Read part one of this article here.
Fuel quality and tax policies drive refinery investment and oil trade
Almost all governments attempt to use regulation and tax policy to nudge business investment and trade behaviour. In Russia, the level of state involvement remains very high. The Russian government enacted a set of tax reforms for the oil industry in 2011. Since then, however, Russia has been hit hard by the collapse in international oil prices and the international sanctions. According to the Russian Prime Minister, roughly 30% of the national budget depends on fuel and energy. Lengthy discussions between government and industry have resulted in a number of amendments to the tax reforms. The central government's stance is that the tax changes strike a balance between the revenue needs of government and the needs of energy producers and refiners. Many of the refining companies believe that the tax changes will harm their profitability and that they will bear a disproportionate share of the tax burden.
As the refining industry began to modernise, many of the smaller and less efficient refineries finally began to close, or else began to operate only sporadically in niche markets. The larger refineries serving metropolitan areas and export markets have been required to invest in order to improve fuel quality, just as many of their counterparts in Europe, Asia and the Americas have been required to invest. The allowable sulfur level in motor gasoline was cut from 500 ppm to 150 ppm in 2011, 50 ppm in 2012, to 10 ppm in 2015. Benzene content was reduced to 1% by volume in 2011, and total aromatics are now limited to 35% by volume, down from a maximum of 42% in 2011. Diesel sulfur levels have been cut from 500 ppm Grade 2 and 350 ppm Grade 3 (consistent with Euro 2 and Euro 3) to 50 ppm Grade 4 in 2012, and are being cut to 10 ppm by 2015, consistent with Euro 5. The minimum cetane number is 51. Now, some investments and trade patterns are being influenced increasingly by changes in Russia's tax policies affecting the oil industry.
The main tax items are the Mineral Extraction Tax (MET) assessed on production, the crude and product export duties, and the excise taxes on refined products. The Russian Ministry of Energy has made numerous changes in tax regulations affecting the oil industry, and additional changes are proposed for 2015, 2016 and 2017. The current reforms are being called the ‘tax manouevre’.
First, on the production side, the Mineral Extraction Tax is a production tax charged on a RUB/t basis. It was RUB493/t in 2014, or US$8.87/t using the exchange rate of US$0.018/RUB. The government planned to raise the MET to RUB530/t in 2015 (US$9.54), but it now is raising this rate to RUB765/t (US$13.77/t). The proposed rate of RUB559/t (US$10.06) in 2016 and 2017 was raised to RUB856/t (US$15.41) in 2016 and RUB919/t (US$16.54) in 2017.
The tax increases are expected to be passed on to consumers, which is likely to have a dampening effect on domestic use. The International Energy Agency (IEA) believes that Russian oil demand will fall by approximately 4% in 2015 relative to 2014. In part, however, the increase in costs to the consumer will be offset by a reduction in the excise tax charged on gasoline and diesel. In 2014 the excise tax on Euro 4 gasoline was RUB9916/t (US$21/bbl), while the tax on Euro 5 gasoline was RUB6450/t (US$13.66/bbl). The excise tax differential also hastened the adoption of Euro 5 gasoline. The excise tax on diesel was RUB5427/t (US$13.02/bbl). Under the previous tax plan, the excise taxes for all three of these fuels would have gone up in 2015, but they now have been reduced to RUB7300/t for Euro 4 gasoline, RUB5530/t for Euro 5 gasoline, and RUB3450/t for diesel.
The export duties are expressed as percentage rates relative to crude, which follows the market, but with a monthly lag. Therefore, if the price of crude rises, the export duty rises in tandem. The reference crude price used is a calculated monthly average price for Urals crude on the international market. The rates of crude export duty include a step function based on crude price, but the step function applies to low crude prices, so the first steps are currently irrelevant. At prices above US$25/bbl, the duty in 2014 was US$4 plus 59% times the actual price minus US$25/bbl. The hefty export duty has increased the amount of domestic crude available to domestic refineries at relatively low cost, which in turn has supported refiner margins. But under the tax manouevre, the crude export duty is now being reduced at an accelerated rate. Previously, the crude export duty was scheduled to go to 57% in 2015, down slightly from 59% in 2014. Another slight reduction, to 55%, was planned for 2016 and 2017. Under the latest tax plan, however, the export duty will be cut to 42% in 2015, 36% in 2016, and 30% in 2017. Crude feedstock costs to refiners will therefore rise.
The export duties on refined products are now slated for several changes as well, however. Cutting product export duties partly will counteract the reduction in crude export duties, since the economics of product exports will be improved as well. The export duties on light and middle distillates and on aromatics (benzene, toluene and xylenes,) were 65% in 2014. They were scheduled for a slight reduction to 63% in 2015 and 61% in 2016 - 2017. Under the new plan, the export duties will be reduced more swiftly to 48% in 2015, 40% in 2016, and 30% in 2017, making exports of these products more economical. Naphtha export duties were slated to remain unchanged at 90% from 2014 through 2017, but the duty is now being reduced to 85% in 2015, 71% in 2016, and 55% in 2017. The gasoline export duty was 90% in 2014, and it also was planned to remain at 90% through 2017, but now it has been cut to 78% in 2015, 61% in 2016, and 30% in 2017.
The export duty on lubricating oils was 66% in 2014. It was slated to rise to 100% in 2015, 2016 and 2017. Now, it is scheduled to be cut to 48% in 2015, 40% in 2016, and 30% in 2017. The export duty on petroleum coke was also 66% in 2014 and was scheduled to go to 100% in 2015, 2016 and 2017. It has been cut to a mere 6.5%, which also is a reflection of how little some petroleum cokes are worth as export commodities. The export duties on fuel oil, bitumen, and certain other heavy products were planned to rise from 90% in 2014 to 100% in 2015, 2016 and 2017. The planned increase is now being phased in more slowly, going from 76% in 2015 and 82% in 2016 before rising to 100% in 2017. The selective shifting of export duties should encourage downstream processing at refineries, thereby supporting investments in fuel oil destruction technologies.
Part three of this article will be available soon.
Written by Nancy Yamaguchi, Contributing Editor. This is an abridged article taken from the August 2015 issue of Hydrocarbon Engineering.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/03082015/russian-refining-part-two-1210/