Russian oil production, which declined last year for the first time in a decade, will keep falling unless the Kremlin cuts punitively high taxes on oil companies, a senior Russian oil-industry executive said.
Vagit Alekperov, head of OAO Lukoil, Russia's second-largest oil producer, said that more tax relief would release billions of dollars for investment in new oil fields to compensate for fast-depleting areas such as Western Siberia.
"The natural decline is happening much more intensively than the new capacity" that's being brought on, Mr. Alekperov said. "If decisions are not taken on additional large-scale investments, then production volumes will continue to gradually decline."
Oil companies in Russia, the world's second-largest oil exporter after Saudi Arabia, have been hit hard by the financial crisis and plummeting oil prices. Short of cash, many have announced big cuts in capital spending. Lukoil said it has reduced investments for this year by 20% compared to 2008.
Yet the cutbacks are coming at a critical time for the industry. Russian oil's traditional heartland, Western Siberia, is producing fewer and fewer barrels, while new fields further east and in the Arctic are remote and costly to develop.
The slowdown in investment could have a major impact on the world's energy balance. Russia was a vital source of new crude for world markets early this century after privatized oil companies began to apply Western production techniques to aging Soviet-era fields and output soared.
Now there are fears Russia won't be able to supply the extra barrels the world needs when the global economy recovers and demand for oil picks up again. That could contribute to a future supply crunch and even higher prices than last year, when oil reached $147 a barrel.
Companies say they don't have the resources to expand into the virgin territories of Eastern Siberia, and blame a tax regime they claim discourages investment. Robert Dudley, the former head of BP PLC's Russian venture TNK-BP, described it last year as "the toughest in the world for oil producers," with companies paying as much as 65% of revenue in taxes and royalties.
The stagnation has coincided with the rise of state-run companies such as OAO Gazprom and OAO Rosneft, Russia's No. 1 oil producer, which tend to be less efficient than smaller, privately owned firms. Lukoil and its peers must partner up with the state companies to bid for oil fields considered "strategic." Last year, Lukoil formed a consortium with Gazprom's oil arm to develop two fields in the Arctic, but the government has so far failed to approve the venture.
Russian authorities confirmed last month that in 2008, average daily output of crude in Russia dropped for the first time in 10 years to 9.78 million barrels a day from 9.87 million barrels a day in 2007. The Economics Ministry forecasts production will fall a further 2% this year and overall investment in the oil industry will plunge more than 20%.
Production could fall further if Russia answers a call by the Organization of Petroleum Exporting Countries to non-OPEC producers to cut output. Many analysts say Russia's recent public backing of OPEC was an attempt to dress up an unplanned decline.
Lukoil expects its production to be flat this year, after years of steady growth. The company failed to replace its oil reserves in 2008 -- a troubling sign, because investors view an oil firm's reserve replacement rate as a key indicator of growth prospects.
Worried by the bleak outlook for the industry, the Russian government has already provided $5 billion in tax breaks. The Kremlin knows high taxes are stunting the industry, but it's also heavily reliant on oil taxes to balance the budget.