May 3, 2012 / 4:06 PM / 8 years ago

UPDATE 2-Russia's Putin pledges tax relief for 'tight' oil

* Extraction tax to be lower for tight oil deposits

* Tax breaks would encourage use of hydraulic fracturing

* “New life” for old province of Western Siberia

* Exxon, Rosneft deal addresses tight oil potential in Russia (Adds details on policy, comments from deputy energy minister)

By Melissa Akin and Vladimir Soldatkin

MOSCOW, May 3 (Reuters) - Russian Prime Minister Vladimir Putin on Thursday approved a package of stimulus measures to unlock vast untapped unconventional oil resources in Western Siberia that could boost Russian oil production by up to 2 million barrels per day.

The proposals would encourage investors in Russia, whose status as the world’s top crude producer is threatened by falling conventional output at Soviet-era fields, to expand use of costly hydraulic fracturing and other chemical enhanced recovery methods.

“Fracking,” which brought a boom in U.S. unconventional oil and gas output, is already in use at some fields in Western Siberia, the Soviet-era oil heartland, but has yet to open up the so-called tight oil targeted in the proposals.

“This will open a second life for Western Siberia. The impact on Russian oil output will be very significant,” Deputy Energy Minister Pavel Fedorov said after Putin signed a decree ordering the government to refine the package of stimulus measures by Oct. 1 and turn them into legislation.

“The potential is pretty substantial from learning how to produce from tighter formations. There is a grey area between tight rock formations and formations in west Siberian regions which produce today.”

The centrepiece of the package is a sliding scale of tax breaks for investors in tight oil which would grant a discount of 50 to 100 percent on mineral extraction tax depending on the permeability of the rock.

“We have to send a clear signal to both domestic and international companies, to stimulate them to work in such a difficult - but at the same time prospective - sector,” Putin said, citing estimates that the measures could yield up to 2 million bpd in additional output over time.

Putin, who returns to presidency next Monday after winning a March election, added that tight oil production in Russia amounts to around 4 percent of total output, which stood at 10.33 million barrels per day in April.

The terms under discussion would cover some shale and also include a 10-year export duty reductions on high viscosity crudes, Fedorov said.

Unlike the United States, the world’s largest oil consumer, where dependence on expensive oil imports is seen as a drag on the overall economy, Russia’s main incentive to raise output is fiscal, as oil and gas fund over half the state budget.

Whereas oil companies in the United States face political pressure to pay more tax, Russia is looking for ways to ease one of the world’s toughest tax regimes to avoid choking off investment in future oil output.

The decision to hand out support for the tight oil follows similar steps to facilitate offshore oil and gas production in Russia.

Russia’s tight oil potential came to the fore last month when Exxon, as part of its agreement with Rosneft, brought the Russian state oil company into two unconventional projects in North America to provide expertise for Rosneft’s use in Siberia.

The two also agreed to look at tight oil potential at Rosneft’s own fields. Rosneft estimates it has about 2.5 billion tonnes of unconventional oil reserves trapped in the so-called Bazhenov formation at its West Siberian fields.

Russia had been aiming to keep its oil production at no less than 10 million barrels per day for the next 10 years through stimulus measures but the new tax policy suggests targets are becoming more ambitious. (Writing by Melissa Akin; Editing by Gary Hill)

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