Lagniappe

 

 

Global Insight : Russian oil tax cuts

Russian oil tax cuts/analysis from Global Insight


Russia: Finance Ministry Reveals Details on Russian Oil Tax Cut Proposals

Russia's Finance Ministry yesterday unveiled its proposals for a series of tax breaks for the oil sector that are designed to stimulate new production growth.
Global Insight Perspective

Significance

Russia's Finance Ministry yesterday revealed details of its proposal to offer tax breaks and incentives to oil producers in a bid to generate new investment in exploration and production and thus avoid a potential decline in the country's total oil output.

Implications

The hotly anticipated proposals include a reduction in the mineral extraction tax, tax holidays for offshore exploration, and changes to the excise duties on high-quality oil products, but the estimated US$4.2-billion tax cuts would leave the current oil export tariff system—roundly criticised by oil companies—in place.

Outlook

The Ministry's proposals, to be reviewed by the government later this week, are fairly moderate in nature, and while they will appease oil producers in their effort to ease the tax burden, on their own these tax breaks likely will be insufficient to catalyse the industry into boosting output, thereby probably requiring the government to take additional steps down the road.

Tax Cuts for Oil, No Tax Hike for Gas

The Russian Finance Ministry yesterday unveiled its heavily anticipated tax-cut proposals for the Russian oil sector, part of its fiscal policy strategy for 2009-2011. The Ministry, which last week announced that it planned to offer a 100-billion rouble (US$4.2-billion) package of tax breaks and incentives to stimulate stagnating production growth, revealed the first details of the tax cuts yesterday

Among the key proposals are plans to reduce the mineral extraction tax, change the excise duty on high-quality oil products, and introduce tax holidays for firms carrying out exploration on the continental shelf.

Finance Minister Alexei Kudrin said last week that the tax cut proposals, which will be reviewed by the government on 3 April, envision a reduction on the mineral extraction tax by raising the non-taxable threshold from the current US$9/b to US$15/b. The draft proposals also see a change in the taxation of oil products geared to provide incentives for refiners to produce more high-quality and environmentally cleaner fuels. Currently oil companies pay around US$154/tonne (US$21.01/b) for high-octane gasoline (petrol), US$113/tonne for low-octane gasoline, and just US$46/tonne of diesel. In addition, the draft proposals would provide tax holidays for firms carrying out offshore exploration or granting them mineral extraction tax breaks.

However, the tax proposals may in fact be more notable for what they did not include than for what they did include. As reported last week, the proposals say nothing about an increase on the extraction tax for natural gas, with merely a recommendation that the tax be raised no earlier than 2011. Furthermore, the proposals only briefly touch on the issue of cutting the value-added tax (VAT) for the oil sector, an idea supported both by Russian President Vladimir Putin and President-Elect Dmitry Medvedev. Finally, the proposals do not include any of the proposals from the oil industry itself with regard to scrapping the excise duties on oil products or changing the oil export tariff system. Producers say that this still favours heavy oil products, giving refiners little incentive to upgrade their facilities to produce lighter, more valuable oil products such as gasoline.

Outlook and Implications

The Finance Ministry's tax proposals will be cheered by oil and gas producers alike, but the measures to reduce the crushing tax burden are not likely to go far enough. Gazprom, the Russian gas giant that has lobbied strongly to prevent an increase in the mineral extraction tax on natural gas in the short term, will claim victory in winning a delay in the hike until at least 2011, while Russian oil companies can take comfort in finally convincing the government to ease their tax liabilities. Given the relatively non-controversial aspects of the tax proposals, the government seems likely to approve the changes in more or less their current form.

However, precisely because these proposals are so watered-down, leaving out the more "radical" industry-favoured changes to rebalance the export tariff system, it seems virtually certain that these tax cuts will have only a minimal impact to achieving their aims; namely, to stimulate Russia's stagnating oil production growth. After 53% total growth between 1998 and 2004, annual production growth has slowed to just 2-2.5% since then, and with monthly output registering consecutive declines in January and February this year, there are growing warnings about a potential annual drop in Russia's oil output this year. Although the government appears content to see production grow at a slower but steady clip of perhaps 1%, surpassing 10 million b/d in oil production this year, the government appears less inclined to accept Russia's first annual decline in oil production in over a decade.

Nevertheless, the Finance Ministry's tax proposals are a very moderate step to reduce the burden on the oil sector, which has complained since the current taxation system went into effect in 2004 that this system provides few incentives and little extra profits to invest in new exploration and production. Indeed, some 90% of the extra revenue generated from oil prices above US$27/b is directed to the government, meaning Russian oil producers' bottom lines have benefited very little from the trebling in international oil prices since 2004. In order to free up more money for oil companies to invest in new exploration and production, the government is likely to have to offer new tax breaks on top of these proposals. An increase on the oil price cap for "windfall profits" to be transferred to the government would generate larger profits for oil producers to re-invest in production, but when (and if) the government is willing to alter this policy—which has strongly benefited the state's budget coffers, albeit at the cost of a slowdown in oil production growth—remains to be determined.

 

Andrew Neff is a Global Insight's energy analyst. Andrew.neff@globalinsight.com Petroleumworld does not necessarily share these views

Editor's Note: For more information on Global Insigth, contact: Catarina
Feria-Walsh Global Insight, catarina.walsh@globalinsight.com. www.globalinsight.com. Petroleumworld reprint this article in the interest of our readers.

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.

Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Internet web links to http://www.petroleumworld.com are appreciated

Petroleumworld welcomes your feedback and comments: editor@petroleumworld.com. By using this link, you agree to allow E&P to publish your comments on our letters page.

Petroleumworld News 04/03/08

Copyright© 2008 respective author or news agency. All rights reserved.
We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors.

 

Send this story to a friend

Your feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.

Write to editor@petroleumworld.com

Any question or suggestions, please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels