LUKOIL says output growth hinges on more tax cuts

By Tanya Mosolova

MOSCOW (Reuters) - LUKOIL (LKOH.MM: Quote, Profile, Research, Stock Buzz), Russia's second-largest oil producer, cannot guarantee its oil production will grow if the government decides against extending tax breaks to the industry, its vice president said.

Leonid Fedun told the Reuters Russia Investment Summit that the industry needed at least 400 billion roubles ($15.6 billion) in extra tax breaks in addition to the alleviation of 140 billion roubles already approved.

"The state should decide what is more important: Tax stability or growth," Fedun said at the event, held at the Reuters office in Moscow.

"If Russia plans to grow (production) by 1.5 percent we should understand that annual investments in oil production should exceed $100 billion," he said.

"LUKOIL can have an investment programme of $7 billion, $12 billion or $14 billion. Under the first scenario we do not grow, under the second scenario we grow very slowly, under the third we grow faster," he said.

U.S. oil major ConocoPhillips (COP.N: Quote, Profile, Research, Stock Buzz) holds one fifth of LUKOIL's stock.

LUKOIL's production amounts to around one-fifth of Russia's total output, which has been falling since the beginning of the year, making it almost impossible for the country to avoid its first annual output decline in a decade.

Poor oil output performance in Russia, the world's second-largest oil exporter after Saudi Arabia, has become a major concern for the country's government, which depends heavily on oil revenues, as well as for global markets.

Many officials have said a second stage of oil tax reform is needed but Finance Minister Alexei Kudrin, the main fiscal hawk in the government of Prime Minister Vladimir Putin, has said oil firms should not expect further cuts before 2011.

Fedun said the first stage of the tax reform, when the government agreed to cut the mineral extraction tax and introduce tax holidays for depleted and new fields from next year, will allow LUKOIL to invest more in deposits in the Arctic Timan Pechora region and speed up its offshore Caspian fields.

LUKOIL cut its oil output growth forecast for 2008 earlier this year to 1.4-1.7 percent from over 2 percent before. It produced 91.5 million tons (1.8 million barrels per day) last year.

(Additional reporting by Dmitry Zhdannikov, Michael Stott, Robin Paxton and Katya Golubkova; Editing by Jason Neely)