Tax changes to bring more crude production and better profitability

Russian oil companies have reversed their forecast that national production will fall over the next decade, after the government pledged new tax cuts.

Black gold traded above $70 a barrel on Monday. That's double the price on March.

For Russia's economy, which taxes oil firms up to 90 cents in the dollar, it's a blessing, according to Energy Minister, Sergey Shmatko.

“Thanks to the rise in price, second quarter oil revenue to the national budget will be well up on quarter 1. That makes it a cashcow for the Russian economy.”

But Shmatko admits he's killing the goose that lays the golden eggs. The Energy Ministry found most new oil projects in Russia won't be profitable under the existing tax regime, even if prices soar to $150 per barrel.

The government has now submitted proposals to scrap the Mineral Extraction Tax, and export tariffs for undeveloped fields. Ivan Mazalov, Director of Prosperity Capital management, says this changes the profitability outlook for oil producers.

“The oil companies will be extremely profitable actually. You have very low costs from new deposits which would run $4 or $5 per barrel. But then you have international oil price, which is even now between $60 and $70.”

The situation could be a win-win. The government will switch to taxing profits, which lets producers decide how they make that money.