June 26, 2013 / 5:30 PM / 5 years ago

Russia tight oil tax relief at risk from compliance costs

* Russian parliament to discuss tight oil bill

* Experts says metering costs outweigh benefits

* Russia needs tight oil development to sustain production

By Vladimir Soldatkin

MOSCOW, June 26 (Reuters) - Steps to stimulate extraction of hard-to-recover oil in Russia, vital to sustain output in the world’s largest crude producer, could be stymied by onerous costs of measuring output, experts and a key member of parliament told Reuters on Wednesday.

The debate over tax relief for unconventional oil comes as Moscow tries to join the shale revolution led by the United States, which has overtaken Russia to become the world’s top gas producer and ramped up output of oil in recent years.

Russian producers have already reported 500 million tonnes, or 3.5 billion barrels, of recoverable reserves of ‘tight’ oil in the shale of Siberia’s Bazhenov formation.

Yet that is just a fraction of Russia’s 75 billion barrels in recoverable resources of shale oil which the U.S. Energy Information Administration estimates are larger than the 58 billion barrels held by the United States.

The Russian government has worked out proposals to nullify mineral extraction tax for Bazhenov starting from January 2014 and cut the rate for other unconventional oil, including the “easiest” Tyumen formation.

But the positive effect could come to naught if costly and cumbersome measures proposed by the Finance Ministry, aimed at better control over tight oil production, are introduced by 2016, as the ministry suggested.

“The worst (of the proposals) is the system of direct separate metering of oil. For many companies related costs to the system may offset tax relief,” Ivan Grachev, the head of the energy committee in the State Duma, Russia’s lower house of parliament, told Reuters after the committee approved the bill.

He said the draft law will be sent to Duma for discussions in the first reading when the necessary amendments will be debated. The Finance Ministry declined immediate comments.


Much studied but largely untapped, Russian tight oil, including Bazhenov - which the International Energy Agency describes as the world’s largest source rock - lies in impenetrable black clay beneath existing oilfields covering most of West Siberia.

Without steps to spur tight oil output, Russia may miss its target of producing at least 10 million barrels of oil per day this decade and lose substantial amount of budget revenues.

Tight oil development is also crucial for Russia’s top crude producer, Rosneft, to stick to its commitment of more than doubling its oil supplies to China over the next 25 years.

Rosneft and U.S. Exxon Mobil last year struck an alliance to assess tight oil reserves at the Bazhenov and Achimov formations in Western Siberia.

It’s a partnership that some analysts say could reach commercial production sooner than the Arctic and Black Sea offshore projects the two are tackling.

Denis Borisov, a director at accounting firm Ernst & Young, which advises the Energy Ministry on tax policy, said the steps to set up measuring infrastructure would hinder development of Russia’s unconventional oil reserves.

“One of the key conditions for the practical implementation of tax benefits, which stimulate the development of hard-to-recover oil, is scrapping the direct separate measurement requirements,” he said.

On a separate bill, aimed at increasing excise taxes for high-grade fuel, the energy committee voted against the measures.

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