Russian finance ministry proposes oil tax overhaul
The Russian finance ministry has proposed a major overhaul of the oil taxation system, which if approved could have a significant long-term impact on the Russian oil sector.
The ministry wants to move away from the current system of numerous tax breaks that are conditional on operational criteria, including reservoir performance, which the ministry has little control over, or ability to monitor and predict. This system would be replaced by wide-scale use of an excess profit tax (EPT), which is already in place at some fields in Russia.
Oil and gas revenues play a key role in the state budget, making the industry a logical target for tax hikes during economic crises, including the current downturn caused by the coronavirus pandemic. Russian oil producers often complain that frequent changes to oil taxation complicate planning of long-term development projects
Finance minister Anton Siluanov said Sept. 16 that the ministry is proposing cancellation of the zero-rate of mineral extraction tax for high viscosity oil, as well as export duty tax breaks for brownfields, the Prime news agency reported. Siluanov estimated that the benefit from these export duty changes would be Rb30 billion. This is around $400 million at the current exchange rate.
These plans follow earlier proposals from the finance ministry to amend the parameters of the EPT to regain Rb200 billion ($2.67 billion) of lost earnings. The changes to EPT met with opposition from Russian oil producers.
In contrast, Russia’s largest crude producer Rosneft said Sept. 16 that the government’s bid to find additional sources of budget revenue is “logical” and “deserves support,” considering that payments have significantly fallen and the government must continue to meet spending obligations.
“We hope that decisions taken will be balanced and focus on the development of the Russian economy in the long term,” the state-controlled company said in a statement.
The company added that the economic crisis caused by the coronavirus pandemic has become a serious challenge for the Russian oil and gas industry.
“The situation has been significantly exacerbated by necessary coordination with partners on the global commodities market,” Rosneft said, referring to the OPEC+ production agreement that Russia is a party to.
Negative for sector fundamentals
Analysts see the proposed tax changes as negative for the industry.
“While the news is negative for the industry, at this stage we would expect the draft bill to undergo a number of amendments and anticipate that discussions on the matter will continue,” analysts at ATON said in a research note released Sept. 17.
VTB Capital also deems the proposals as negative for Russian oil and gas companies’ investment cases and detrimental for the industry’s operating foundations.
“On our numbers, the average difference between the many, currently existing, tax reliefs and the new ‘one-size-fits-all’ tax discount suggested by EPT is some $1.30/b (with oil at $45/b). Taking this into account, and given that around 60% of total oil production in Russia is subject to some form of tax break, we calculate a potential additional tax collection of around Rb230 billion for 2021,” VTB Capital said in a research note released Sept. 17.
Changes to tax breaks on high viscosity oil are most likely to hit Tatneft, and to a lesser extent Lukoil and Rosneft.
Analysts at Sova Capital said: “We think it is more likely that the zero rate will be adjusted upwards, but Tatneft, Lukoil and Rosneft will still get some breaks for producing HVO.”