Tax incentives promoting oil recovery
The Companies shall earn on hard-to-recover oil
In Russia a special attention is given to oil recovery enhancement at the level of the industrial agencies. As it was told to RBC Daily by Arkady Bokserman, advisor to the General Director of “Zarubezhneft” JSC, interagency working group to Rosenergo is now completing the conception for oil recovery decline combating which may become a federal program already this year. According to him, in case of its implementation, the country would have obtained by the year 2020 the potential oil production growth of not less than 160 million tons of oil annually and about 4 Billion tons of reserves by the year 2020. But for this purpose 5 million tons of oil produced in Russia with use of oil recovery enhancement technologies shall be exempted from tax for 5-7 years.
The conception of the program for combating the oil recovery decline was developed in 2005 at the level of the Committee for the Use of Natural Resources of the State Duma with participation of experts from oil companies such as Zarubezhneft, RITEK, Gazpromneft, scientists and relevant ministries. Its creators proposed to enter a number of amendments into the Subsoil Law and Tax Code which would have allowed making oil recovery enhancement technologies introduction cost-effective in general for the country owing to tax incentives for development of high-viscosity and heavy oil fields and low-permeability formations.
At present, according to the experts, oil recovery factor in general for Russia decreased from 51% in 1960 to 25-28% this year. At the same time in USA these figures in average are higher than 45%. As the program’s developers believe, the same success can be reached in Russia also in case of applying oil recovery technologies, e.g. steam-and-gas, chemical or thermal technologies.
According to the information received by RBC Daily from Rosenergo, the first meeting of interagency working group for considering the issues of elaboration and commercial development of innovation methods to enhance the oil recovery was held on February 14, and the following meeting must be held in April. The officials from the Ministry of the Industry and Energy, the Ministry of Natural Resources, the representatives of Khanty-Mansiysk Autonomous Area’s authorities, the scientists, managers and relevant experts from oil companies, including those from Zarubezhneft, LUKOIL, RITEK, Gazpromneft, Tatneft and Assoneft are taking part in discussions.
According to Arkady Bokserman, the Deputy Chairman of the working group, its participants have come to conclusion about necessity to stimulate by tax incentives the oil recovery technologies introduction countrywide. In particular, on the part of Zarubezhneft it was proposed to exempt from taxes and custom duties up to 5 million tons of oil per year produced using oil recovery enhancement technologies until the project payback period is completed – from five to seven years. In addition, Arkady Bokserman emphasizes, that the matter concerns not only zero rate of NDPI (Mineral Extraction Tax) for such projects but also the possibility to exempt from profit tax the investment technologies required for introduction. Such projects, in his opinion, should be determined on competitive basis.
Oil companies agree that the tax incentives methods to promote oil recovery are required, but doubt that the State will grant such big presents for the oil industry. In particular, the representative of LUKOIL assumes that such tax incentives will help making profitable the investments in hard-to-recover oil reserves since current tax exemptions for NDPI do not reach this aim due to necessity of direct metering of oil produced in such a way. Nevertheless, he emphasizes that the possibilities of exemption from custom duty of these volumes of the raw products raise doubts since the fuel can be also supplied to the domestic market.
The manager of Assoneft, Elena Korzun supposes that if the tax incentives are introduced, it should only be regardless any particular volumes since it will be difficult to administrate them. In her opinion, it would be reasonable to allocate them not on competitive basis but to fix them in the technological schemes of the field development. It is also supported by the source of RBC Daily in the Ministry of Natural Resources. According to him, the issues of oil recovery were supposed to be discussed at the Committee of the Government for Fuel-and-Energy Complex as long ago as in June of the last year, but the meeting had been postponed due to the need to complete the document. He emphasized that the Ministry of Natural Resources has earlier criticized the conception of combating the oil recovery decline as it is prepared without regard to modern legislation on subsoil and administration reform results. However, the necessity of large-scale introduction of oil recovery enhancement methods is supported in the Ministry, and it is reported that this will allow in the future to efficiently develop such reserves as the deposits of Bazhenov Series with oil reserves varying from 0,8 to 1 trillion tons.
According to the figures of the draft conception of social-and-economic development of Russia till the year 2020, prepared by the Ministry of Economic Development and Trade, in case of oil recovery enhancement methods application oil reserves growth with the price from 100 USD per barrel shall be about 5 billion tons including 0,8 billion tons in 2008-2010. Denis Borisov from Investment and Financial Company “Solid” has calculated that in case of introducing the tax incentives proposed by the experts of Zarubezhneft the oil companies would have saved on NDPI tax alone about 667 million USD per year. He supposes that oil recovery enhancement technologies application would allow to essentially decrease the rate of oil production decline in a number of oilfields in Western Siberia and to increase the cost-effectiveness of bitumen, sandstones and high-viscosity oil development.
LUDMILA PODOBEDOVA, 01.04.2008