Answers to questions on Russian energy.

By bne IntelliNews February 25, 2013

The main taxes on hydrocarbon production in Russia are: extraction tax for natural resources (NDPI) - the main mechanism for taxing the extraction of natural gas; and export duty, which is the main mechanism for taxing oil extraction and production of oil products. In the past years various reforms took place. NDPI for gas was doubled in 2012 for Gazprom (state-controlled largest gas producer and liquefied gas exports monopolist) from RUB 237 per 1,000 m3 to RUB 509 per 1,000 m3. The NDPI is set to further increase it to RUB 788 per 1,000 m3 by 2015 for Gazprom and to RUB 522 per 1,000 m3 for independent producers. The finance ministry has long argued that the natural gas industry was "undertaxed" as compared to oil companies, but it took a long time until amendments could be passed due to high resistance by Gazprom's lobby and other agents. In the spring of 2012, when the new rates were approved, Fitch warned that FinMin's taxation policy guidelines for 2013-2015 were going to decrease the free cash flow of the second-largest Russian gas producer, Novatek, by about 20%. The effect on the cash flows of Gazprom was expected to be smoother due to compensation from higher international prices. However, more recent reports from H2/12 and the beginning of 2013 show that Gazprom is pressured to review its prices in Europe downwards. The Ministry of Energy has recently proposed a new NDPI formula, in which it plans to tax each gas field separately, in order to account for difficulty of extraction and regional development priorities. The ministry proposed applying the tax on 37% of the gross margin of each field, multiplied by regional a stimulation coefficient (0 for Far East and 0.67% for Yamal peninsula) and multiplied by coefficient of geological costs. While the FinMin and the Ministry of Energy still continue drafting the precise formula, preliminary estimates by Finmarket show that should it be accepted, the taxation rates will not change significantly from those previously proposed by the FinMin, but Gazprom would have to pay about RUB 33bn more in NDPI, while independent producers will have to pay RUB 33bn less. Discussions on the new NDPI formula are to continue throughout March-April and will be submitted to State Duma. Oil extraction is also being taxed through export duty, which is set monthly by the FinMin, depending on the average price of Urals blend oil in the preceding month. In the end of 2008 it was resolved by the government to start revising the oil tariffs every month rather than every two months, to reflect the fluctuating global oil prices as closely as possible. The most recent report by the FinMin shows that as of March 1, 2012 crude oil export duties could go up by 4.3% m/m to USD 420.6 per metric tonne vs. current USD 403.3. Bloomberg added that the tariff corresponds to about USD 57.38 per barrel and reminded that this would make the highest rate since May 2010. The dynamics of the export duty derived from the oil price were uneven throughout 2012, resulting in the export duty remaining almost flat y/y. In 2011 overall, export duty increased from USD 317.5 set as of Jan 1 2011 to USD 398.9 set as of Jan 1 2012, posting a strong growth of 26.5%. Export duty too is diversified: a discount rate for oil fields in West Siberia and Caspian Sea is in place. However, Siberian oil fields are starting to exhaust themselves and foreign and domestic reports indicate that fast introduction of new fields is required to maintain oil output at targeted levels. Territories that are currently regarded as strategic for this goal are Russia's Far East and continental shelf of the Arctic Sea, where technically extraction is much more challenging. In November 2012 FinMin presented a number of amendments which would diversify the taxation of oil production depending on the degree of the technological difficulty of the extraction. The diversification indicators are based on the depth of the drilling and degree of the exhaustion of the oil fields, setting discounted extraction NDPI rates at 0%, 20%, and 40% of the normal rate. Experts surveyed by gazeta.ru on the proposals welcomed the initiative as being necessary to facilitate the introduction of new oil fields, but criticize the technical parameters chosen as not being the most precise. At the same time, in October 2011 last year the government approved a new "60-66" taxation scheme for oil products, under which export duties on light oil products (and higher value added ones) were set at a lower level (60% and 66% of crude oil export duty set monthly) than cheaper dark oil products (90% to 100% of crude oil duty). Previously, light oil products' export duty equaled 67% of crude oil duty, while dark oil products' equals 46.7%, which was argued by supervisory bodies and ministries to demotivate oil producers to produce high-margin products such as fuels, exporting dark oil products at a lower duty rate instead. It was planned that by 2015 the groups of most unrefined dark oil products such as mazut and oils will have the same export duty as crude oil applied. It was argued by the Ministry of Energy and Skolkovo think-tank that "60-66" system has positively influenced the oil products market, increasing the capital investment in oil refining and oil refining volumes. However, the link is not as evident and could be attributed to activity of single large market players such as Gazprom Neft, which notably expanded its oil refining capacities in 2012, as well as rising global prices on oil products. At the same time, in fall 2012 deputy FinMin Sergei Shatalov admitted to the press that the budget lost about USD 1.6bn since October 2011 on the new "60/66" oil products exports duty system. The system was believed to be neutral for the budget, which so far did not work, Shatalov commented. FinMin is taking until spring 2013 to re-evaluate the system and to come up with other solutions. To sum up, spring 2013 will see a number of major changes to the taxation of hydrocarbon extraction, which will include a new NDPI formula for natural gas, diversified formula for oil extraction NDPI which will facilitate Far East and continental shelf extraction, as well as revised export duty formula for oil products. Official: Oil exports duty unlikely to be revised in 2014. Deputy PM Arcady Dvorkovich who curates the fuel and energy sector in the government told the press that the formula for calculating the oil export duties, including the "60-66" formula for oil products is unlikely to be revised in 2014. To remind, by May 1 2013 new proposals for the formula are to be submitted: in fall 2012 deputy FinMin Sergei Shatalov admitted to the press that the budget lost about USD 1.6bn since October 2011 on the new "60/66" oil products exports duty system. The system was believed to be neutral for the budget, which so far did not work, Shatalov commented, while FinMin took until spring 2013 to re-evaluate the system and to come up with other solutions. In October 2011 last year the government approved a new "60-66" taxation scheme for oil products, under which export duties on light oil products (and higher value added ones) were set at a lower level (60% and 66% of crude oil export duty set monthly) than cheaper dark oil products (90% to 100% of crude oil duty). It was planned that by 2015 the groups of most unrefined dark oil products such as mazut and oils will have the same export duty as crude oil. It was argued by the Ministry of Energy and Skolkovo think-tank that "60-66" system has positively influenced the oil products market, increasing the capital investment in oil refining and oil refining volumes. However, the link is not as evident and could be attributed to activity of single large market players such as Gazprom Neft, which notably expanded its oil refining capacities in 2012, as well as rising global prices on oil products.

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