Page 4 - FSUOGM Week 17

FSUOGM COMMENTARY FSUOGM
Russia’s tax system in a nutshell: Who prospers as oil prices tank?
Russia’s tax system means that larger producers that supply more oil overseas will fare better during the downturn, writes Rystad Energy
RUSSIA
The tax code in Russia is anything but simple.
THE tax code in Russia is anything but simple, and gets more and more layers and complexi- ties each year. Rystad Energy breaks down how the tax system, which is based on the Mineral Extraction Tax (MET), works in Russia both in times of plenty and in dire straits. As oil prices get lower and eat away at upstream profits, oper- ators can expect to pay less tax. At a $20 Urals price, Russian producers that ship barrels of oil abroad can see their tax burden drop as low as 19% of revenues compared to 49% shelled out in 2019 in a higher price environment. But smaller producers (those pumping less than 10,000 bpd) that sell to the domestic market will still be forced to pay 40% of revenues into the national budget, compared to 52% in 2019, putting them at great risk for financial insolvency as the oil price rout so far shows few signs of relenting in the short-term.
Since the inception of MET in 2002, the tax rate has been a simple multiplication of a fixed parameter in RUB per tonne and a coefficient dependent on Urals price in the international market. Both companies and the government were quite comfortable with this approach since companies were able to hold onto a siza- ble share of profits from giant fields while at the same time keeping the budget more than flush. This tax mechanism is also appreciated for its progressive scale: companies are forced to share more revenue with the government amid high oil prices but save more money during market
downturns. The same scheme is used in tariff legislation: export duties on oil and oil products are linked to the oil price.
Based on Rystad Energy estimates, the tax burden sensitivity to Urals oil price is increasing in low price bands (Figure 1). MET and export duty before adjustments to tax reliefs and deduc- tions are included. With Urals price at $15 per barrel – that is the level considered to be the ref- erence for Russian oil production and transpor- tation costs – most components of the MET rate are zeroed while some meagre tax revenues to the budget are secured by fixed components in the MET formula.
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Week 17 29•April•2020