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Dec. 17, 2007
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Bankers See Grim Outlook for Russian Oil
UBS investment bank as followed Alfa Bank's example and lowered its recommendation for the Russian oil industry. The bank says that oil production will become unprofitable for many companies because of high taxes, capital investments and exhausted deposits. The pessimistic long-term prognosis was published on Friday. Recommendations for all Russian oil companies except Rosneft were lowered by at least one position. The bank notes that Rosneft had good indicators even without YUKOS assets.
UBS notes that the upstream sector (exploration and production) is becoming less profitable, but downstream (refining and sales) is looking up. About 70 percent of the value of Russian companies is now in the downstream sector and its share in the companies' money flows will only grow. Upstream, meanwhile, will become loss-making in 2012-2014.

The bank's experts note that tax policy is a major obstacle to the Russian oil industry. They recommend radically lowering the mineral use tax, although it would cost $23 billion in lost income to the federal budget in 2008 and $21 billion in 2009.

There are hidden subsidies for refining that partially cover the tax burden on production. Those subsidies include export duties that have a three-month lag in calculating the price of oil and are worth $16 per barrel this quarter. They are expected to rise to $19 per barrel in the beginning of next year.

Not all investment banks agree with the UBS assessment. JP Morgan published a rosy appraisal of industry health at the end of last month, and Troika Dialog recommends buying Gazprom Neft. Renaissance Capital predicts that LUKOIL will benefit from tax policy changes by the new government next year.

All the Article in Russian as of Dec. 17, 2007

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