The recent changes in the taxation of Russia’s oil and gas sector reflect both the country’s pivot eastward and the special treatment afforded to its state controlled energy companies, according to an analyst with research and consulting firm GlobalData.
According to Will Scargill, GlobalData’s Upstream Fiscal Analyst, the so-called ‘tax manoeuvre’ shifts the tax burden from export duty on oil and petroleum products to Mineral Extraction Tax (MET) on oil production. It will gradually reduce Russia’s marginal rate of export duty to 30% in 2017, while increasing the base rate of MET to RUB919/t.
Scargill explains: “The primary motive for this is to harmonise Russian export duty with that existing in other Eurasian Economic Union countries, particularly Kazakhstan and Belarus, in preparation for the development of a common energy market between 2018 and 2025.
“While the simultaneous MET hike and duty reduction means that the change is relatively neutral for oil exporters, profit margins in the refining sector are likely to be hit”.
Additionally, new tax breaks targeted at state owned Gazprom’s Chayandinskoye and Kovyktinskoye gas fields and the US$21 billion Power of Siberia pipeline have been granted, adding to the strategically important projects receiving preferential treatment.
This trend is already benefiting projects supplying China and is likely to extend to other Asian partners, with India’s ONGC Videsh looking to capitalise on strong economic ties between the two countries to secure tax breaks on Russian projects.
However, GlobalData’s latest report states that although the tax manoeuvre has only recently been implemented, there are already doubts over its longevity.
The head of the State Duma’s energy committee said that there is a possibility of the manoeuvre being revoked if gasoline prices rise significantly, and a draft bill to this effect has already been submitted. However, the energy minister contradicted these remarks, saying that a U-turn was not being considered.
Scargill comments: “Whether or not a full reversal is being seriously considered, these mixed messages indicate that policymakers are open to implementing further amendments in response to the changing industry landscape.
“Russia’s fiscal regime is notoriously prone to fluctuation, and this is expected to continue through the medium term. A reversal of the tax manoeuvre would be the clearest demonstration yet of the regime’s lack of stability, which increases the level of commercial risk in the sector”, the analyst concludes.
Adapted from a press release by Emma McAleavey.
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