According to the ever-reliable Upstream Online, Russia is considering lowering its taxes for oil companies in order to boost exploration activities:
In comments broadcast on state-owned television, Energy Minister Viktor Khristenko said the government should lower taxation in the oil sector and, in particular, unpeg the mineral extraction tax from global prices to encourage investment in exploration and development of difficult fields. He added that the government was considering introducing tax breaks for oil companies during the development of new fields.
Note the phrase development of new fields. Such is the economic climate in Russia that the large oil companies, having been burned in Russia on previous occasions, are wary of developing new fields and instead prefer to buy into proven reserves. Exploration is a risky business and must be carried out against a foreseeable return on investment, and as with everything in Russia these returns are very difficult to predict over the course of 12 months, never mind one or two decades. Hence exploration activity in Russia has been limited for the past few years and the Kremlin is obviously trying to encourage outside investment into this area.
This is a sensible enough policy, but will it work? Unfortunately, Russia has built itself a reputation of making up tax laws as it goes along, with a change in law sometimes requiring companies to pay hefty sums to the government in back taxes which were never taken into account in the company’s initial business plan. Mikhail Khodorkovsky might know a thing or two about this. Chances are investors will be frightened by the very real possibility that these tax cuts will be reversed once a company starts to develop the field, or some jiggery-pokery will take place forcing the company off the field which it has just spend large sums exploring, to make way for a favoured Russian player to step in.
The Russian government is in effect asking investors to put their faith in a Kremlin tax promise. They’d be better sticking their money on a horse.