TNK-BP unfazed by Russian oil production slump

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Oil production growth in Russia is suffering due to lack of investments, etc...
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TNK-BP unfazed by Russian oil production slump

Russian Federal Tax Service’s decision to reduce TNK-BP’s tax liabilities for 2001 to 6.98 billion rubles from 26 billion rubles is a very positive development and TNK-BP intends to pay the amount in full by August 18, Marina Dracheva, a spokeswoman for the Russian-British joint venture, told New Europe on August 11.

By Kostis Geropoulos

Analysts say the tax authorities’ decision represents a compromise, something YUKOS wasn’t able to achieve, but Dracheva said the initial tax claim was way off the mark. “I wouldn’t call it a deal. It’s not a deal. It’s the conclusion which tax authorities arrived at after detailed consultations with our company and after studying the documents submitted by TNK-BP explaining the methods used by TNK back in 2001 when calculating tax payments,” she said telephonically from Moscow.

“The initial tax assessment by the authorities was way higher than the final assessment which was done and resulted in 6.98 billion rubles (USD 247 million). So we believe that this is a very positive development and because this is a final decision reached as a result of our consultations, we are ready to pay it in due time which is by August 18,” the TNK-BP spokeswoman added.

The oil major was originally hit with a back tax claim of USD 87 million in November 2004. On April 11, 2005, the company announced that the back tax claims for 2001 have been raised to 26 billion rubles (USD 936 million). The company promised to contest the claims in court.

Shortly following the announcement of the raised tax claim, the head of British Petroleum John Browne met with Russian President Vladimir Putin who tried to boost foreign investors’ confidence in Russia. “President Putin met with Lord Brown to discuss BP activities in Russia. We were not present at that meeting but - from what our shareholder BP was telling us at the moment - tax issues were not raised at that meeting,” Dracheva said. Russia’s current tax system which places a very heavy burden on oil producers, has caused a slump in oil extraction, Anatoly Yankovsky, the director of Russia’s Industry and Energy Ministry’s fuel and energy department, said on August 3. The official, quoted by RIA Novosti, said a working group had been created to try to correct the situation.

One of the reasons for the oil extraction slump “is the current system of taxation in the oil industry, particularly the export tariff and the severance tax,” Yankovsky said. He added that a lack of incentives for oil ventures to accelerate production and the growing tax burden led to a recent decline in the average daily extraction of oil.

The tax burden has been on the rise recently in Russia mainly because the world oil price has been rising and the amount of export duty is linked to the level of the international oil price, Dracheva said. There was also an increase in unified production tax for oil companies, she added, but she noted that TNK-BP will not change its planned production levels. “This year we plan for production to rise between 6-7 percent and, in any case, for the coming five years we think our production will rise above the industry average at a very healthy rate,” TNK-BP’s Dracheva said.

However, other companies’ oil production growth has stagnated. Former industry leader YUKOS continued to show disappointing figures as production declined at its remaining units, Samara and Tomsk, due to lack of cash for investment. Former growth leader Sibneft, which in past years was showing year-on-year increases of more than 20 percent, produced 653,000 barrels per day in July, down from 672,000 barrels per day in June 2005 and 698,000 barrels per day in July 2004.

Overall, Russian oil production grew 2.7 percent in the first half of this year, compared to the same period last year, according to the industry and energy ministry’s data. Meanwhile in 2000-2004 average annual production growth in the oil sector amounted to 14 percent.

On the export front, Russia’s pipeline monopoly Transneft’s shipments to Europe in July 2005 were below an all-time high of over 4.6 million barrels per day reached in May 2005.

Russia’s poorer-than-expected oil output has been one of the factors behind this year’s global oil price rally as the Organisation of Petroleum Exporting Countries (OPEC) cannot cope with booming demand, spurred by countries such as China and India, and instability in the Middle East has increased the need for other sources of oil.

The price of crude oil climbed past USD 66 per barrel on August 12 with Russia partially responsible as its own production growth has stagnated and the launch of several massive projects has been postponed.

Royal Dutch/Shell said this month it would delay its plan to quadruple oil output from its landmark Sakhalin-2 project by one year until 2008 at the earliest alongside delays of its massive liquefied natural gas project. It had been expecting to produce 150,000 barrels per day from 2007. Things look better for US ExxonMobil’s neighbouring Sakhalin-1 which will produce the first oil on schedule this year and reach peak output of 250,000 barrels per day by the end of 2006.

Kostis Geropoulos, Senior Reporter, New Europe