According to EY, the Russian Government’s fiscal policy, along with the external market environment and domestic demand for oil products, has become a key factor impacting the development of the national downstream sector.
A favourable tax environment is seen as a crucial driver of investment activity in the downstream segment. Different levels of government take depending on the type and class oil products would make upgrading costs economically viable.
Another critical issue is the rational use of oil resources. In the current tax regime, in which most taxes are based on gross receipts rather than net profits, lower export duties on oil products, compared with those on crude oil, make crude oil exports more attractive to the government.
Over the past 10 years, the growth in refining capacities has been outpacing production growth, which has been gradually losing momentum in the face of a deteriorating resource base and limited investment in exploration.
At the same time, the level of Government take in the Russian upstream segment is significantly high (over 70%). According to EY, maintaining and increasing production levels may only be possible if the Government pursues a balanced fiscal policy and eases pressure on taxpayers.
These factors collectively triggered a new tax system, known as 60-66 or 60-66-90-100, which was introduced in October 2011 by Government Decree No.719 of 26 August 2011. Under the new system, the maximum rate of export duty on crude oil was decreased from 65% to 60%, while export duties on light and heavy products were equalized at 66% of the export duty on crude oil.
With the introduction of Federal law No.263-FZ on 30 September 2013 (the 'tax maneuver', 55-61-90-100), the rates of export duty and the base rate of mineral extraction tax (MET) on crude oil were changed. The tax maneuver calls calls for an incremental reduction in the maximum export rate on crude oil from 60% to 59% in the period from 1 January through 31 December 2013; 57% from 1 January through 31 December 2015; and 55% from 1 January 2016. These changes also involve lowering the level of export duty on light products from 66% to 65% in 2014, 63% in 2015 and 61% beginning in 2016.
According to officials at the Ministry of Finance, in the near future the Ministry is likely to embark on another ‘big tax maneuver’ that will fundamentally change the existing tax principles by reducing or abolishing excise and export duties on crude oil and petroleum products in parallel with raising the current rates of MET.
This is intended to reduce the shortfall in government receipts (from 2015, estimated at US$ 30 – US$ 40 billion) as a result of oil supplies from Russia to Belarus and Kazakhstan within a Common Economic Space planned to be created by 2015. However, decisions are still ongoing.
The key reason behind the shift to the 60-66 tax system was to ease the subsidy burden on the upstream segment (i.e. lowering crude oil export duties, resulting in a netback increase), and to gradually widen the gap between export duties on heavy and light products (raising export duties on heavy products, while lowering them on light products).
Apart from positive implications for the upstream segment, this move was supposed to reduce the profitability of heavy products (resulting in the shutdown of inefficient processing plants) and improve the depth of refining at the remaining facilities. The desired goal was not achieved (see 'Russian refining economics and upgrading' to find out why).
Adapted from a report by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/22072014/russian-fiscal-policy-978/