Page 6 - FSUOGM Week 31

FSUOGM COMMENTARY FSUOGM

Kremlin may have to intervene

in latest oil tax row

The use of the profit-based tax system caused a $2.7bn shortfall in the budget

RUSSIA PRESIDENT Vladimir Putin might have to customs code in 2021-23.
intervene and mediate the tension between Sberbank sees Rosneft and Gazprom Neft
WHAT: the Finance Ministry and Russia's oil majors as the key beneficiaries of the EPT so far, hav-
Russia trialled a new over the new excess profit tax system (EPT), ing made gains of $2bn and $1.2bn respectively.
profit-based tax system Kommersant daily reported citing unnamed Gazprom Neft made most of its savings at the
last year. sources. Novoport project in the Russian Arctic.
The price of the question is over RUB200bn "Just the introduction of the 1.5 coefficient
WHY: ($2.7bn) of tax benefits that the ministry seeks to into the EPT formula (instead of 0.4-0.8) for
The system's adoption led reclaim from Rosneft, Gazprom Neft and others. 2021-23 would boost the tax bill for Rosneft's
to the finance ministry "The crux of the disagreement is that the first EPT greenfields by more than $2bn and for
losing $2.7bn in tax experiment with the EPT, applied to a number of Gazprom Neft's Novoport by $0.8bn," accord-
receipts. fields from various companies in 2019, resulted ing to Sberbank CIB calculations, which rep-
in RUB213bn less tax revenue than MinFin had resent a respective 5% and 4% of their market
WHAT NEXT: estimated," BCS Global Markets explained on capitaliation.
The system is likely to August 3. Sberbank CIB expects the discussion over the
be tweaked rather than In the meantime, the MinFin’s insistence on proposed tax amendments to be "quite heated"
abandoned. claiming back the "lost" revenue has caused a in the coming weeks and sees resistance to draft
backlash from the oil companies, particularly legislation from both oil companies and the
state-owned Gazprom Neft and Rosneft. Those Energy Ministry. In its current form it implies
companies are reportedly the largest beneficiar- material risks for the state-controlled Rosneft
ies of the unexpectedly profitable nature of the and Gazprom Neft, the analysts warned.
EPT system for new extraction fields in remote "Although MinFin’s intention to amend the
Russian regions, BCS GM said. EPT tax regime was voiced previously, we think
BCS GM believes that the MinFin will the markets did not fully realise that certain
get some revenue recovery, but less than the measures might be implemented already from
RUB213bn it is claiming. 2021," VTB Capital (VTBC) commented on
"In return, the EPT will be tweaked sub- August 3, seeing the potential changes to the
stantially, and will likely eventually replace the regulatory regime as negative for the industry’s
existing, increasingly complex tax system, mak- fundamentals.
ing a large number of complex, small or remote Given that Gazprom Neft and Rosneft have
fields economically attractive for oil producers to higher exposure to EPT, the companies are set
develop," BCS GM analysts argue. to be hit more than peers if the changes in the
Sberbank CIB, however, on August 3 argued tax regime are introduced, VTBC warned, while
that "the draft legislation would considerably anticipating more newsflow on the subject,
reduce the attractiveness of the EPT regime for which will be negative for oil stocks' sentiment.
oil companies, primarily because it would more The analysts at VTBC calculate that Gazprom
than halve the cost compensation inflation rate." Neft’s Ebitda might decline by $1.1bn (22%) and
This is a big factor for projects' IRR, the bank $0.9bn (15%) in 2021-22 under an oil price of
believes. $45-47 per barrel. Rosneft’s EBITDA might
The proposed changes to the regime, which decrease $440mn (2.4%) and $990mn (4.7%) in
would apply to all EPT-eligible fields, according 2021-22.
to Kommersant, include reducing the historical The energy ministry and much of the oil
cost compensation inflation rate from 16.3% to industry have long called for the adoption of a
7.0%, limiting the amount of compensation to nationwide profit-based tax system, which they
50% of the taxable base from 2020 and reduc- say would be more responsive to changes in mar-
ing the upper limit for the deductible cost base ket conditions and encourage producers to focus
to RUB8,000 per tonne starting in 2025 (ver- more on their efficiency. As it stands now, Rus-
sus RUB9,520 per tonne in 2021 in the current sian producers mainly pay levies in the form of
legislation). mineral extraction tax (MET) and export duties.
In addition, the ministry has reportedly pro- Tax breaks are rewarded on a case-by-case basis,
posed setting the tax holiday coefficient to 1.5x typically to those companies with the strongest
for fields in Group 2 of the Eurasian Union's lobbying power in government. ™

P6 www. NEWSBASE .com Week 31 05•August•2020