President Dmitry Medvedev said Friday that oil companies would get additional incentives to keep drilling, but he also warned that the industry would need to be decriminalized after a surge in unregistered minirefineries. Speaking at a meeting with top government officials and oil industry executives, Medvedev said he backed a plan by Deputy Prime Minister Igor Sechin to tighten oversight of the export of refined oil products. The export of crude oil is largely controlled by state-run Transneft, but most refined products are exported from Russia by rail.
"Efficient incentives are required in order to raise investment and innovative activity of fuel and energy companies in terms of developing new deposits of hydrocarbons and efficient use of mineral resources," he said, while chairing a meeting on energy security in Omsk, in western Siberia. "I think it is necessary to prepare suggestions on export duties for enterprises that work in difficult conditions, on difficult deposits." During his visit, he toured a refinery run by state-controlled Gazprom Neft, which will get 60 billion rubles ($2 billion) in cash investments through 2020.
But Medvedev appeared to get testy in an exchange with Gazprom Neft president Alexander Dyukov after the executive said his company was transparent and that minirefineries would continue to "sprout up like mushrooms" as long as a gap on customs duties for light and heavy refined products remains, Kommersant reported. Responding to a question from Medvedev, Dyukov said there were 196 minirefineries in the country, including "116 factories that are not officially certified and not licensed," Interfax reported. "But that's criminal. Fine, we'll deal with that," Medvedev answered.
Energy Minister Sergei Shmatko told the State Duma in December that Russia has raised its production of refined oil products by 20 percent since 2004, but that their quality was very still low — meaning that the refined products sometimes sold for no more than Russian crude on foreign markets. The federal budget could annually collect $15 billion more if oil companies exported crude instead of poorly refined products, he said. But the quality will start improving soon because oil companies are planning massive investment of at least 1.2 trillion rubles ($41 billion) to upgrade their refineries by 2015 to comply with new federal standards enacted last year, Shmatko said.
The Energy Ministry was ordered to develop mechanisms to oversee exports of oil and oil products last month. Neftekontrol, the new system to be operated by the Energy Ministry, will establish a unified schedule of export supplies and will set up a registrar of oil producers allowed to export. Medvedev's comments on added incentives for the industry come amid a dispute between the Finance Ministry and oil companies — in particular state-run Rosneft, chaired by Sechin — over tax breaks for fields in eastern Siberia, including Rosneft's massive Vankor.
Export tariffs were lifted for the fields, threatening to eat into key budget revenue as the Finance Ministry tries to close a deficit that it fears could reach 7.2 percent of gross domestic product this year. "The Finance Ministry was outraged by this decision and wanted privileges to be canceled as soon as possible," said Alexander Kokin, an analyst at Metropol. "It looks like Medvedev sent a signal that the oil fields in eastern Siberia are likely to keep their privileges."
Russia increased oil production by 1.25 percent in 2009, reaching 494.2 million metric tons, according to Energy Ministry estimates. "The decline in oil extraction in western Siberia has become a reality and seems irreversible. The government is looking for additional capacity to replace it and puts a lot of hopes on east Siberia. A number of oil fields across the country now have privileges, such as an 80 percent discount on the natural resources extraction tax for exhausted deposits and a zero export duty to boost production at existing fields where oil is running out.
But new fiscal measures are unlikely to appear after Medvedev's speech in Omsk, said Chirvani Abdoullaev, an analyst at Alfa Bank. "I think he was talking about general things like improving the investment climate and providing access to oil extraction to small enterprises," he said. "I don't think that we will be seeing new fiscal measures soon in an addition to those that already exist."
The government aims to compensate oil the expenses for exploration of new fields, and its future decisions will lie in this area, said Artyom Konchin, an analyst at UniCredit Securities. "The possible measures may include tax discounts equal to the amount of annual investments in the search and geologic exploration of the fields," he said.
