Russian Prime Minister Mikhail Fradkov at a meeting of the federal commission for economic development in the Russian Far East, Buryatia, Irkutsk, and Chita regions, in Moscow on June 19, 2007.
Photo: Yury Martyanov
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High-Pressure Geology
// Unfinished Oil Survey Plans Threaten Companies with Increased Export Tariffs
Russian Prime Minister Mikhail Fradkov announced yesterday that export tariffs on oil may be raised if oil companies do not increase their investment in geological surveys in eastern Siberia. The announcement amounts to a threat that if Rosneft, LUKOIL, Surgutneftegaz, and Gazprom Oil do not step up to the plate by themselves, then the federal government is prepared to squeeze enough money out of them to ensure sufficient oil reserves to supply the Eastern Siberia—Pacific Ocean pipeline (VSTO). In order for the VSTO to operate at its full carrying capacity of 80 million tons of oil per year, an additional 45 million tons of oil must be extracted annually. The Russian Natural Resources Ministry, however, says that "these oil fields simply do not exist."
Mr. Fradkov unexpectedly brought up the issue of increasing export tariffs on oil and petroleum products during a meeting yesterday of the federal commission on the Far East. The prime minister's exact words were, "Maybe we'll just do like we did with lumber – raise customs tariffs for raw oil and fuel to what they should be!" In an effort to provide incentives for the development of Russia's domestic wood-processing sector, the government will begin implementing its program of increasing customs tariffs on the export of logs on July 1 of this year, and by 2011 the export tax for most of Russia's wood products will have increased from close to 6% to 80%. The export tax on oil and petroleum products is currently pegged to the price of Urals oil, and it is not expected to increase relative to the quoted price of Urals.
The prime minister's radical suggestion came after almost all of the participants in the commission's meeting agreed that the current volume of surveyed oil reserves in eastern Siberia is not sufficient to simultaneously satisfy both the domestic and export markets. Yesterday the commission reviewed the progress that has been made in fulfilling Russian President Vladimir Putin's instructions regarding the development of the Far East and discussed where the oil to supply the VSTO pipeline will come from.
Deputy Natural Resources Minister Alexei Varlamov reported that the drive to bring the VSTO pipeline to its full annual operating capacity of 80 million tons of oil by 2020 will fall short by 45 million tons. "These oil fields simply do not exist [yet]," said Mr. Varlamov, adding that the exploitation of oil fields in eastern Siberia and the Far East that have already been surveyed will yield a maximum of only 35 million tons of oil per year. He calculates that improving the situation will require annual investment of up to 6-8 billion rubles in geological surveys. In 2006, however, the federal budget allocated only 2.5 billion rubles, which was increased to 3.9 billion rubles in 2007.
Transneft President Semyon Vainshtok said that oil companies, with the exception of Surgutneftegaz, do not spend any of their profits off the high price of oil on geological surveys. Meanwhile, not long ago, when oil was still $8 a barrel, extraction volume grew. This incensed Mikhail Fradkov: "Right now it is profitable to run an energy export deficit. All countries are developing, while we are a source of raw materials," he exclaimed. The commission did not discuss the actual level of the tax burden on oil companies or the level of investment activity in the field.
"We need to take some kind of drastic measures," concluded Mr. Fradkov. The prime minister's logic is simple: either oil companies must be forced to take the initiative in paying for surveys of exploitable oil fields, or the federal budget will pay for them. In the latter case, these budget expenditures will be compensated for by higher taxes on oil companies. According to Mr. Fradkov, "the energy sector is the locomotive of economic development, and it must serve to increase prosperity among the population and Russia's economic and geopolitical position in the world."
Oil companies maintain that the current tax system does not allow them to fund geopolitical ideas. Surgutneftegaz CEO Vladimir Bogdanov, for example, attempted to dissuade Mikhail Fradkov right in the middle of the meeting. According to Mr. Bogdanov, Surgutneftegaz made a clear profit of around 10 billion rubles in the first two quarters of 2007, while the planned geological surveys alone would cost 8 billion rubles. He told the prime minister that the government should "release new oil fields from [the burden of] taxes" and develop infrastructure in workable regions of eastern Siberia.
A representative of another oil company explained to Kommersant that the government has spent too much time deciding on the route for the construction of the VSTO pipeline. As a result, the oil companies, unable estimate the commercial viability of the pipeline project, are delaying the development of their oil fields. According to him, the move by the prime minister yesterday points to a desire to use administrative means to resolve the political issue of the economic uncertainty surrounding the VSTO project. There is truth to all of this: according to calculations made by Merrill Lynch, when the price of oil was $64 a barrel in April and May 2007, oil companies paid $27 per barrel in customs tariffs and payments to Transneft. With the remaining $37 per barrel, they still had to pay the federal government's natural resources tax and cover their own capital outlays.
Nevertheless, yesterday Mikhail Fradkov demonstrated that he is prepared to use any means necessary to force oil companies to pay for geological surveys. He suggested that the issue be reviewed separately at the energy commission's next meeting and charged Transneft CEO Semyon Vainshtok with preparing a report on the volumes and destinations of oil and petroleum products exported by each company. He also demanded the same information from the Federal Customs Service. Mr. Fradkov himself put his goal thus: "If business does not understand something, then it needs to be explained using economic means. The current situation suits them, but it does not suit the country… We have only five or six oligarchs in this field. One of them gets it (presumably Semyon Vainshtok). Why don't the rest?"
Pyotr Netreba
All the Article in Russian as of June 20, 2007
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