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O.I. Izryadnova Oil and gas sector In 2006 the growth of oil, oil products and gas production proceeded. At the same time the growth rates of oil production decreased substantially. This is the indicator of fast increase reserves depletion in oil production in the country and the evidence of necessity of very active actions to develop new oil fields. In January 2007 the changes, which are aimed at the stimulation of new and exhausted oil fields, in the system of oil production taxation came into the effect.

In 2006 the development of oil and gas sector of Russian economy was characterized by the sustention of the tendency of oil, oil products and natural gas production, which was formed during 2000-2005 (Table 1).

In 2006 oil production, including gas condensate, reached 480 millions of tons. This level is 15.7% lower than the observed maximum, reached in 1987, when oil production was 569.4 million tons, and 59% higher than the minimum level of 1996, when the oil production fell down to 301.3 millions of tons. The reasons for the significant growth of oil production were the enhancement of opportunities in oil export, due to the establishment of Baltic pipeline system and the use of railway transport, in particular, as well as the demand growth at the domestic market. However, a significant slow-down of oil production growth rates in 20052006 should be mentioned. In such a way, while in 2002-2004 the increase in production was equal to 8.911% a year, in 2006 it was only 2.1%. This is the indicator of fast increase reserves depletion in oil production in the country and the evidence of necessity of very active actions to develop new oil fields.

Table Oil, oil products and natural gas production during 2000-2006, in % vs. the preceding year 2000 2001 2002 2003 2004 2005 Oil, including gas conden- 106,0 107,7 109,0 111,0 108,9 102,2 102,sate Primary oil processing 102,7 103,2 103,3 102,7 102,6 106,2 105,Motor petrol 103,6 100,6 104,9 101,2 103,8 104,8 107,Diesel oil 104,9 102,0 104,7 102,0 102,7 108,5 107,Furnace fuel oil 98,3 104,2 107,1 100,3 97,8 105,8 104,Natural gas, billion m3 98,5 99,2 101,9 103,4 101,6 100,5 102,Source: Federal State Statistics Service Owing to this fact in 2006 some amendments to the taxation system of oil sector, which came into effect January 2007, were made. The alternations in question were aimed at the stimulation of new and exhausted oil fields development in order to sustain and increase the oil production in the country.

The main constituents of the existing taxation system of oil sector are the severance tax and the export duty. Severance tax was introduced from the beginning of 2002 instead of three payments, which were in force at that time: royalty, raw materials and mineral base restoration tax and excise-duty for oil. From the beginning of 2005 severance base tax rate was fixed at RUR 419 per 1 ton, and the coefficient that characterizes the oil world prices dynamics and is applied to the basic tax rate is calculated by a formula:

Cp = (P 9) R / 261, where P is the average price level for oil grade Urals in USD per barrel over the taxation period;

R is the average over the taxation period value of USD to RUR rate exchange, which is fixed by the Central Bank of the Russian Federation (Table 2).

Table Severance Tax Rate on Oil Production over 2002- 2002-2003 2004 2005-Severance base rate, RUR per ton 340 347 Coefficient, characterizing the oil world prices dynamics (Cp) (P-8)R/252 (P-9)R/Source: Federal Law No. 33- from 07.05.2004, Federal Law No. 126- from 08.08.2001.

The severance tax introduction enabled to increase significantly the taxation system budget efficiency, to neutralize negative taxation effects of transfer price formation, to ensure the transparence of tax rates ranking, to adjust Russian taxation system to the world practice.

At the same time the existing tax system, which is based on the flat specific severance rate, is intended to be used chiefly in average conditions and does not take into consideration existing differences in oil production conditions, which are accounted for by field characteristics, its location, as well as the extent of its development. As a result, the economy of production on the fields with higher expenses becomes worse, the selective choice of the most effective reserves and the early end of exhausted reserves development is stimulated, oil being lost in the interiors of the Earth. Simultaneously, the start of development of new oil fields becomes more complicated, especially in unreclaimed regions with undeveloped infrastructure. Higher capital, investment and transport expenses lead to the fact, that in the environment of the existing tax system the realization of many oil fields development projects in new regions does not provide necessary investment return.

The disadvantages of the severance flat rate account for the search of the ways to differentiate tax rate depending on the mining and geological, economic and geographic factors, which characterize real oil production conditions. As a result, a set of suggestions to differentiate severance tax rate was developed by various government bodies, institutes and individual experts.

The analysis of different conceptions of tax rate differentiation depending on the mining, geological, economic and geographic conditions of oil production demonstrates that in the conditions of present-day Russia the complication of administration, potential corruption, the opportunity to manipulate and underdeclare tax liabilities constrains the application of many approaches. The approaches, that can be realized potentially, are only severance differentiation by reserves exhaust and severance differentiation by location, zero rate application in the first years from the start of the development for new oil fields (tax vacations), as well as zero rate application in case of special oil production conditions (superviscous oil).

The existing taxation system was supplemented with a set of new element by the Federal Law No. 151- from 27 July 2006, On amendments to chapter 26 part two of the Tax Code of the Russian Federation and invalidation of specific statues of the Russian Federation. The main amendments, which came into effect on 1 January 2007, are the following.

1. The severance zero rate if fixed for oil fields of East Siberian oil and gas province in the territory of the Republic of Sakha (Yakutia), Irkutsk region and the Krasnoyarsk territory till the achievement of 25 million tons of accumulated oil production volume on the subsoil area or for 10 years in case of the license to use subsoil with the aim of exploration and for 15 years in case of the license for simultaneous geological exploration and oil production from the moment of the state registration of the license.

The severance zero rate for the period before reaching of 25 million tons of accumulated oil production volume on the subsoil area or 10-year period, calculated from 1 January 2007, is applied to all oil fields of these region in the process of development, if the extent of exhaust does not exceed 0.05.

2. An extra coefficient Ce, which is applied to severance basic rate and characterizes the extent of oil reserves exhaust in the subsoil area, is introduced. Ce coefficient is applied if the extent of the subsoil area exhaust is in the range from 0.8 to 1 and is calculated by the following formula:

N Ce = 3.8 3.5 ---, V where N is accumulated oil production in the subsoil area;

V is the initially extracted oil reserves of grades , , 1 and 2 at the subsoil area.

Thus, for oil fields with the reserves exhaust extent of more than 80% a reducing coefficient, which value varies from 1 (corresponding to exhaust extent of 0.8) to 0.3 (corresponding to exhaust extent of 1), is applied to severance rate. If reserves exhaust rate at the subsoil area exceeds 1, Ce coefficient is assumed to be equal to 0.3.

3. Regulations that fix severance specific rate for oil production and the procedure of its application are included directly in the Tax Code of the Russian Federation (chapter 26). Before that the application of severance specific rate and Cp coefficient, which characterizes the world oil prices dynamics, was established by the Federal Laws No. 126- from August, 8th, 2001 and No. 33- from 7 May 2004, for the period up to 31 December 2006.

Thus, from 1 January 2007, the application of severance specific rate for oil production is fortified, while the regulation on ad valorem rate of this tax, which was present in the Tax Code, is excluded.

Passed amendments envisage that severance preferences for new and exhausted oil fields can only be received when applying a direct method of oil production quantity control at the subsoil area. As applied to exhausted oil fields, this regulation limits substantially the sphere of tax remissions application, for not all exhausted oil fields (licensed lots) have got a direct control of oil production quantity.

According to the calculations of the Government of the Russian Federation, the reduction in budget profits because of reduction coefficient application at exhausted oil fields within the period of 2007-2009 will be RUR 66.8 bln. At the same time the taxation basis (the volume of oil produced at the oil fields with high exhaust extent) will expand, which should compensate the mentioned volume of drop-out income.

Severance remission provision for new oil fields in East Siberia does not lead to the reduction of current budget income, for the development of these oil fields in the environment of the existing tax regulations will not proceed because of low investment return.

Adopted amendments are aimed at the stimulation of the development of exhausted and new oil fields.

Severance differentiation with regard to reserves exhaust enables to prolong exhausted fields development periods and increase oil extraction extent. The extension of exhausted fields exploitation provides extra inpayments of severance (collected with the lowered rate) as well as other taxes (profit tax, export duties etc.).

Severance rate reduction for new oil fields makes it possible to stimulate the development of East Siberia oil and gas province, create the basis for future income of the state budget.

It can be noted, that these approaches are essentially different from those that are normally applied to oil production taxation in the world. It should be taken into account, however, that application of more complicated tax instruments, similar to those used in the Great Britain, Norway or the USA requires the creation of definite prerequisites, so such approaches can be fulfilled only in future.

Yu.N.Bobylev Business Survey in January The restoration of the usual weather conditions and already accumulated experience in dealing with the negative after-effects of long New Years holidays enabled the majority of Russian enterprises and the industry as a whole to reach significant positive results in January.

The official results of December and 2006 as a whole did not meet the expectations of analysts and officials. According to Federal State Statistics Service data, in 2006 the Russian industry produced only 3.9% more goods than in the preceding year. The result of 2005 was a little bit higher 4%. The Ministry of Economic Development meanwhile expected the industry production to grow by 4.6% as a result of the year.

It was December that spoilt the figures. In the last month of the year the industry, according to the estimations of Federal State Statistics Service, grew up only by 1.9% in comparison with December 2005. this time it was the unusually warm weather, due to which the production of electricity, heat, gas and water fell down by 4.4%, that did the domestic industry a bad turn. In February 2006 the industry had similar problems due to unusually cold weather. But then, certainly, there were other industries that suffered.

The return of the usual weather conditions and already accumulated experience in dealing with the negative after-effects of long New Years holidays enabled the majority of Russian enterprises and the industry as a whole to reach significantly positive effects in January.

In January the demand for industry production dropped but negligibly. According to initial (i.e. free from seasonal factor) data, the rate of demand decrease was only 7 balance points. Whereas in January 2006 this figure reached 24 b.p., and in January 2005 it was 26 b.p. On excluding the seasonality the demand dynamics demonstrated a spectacular growth of +21 b.p., which is the absolute maximum over the whole period of monitoring since 1993. As a result, 68% of Russian industry enterprises estimated their sales volumes as normal in January. This figure is also the absolute maximum over the whole period of monitoring. At the same time in the preceding years the satisfaction with the demand improved only to 47-48%. Since September 2006 the level of demand dissatisfaction in Russian industry has varied in the range of 29-32% and has had the lowest value since 1993.

Unusually favorable for January demand dynamics spared the industry the necessity of drastic decrease in production. The intensity of output change in the beginning of the year, according to the initial data, was equal to 3 balance points (in January 2006 it was 32 b.p., in January 2005 - 30 b.p.). Thus the production has certainly reduced but negligibly in comparison with the same months of the past years. Excluding seasonality demonstrated even the growth of production, and record it was. The output growth rate in January was equal to 40 balance points, which is 10 percentage points higher than Decembers figures and 7 percentage points higher than the previous maximum.

Nevertheless, the low effective demand is traditionally considered as the main obstacle to output growth.

Its occurrence in Russian industry over the last three quarters stabilized at the level of 37%. The lack of liquid capital, which earlier also had a hindering effect, now is the obstacle only for 30% of enterprises. The lack of the staff kept the third place, but its quotation lowered down to 29% after 36-37% in the second half of 2006. Competing imports constrain only 23% of enterprises. This is the minimum over the last eight quarters.

In 2006 the issue of staff, as is demonstrated by the figure, reached maximum acuteness since 1993. In average during the past year it was considered as an obstacle by one third of the Russian industry enterprises.

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