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(Reuters, September 12) – Russian oil exports will jump and production rise as a result of changes to energy taxes that will help the world's largest oil producer keep its lead over OPEC heavyweight Saudi Arabia, executives told the Reuters Russia Investment Summit.

Participants said Russia can sustain growth in production that now exceeds 10 million barrels per day (bpd), while crude exports could rise by more than 1 million bpd, encouraged by cuts in crude oil export duty that take effect next month.

The reforms will cut the marginal rate of crude oil export duty, while increasing the duty on heavy fuel oil, making it uneconomic to process and export heavy fuel oil.

"Only the most efficient refineries will survive... In theory, domestic refining could drop by 70 million tonnes (1.4 million barrels per day)," Alexander Korsik, president of oil firm Bashneft, said in an interview.

Analysts believe the Russian tax reforms will benefit production heavyweights such as Rosneft and LUKOIL and help Russia maintain and even increase output at current peak levels.

Bashneft will be among the most hit by new taxes as the company is 'long' refining capacity, which comfortably exceeds its crude production.

But Korsik – the operations man behind the spectacular oil output growth of billionaire Roman Abramovich's firm Sibneft before its sale to gas export monopoly Gazprom for $13 billion in 2005 – plans similar growth at Bashneft.

Bashneft, the oil arm of telecoms to banking conglomerate Sistema, had almost no growth in the past decade under its previous owners but has become the fastest growing Russian oil firm of the past year.

Jonathan Muir, chief financial officer of BP's Russian venture TNK-BP, said Russia's oil output growth potential was far from exhausted even though the country had had nearly no growth in the past few years after increasing production by more than 60 percent after 1999.

"If you go around all of the major companies in Russia and ask them what their growth plans are, almost all of them will have short-term and medium-term aspirations to grow. It's more difficult than it used to be, but our (Arctic) Yamal projects could add significant growth in the medium term," he said.

The tax changes, Muir said, were encouraging TNK-BP to move ahead with work on its Yamal group of fields in Siberia that could add 600,000-700,000 bpd of new production, in oil equivalent terms, by 2020.

New deals after Exxon
Russia's tax reforms encourage crude output and exports by redistributing the burden of a tax system that captures more than 90 cents of every $1 increase in the price of exported crude.

They would give a new lease on life to the mature 'brownfields' of western Siberia by cutting the marginal rate of crude export duty to 60 percent from 65 percent.

Some of that cost would be shifted to the refining sector, making the export of heavy products such as fuel oil uneconomic and encouraging refiners to upgrade capacity to meet growing domestic demand for light products like gasoline.

Liam Halligan of Prosperity Capital, who helps manage $5 billion including shares in Bashneft, said the tax changes could help Russia increase output to above 12 million barrels per day.

"There is an official desire for Russian oil production to increase but it can still increase and become a smaller share of the economy," he said.

Halligan added that the oil and gas sector accounted for 25 percent of Russia's GDP, down from 40 percent in 2004. Should that share fall further, the government would be more inclined to consider tax breaks for the industry in the long run, which in turn could further help increase output.

Korsik said he did not expect new tax breaks to be implemented any time soon.

"We would of course want taxes to come down as quickly as possible but you have to be honest with yourself, and as long as there is no decline in production, the state has very little incentive to cut taxes," he said.

He also said he saw more opportunities for big Western oil firms in Russia following an Arctic offshore development deal between U.S. Exxon Mobil and Rosneft as the appetite of Western companies was not fading despite high taxation in Russia.

The Kremlin is also still keen to give selective access to its prized reserves to Western firms to gain access to new technologies, he added.

"If the government feels that all the key decisions about the oil industry are being taken in Moscow and not in some other capital then it will be happy to work with a large number of players," Korsik said.