Shmatko Fears 8% Fall in Oil Output

Prime Minister Vladimir Putin agreed on Thursday to consider more incentives to reverse declining oil output, as the energy minister delivered the grimmest outlook yet for the industry.

Crude output will drop by nearly 8 percent from last year's level through 2013 if the government doesn't provide further aid to producers, Energy Minister Sergei Shmatko said at a meeting that Putin convened at a refinery outside St. Petersburg to talk to oil executives.

Any potential incentives would further dent federal revenues, which are already expected to contract drastically this year on the back of low oil prices and the global economic crisis.

Putin announced that the government was willing to discuss lower export duties for oil that is flowing or will flow later from eastern Siberian green fields. These new fields must also enjoy lower taxes, he said.

Existing fields in western Siberia have been depleting, forcing companies to venture out into wilder expanses to the east.

"We know that transportation costs are high there and infrastructure is not developed," Putin said to the chief executives of companies including Rosneft and LUKoil, the country's biggest and second-biggest crude producers, respectively. "I believe it's possible to support you."

In return, the companies will have to invest the money that they save on taxes in exploration and development, "not bonuses or other needs that are not of primary importance," Putin said.

Current taxes do not encourage companies to invest in new fields, Putin conceded. If introduced, the new incentives will come in addition to a package of tax breaks that was approved last year and went into effect in January.

Putin said at the meeting — held at the Kirishi refinery owned by No. 4 crude producer Surgutneftegaz — that the previous measures would help the industry to save 500 billion rubles ($14.3 billion).

The easing of the tax burden coincided with the devaluation of the ruble, benefiting the oil industry by raising the amount of rubles being earned from exports.

Despite that, Shmatko said oil companies might fall short of 200 billion rubles earmarked this year to invest in increasing output. Next year, the shortage may expand to at least 500 billion rubles, he said, citing data from oil producers.

"The industry is stagnating," he said.

Should the government not -intervene, oil output will drop to 450 million tons per annum by 2013, he said. He said the forecast was based on an oil price of $60.

Alternatively, production will grow to 511 million tons by that year if the state extends more tax breaks and state guarantees for loans, Shmatko said.

Russia produced 488 million tons of oil last year, registering the first annual production drop in a decade.

Shmatko's estimate for output contraction is realistic only if the oil price falls further, said VTB analyst Svetlana Grizan. A barrel of the Russian export blend, Urals, has stabilized at about $40 in the past several weeks.

As a way out, Shmatko offered a transition to a tax on excess profits for new fields, but it was unclear if the proposal received the green light from Putin at the meeting. Putin said any new taxes in the oil industry must be easy to collect.

Analysts have warned that oil producers might want to inflate their costs to reduce tax payments in the event that an excess-profits tax becomes reality.

The oil industry generated 43 percent of all federal budget revenues, or 4.4 trillion rubles, last year, Shmatko said.

Shmatko also warned that the transportation rate of $16 per barrel on the East Siberia-Pacific Ocean pipeline that Transneft plans to charge would make oil production unprofitable in eastern Siberia. The pipeline is scheduled to begin operating in December.