A proposal to replace the revenue-based tax system for Russian oil and gas companies with a profit-based system could help avert a fall in output in the next few years, Fitch Ratings says. Russian oil production edged up 1% in 2013, but under the existing tax regime we expect production levels to stabilise at this level in 2014-2015 and potentially to start falling from 2016-2017.

Although the key parameters of the proposed regime are not finalised and the timing of its implementation is uncertain, we believe it could reverse the natural production decline from the traditional brownfields in western Siberia and the Volga-Urals, which account for over 90% of Russia's total oil output. Russian oil and gas companies' two principal levies are the mineral extraction tax (MET), calculated on the physical volume of produced oil, and the export duty for volumes sold abroad.

In Q413 the average price for Russian Urals blend was USD109 per barrel of oil, and the MET and the export duty were USD54/bbl and USD23/bbl respectively, totalling 71% of the Urals price. While there are a number of MET and export duty tax breaks, such as for highly depleted fields, the main drawback of a revenue-based tax system is that it generally disregards production costs.

Many other countries, including Norway and Brazil, tax the net earnings of oil companies, helping them maintain higher production. This is one of the reasons why the reserve life of a typical Russian oil company is higher, and its production level lower than that of similar-size international peers. For example, the median reserve life for Fitch-rated Russian oil and gas companies at end-2013 was 19 years, compared with 13 years for European and 12 years for US companies. Russian companies are also facing challenges when producing from non-traditional oil deposits, such as viscous or tight oil. As production costs for heavy oil are much greater than for traditional oil, production from these deposits remains largely uneconomic under the existing taxation regime, even taking into consideration existing MET tax breaks.

In our view, a profits-based taxation system could be a huge incentive for greater heavy oil production in Russia. The government is considering piloting the profit-based tax on several new fields coming on stream, including LUKOIL's Imilorskoye and Surgetneftegaz's Shpilman fields, the largest untapped conventional oil fields, which should start production in 2015.
Source: Fitch Ratings

Middle East Crude-Discount deepens for Adnoc grades
The Middle East crude market continued to weaken on Monday, with Abu Dhabi grades falling deeper into discount after refiners have mostly completed their purchases for June.

Total offered Lower Zakum at around 70 cents a barrel below OSP (official selling price) on the Platts window, down from a 50 cent discount on Friday, traders said.

Murban may have traded at 30 cents a barrel below OSP, down from a single-digit discount last week, a trader said.

"I think the Japanese have mostly concluded their June purchases," a Singapore-based trader said.

Banoco Arab Medium slipped back into discount, trading at around 15 cents per barrel below its OSP, traders said.

Formosa may have bought a cargo of Basra Light from Unipec after already having secured one cargo of the Iraqi grade in a tender earlier this month, a trader said. The price was not
known, and the deal could not be confirmed.
    
Despite the softening market, sellers expect demand for crude to improve as refineries usually ramp up output in July to meet summer oil consumption.

"Refineries will be coming back from turnaround in end-June, ready for July delivery, so we should see better demand for Middle East grades loading towards end of June," another trader
said.

Limited supply from Iraq may provide some support. Exports from the OPEC member averaged 2.5 million barrels per day (bpd) of oil so far in April. That was more than in March but still well short of its 2014 target, due in part to repeated sabotage of a northern pipeline.
    
*DME OMAN

DME Oman for June settled at $107.18, up 2 cents, at 0830 GMT. This put DME Oman at $1.01 a barrel above Dubai swaps, down from a premium of $1.50 in the previous session.
               
*MARKET NEWS

Libya's eastern oil port of Zueitina, which had been occupied by rebels as part of an eight-month oil blockade, will reopen after damage at its facilities has been assessed, the country's justice minister said on Sunday.

China may be slowing economically but it still wants to buy more oil from Latin America and invest in infrastructure in the region, with a presidential visit planned for July, Chinese and
Brazilians officials said on Friday.

Smaller oil producers are teaming up with engineering and oil service companies in Britain's North Sea to squeeze extra drops from ageing facilities before rising costs force them to
close.
Source: Reuters (Reporting By Jacob Gronholt-Pedersen; editing by Jane Baird)

North Sea physical crude/paper spread at six-week high on increased demand
The physical North Sea market is strengthening against the paper market, reaching a six-week high on Friday and bid higher Monday, as the return of some refineries from maintenance adds to crude demand, while less output than expected is being seen from Libya, sources said Monday.

Dated Brent minus the Frontline swap rose to $0.29/b Friday, its highest since March 17, Platts data showed.

The Dated Brent to Frontline Swap, which measures the relative strength of paper and physical North Sea crude, strengthened further this week in a stronger North Sea market.

The May DFL swap was seen trading at plus 15 cents Monday afternoon compared to plus 5 cents on Friday.

In Europe, "refinery appetite is going to have a small bump higher," said one trader Monday. "Possibly the Gulf Coast refineries will send a lot of products into the European continent, giving them less incentive to run as high as they'd want to. [But] overall, we still have a small window of opportunity (to the upside)."

Traders gave a range of dates for the end of the bulk of European maintenance, through mid-April into May.

"[European maintenance] peaks around mid-May. After that incrementally they'll come back, some will go on to June."

On the supply side, some of the bullishness on prompt structure came from the Buzzard field maintenance that emerged last week, said traders, and is expected to end in the next few days.

Buzzard, the UK's biggest offshore oil field, is a major component of Forties Blend, which is the most actively seen of the four crude grades going into the Dated Brent benchmark.

Less Libyan crude exports than expected by this time has also caused some traders to revise upwards their calculation of the balance of sweet crudes in Europe.
Source: Platts