Tax changes to stimulate crude output further

This weeks announcement of a giant oil discovery in the Gulf of Mexico has served to underline how important further discoveries will be to meeting future demand, with taxation changes in Russia seen as essential.

World’s largest oil fields are running out of oil and independent producers have already peaked. Given the low rate of new developments, experts say global oil production may peak in the next 10 years and the world will face an energy crunch.

But this has been debated with some recent findings, including BP’s giant discovery with the Tiber oil field in the Gulf of Mexico. Yet, experts such as Dmitry Aleksandrov, senior Oil and Gas Analyst at Financial Bridge, are skeptical.

“So far only one well has been checked at this new oil field. Further explorations and more wells are needed and still the data may change one way or another. Oil beds in the Gulf of Mexico are very deep which makes its extraction extremely expensive. With the current oil prices crude from this field won’t be profitable.”

Projects like this one need massive investment to develop. This is all the more difficult to organize in the wake of the credit crunch, with an attendant slump in prices, and clouds over future demand.

Meanwhile, Russia has succeeded in its course of increasing oil production. In August oil output hit a record reaching 10 million barrels per day thanks to the launch of the Vankor oil field. Alexey Kondrashov, Global Oil & Gas Tax Leader at Ernst & Young, says taxation changes in Russia have helped.

“This is a major breakthrough which enabled Russia to maintain and even increase in the August of this year and going forward into this year. To the extent there is demand and we need more Vankors, we need more new projects, we need investments into the new fields, we need investments into enhanced recovery.”

But to stimulate output recovery and exploration of new oilfields Russia has to adjust it tax system. The government has recently suggested a zero rate of mineral development tax on oil and gas produced in the Yamal-Nenets autonomous district. Oil and gas producers hail the measure, but say further tax system changes are needed.