UBS says oil fall threatens Russian oil tax reform

MOSCOW (Reuters) - Russian government concerns over its current account and budget deficit could put the country's oil tax reform plan into question as oil prices continue to sink and output cuts are expected, Swiss bank UBS said on Thursday.

In a research note called Rouble Devaluation Instead of Tax Cuts, UBS Moscow-based analysts said rouble devaluation would partially offset the negative impact of lower oil prices on Russian oil firms, but added this would not be enough for the industry to generate positive cash flow if prices remained low.

"The lower oil prices revive concerns regarding Russia's current account and state budget... If previously the Russian government considered the reasonability of tax changes, we believe that now it will question the affordability of these changes instead," UBS said in the report emailed to Reuters.

Russia is the world's second largest oil exporter and its budget is heavily dependent on oil revenues.

The government has this year approved amendments to the mineral extraction tax and tax breaks for new fields in hard-to-access regions of East Siberia, Timan Pechora and Yamal.

The amendments, due to come into force from 2009, are expected to save more than $5 billion next year for oil companies, which say they need at least an additional $16 billion to support production growth.

The government has said it will go on with the oil tax reform to boost oil output, which may decline this year for the first time in a decade.

UBS said the government will have to accept declining production as oil companies cut investment amid rapidly falling oil prices and a shortage of liquidity.

"As a result of the oil companies' inability to finance sufficient levels of capital expenditures we now expect an inevitable decline in crude oil production in 2009 and a dramatic slowdown in drilling activity," UBS said.

UBS analysts said they expect that the majority of planned capital expenditure in oil production will be cut by 15-20 percent which will result in crude output decline by 2 percent in 2009 at the oil price scenario of $60 per barrel.

UBS said that the recent rouble denomination could help Russian oil companies' financial performance, which is extremely sensitive to the rouble exchange rate as all revenues are linked to the dollar and almost all costs are rouble-denominated.

But it added: "However positive the rouble devaluation could be for oil companies it is not enough to help Russian oil stocks out of their current dire straits." Oil prices remain the most important driving factor for oil stocks by far.

"Russian oil companies' abnormal sensitivity to these prices implies that if oil prices remain at current level in 2009-2015 period... and the tax regime remains unchanged, none of the Russian oil companies will be able to generate positive cash flow," UBS said.

(Reporting by Tanya Mosolova; editing by James Jukwey)