able to put the money promptly and effectively.      

Though, the state has made some steps about that. Last week Igor Sechin had a special meeting with the core industry officials and representatives of the oil companies. He advised the latter that the saved means would be best used for extending the geological survey activities and modernization of the oil processing plants.  

“Basically, such a practice is not vicious” said Vladimir Feigin. “The state has the right to explain where it would be better to invest and what it expects from the oil companies in exchange for the tax remissions”.  

By the way, some experts saw disguised preferences given to Rosneft, Gazpromneft and LUKOIL in the government’s decision. The matter is that major part of the licenses for developing the fields in Yamal and Timano-Pechora belongs exactly to those companies, so it’s them to be main beneficiaries of the tax benefits. “Undoubtedly, those three large companies will get preferences compared to other players in the market. At the moment their only “advantage” is that they are indebted more than others” summarizes Evgeny Yasin.  

However, the tax privileges remain to be applied which is rather difficult under conditions of the complicated tax administration. For example, some time ago a decreased rate of tax was put for the profits out of oil extraction from the worked-out deposits. However, almost no one was able to use this benefit in practice. The matter is that in most cases the meters used by tax inspectors are installed in that part of the pipe where the oil from the worked-out fields is mixed with the rest part of oil. So separate calculation is just impossible. The proposed benefits for the new fields may come to present same problem.   

“It has been proposed repeatedly the more complex system of taxation depending on how worked-out the field is, depending on the depth, conditions and so forth” reminds Vladimir Feigin. “Such a system exists in many countries. And with us similar proposals were met with objections that it is impossible to arrange the system of separate calculation”.  

Evgeny Yasin concretizes the essence of the objections: “With a unified rate and a simple system not requiring any interference by officials, the system becomes less corruption-genous. With the level of corruption we have at the moment, we must carry out the policy of simplifying the actions by the state and minimizing the abuse opportunities”.   

Well, now the state is putting somehow the system of differentiated taxation of the industry. It seems that control by the profile deputy prime minister Igor Sechin and by tax and law enforcement authorities is going to be the only restraining factor for corruption.  

The system itself of the tax benefits is not enough for making incentives for development of the industry. “The companies insist that development of the discovered by them fields be done by them again, which means the license for geological survey should be automatically turning into that giving the right for extraction” explains Vladimir Feigin. “And today a deposit may be discovered by one company while the license for extracting works will be given to another company. This is why a mass of projects proves to be ineffective for oil companies and they refuse it”.