Russia To Scrap Tax Guarantees For Foreign Oil Firms

by Tatiana Smolenska, Tax-News.com, Moscow

07 April 2003

Russia is scrapping a tax incentive devised to attract foreign oil companies to invest in the nation's vast mineral wealth.

The government believes that the political and economic environment is now stable enough to warrant the phasing out the system of production sharing agreements (PSAs). These were created to provide investors with a predictable tax regime over the lifetime of an investment project, and were thought vital in the previously turbulent Russian political and economic regime.

The change will affect 30 PSA schemes which - until this announcement - were in the planning stage. However, the Deputy Prime Minister, Viktor Khristenko, who announced the changes in the state Duma, said that five PSA schemes will still be allowed to go ahead.

Some analysts have criticised the decision, arguing that it will upset foreign giants such as BP, Conoco Phillips and ENI, alhough they did concede that it was unlikely the changes would deter these firms from investing in Russia altogether.

In response, the Russian government pointed to the recent decision by BP to take a 50% stake in Russian oil firm TNK (worth $6.75 billion) as proof that the world's major oil companies retain confidence in the Russian system.

Khristenko said he wanted an open tender system in the first instance for the rights to extract oil, gas and other natural minerals, with PSAs used as a secondary measure.

Some commentators have welcomed the announcement, reasoning that the amendment will level the playing field for domestic oil companies. Valery Nesterov, from brokerage firm Troika Dialog predicted that the move will benefit Russian oil companies: "This decision would be a big victory for Russian firms, such as Yukos, which have enough money to develop oil fields on the basis of regular tax regime and don't see why their competitors should be granted privileges," he announced, according to a report from Reuters.

Of the five PSA projects that will survive two will involve large schemes on the remote eastern island of Sakhalin undertaken by Royal Dutch Shell and ExxonMobil. Other projects include TotalFinaElf's Arctic project and the joint TNK-BP Samoltar Siberian field scheme.

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