LONDON (Bloomberg) — Russia, the world's second-largest oil supplier, may continue to experience declining production as the government seeks to lure investment, BP chief executive officer Tony Hayward said.

Russia's tax system takes 90 percent of a company's earnings when oil prices rise above $30 a barrel, Hayward said. The nation's crude production will fall this year, according to his estimates.

"Russian authorities are responding" with fiscal regime changes, though it may take "a couple of years to reverse the current trend", Hayward said at a presentation in London yesterday.

Russian oil production dropped in the first quarter, the first decline this decade, on lower investment and power shortfall, the demand for which is rising to pump more water to push out oil from the depleted fields in Siberia. Prime Minister Vladimir Putin pledged tax breaks for the oil industry to stimulate investment.

The country cut extraction 0.8 percent to 9.74 million barrels a day in May from a year earlier. The nation increased production by 62 percent between 1998 and 2007, according to BP data.

Analysts including Chris Weafer of UralSib Financial Corp. said government tax-cut proposals may not go far enough to revive production growth.

BP's Russian venture, TNK-BP, is the country's third-largest oil producer.

The decline in crude output also occurred because the government suspended the sale of new oil and gas exploration licenses about five years ago, Sergei Fyodorov, director of subsoil policy at Russia's Natural Resources Ministry, said last month.

Fyodorov estimates Russian output will be flat this year and may rise by more than five percent in 2009 on new field developments in eastern Siberia.

The world's largest crude supplier is Saudi Arabia.