Page 5 - FSUOGM Week 17

FSUOGM COMMENTARY FSUOGM
But all gross taxes, even being linked to oil prices, ignore the economic profile of the field development and the quality of produced hydro- carbons. The increasing concerns around the deterioration of the resource base raised talks of the necessity to lower tax burden for those producers and sites facing low commerciality under the current tax regime. Starting from 2007, the E&P industry has been supported by a wide range of tax reliefs and deductions. New coefficients were included in the MET formula designed to diversify tax rates and to distribute the tax burden among producers more fairly. YTD, the number of decreasing coefficients has increased to 6 (Figure 2).
Apart from the general tax regime, some special tax regimes exist. New offshore fields (start-ups after 2016) are subject to a decreased ad valorem tax that varies by region. Associated gas, natural gas and condensate produced on the fields feeding LNG projects are tax-exempt. Ultra-viscous oil (above 10,000 mPas) and oil from the Bazhenov, Khadum, Domanik and Abalak formations have a significant tax advan- tage that hugely discounts the MET and export duty rates.
However, the current taxation system is still considered far from ‘user-friendly’. Most of the tax benefits were implemented to target certain projects and thus don’t cover a large portion of other fields that need similar incentives. It is common practice for large companies to ask the government for support in the form of more tax deductions, which results in a new paragraph or an article in the Tax Code on that specific field. The ‘Mineral Extraction Tax’ chapter already exceeds 75 pages.
As of 2019, tax is more focused on reve- nues
The first attempt to reshape the tax model in the E&P industry was made in 2019 when the pilot launch of the Additional Income Tax (AIT) was initiated. Similar to MET, AIT assumes a pro- gressive tax scale, but instead of being based on production volumes, the tax base is determined by the net income defined as revenue minus operational and capital costs and gross taxes. Now the tax regime is tied to the commerciality of the field development.
A tax rate of 50% is applied only when the IRR of a project reaches a pre-defined level. To secure some tax revenues from the federal budget when AIT turns to zero, the AIT regime was supplemented by capital deduction limits and a significantly discounted MET rate was applied to production volumes. It is expected that, if successful, AIT will replace the current taxation system in the next 10 years.
Companies get a choice between the new and old tax system
The pilot version of AIT is applied to an undis- closed list of projects located in certain regions or containing oil with certain physical-chemical properties. It should be noted that companies are free to choose whether to stay under the current tax regime or switch to the AIT sys- tem. This is expected to be a hard choice. For instance, highly depleted fields (above 90% of initial resources) are more commercial under the AIT regime regardless of the prevailing price environment. But the AIT only makes sense for assets that receive regional tax support (Ccan = 0) when the long- term Urals price doesn’t exceed $40 per barrel. An exception is a group of fields in Eastern Siberia located above 70° lat- itude with a special zero coefficient that results in an almost zero MET rate for the first 11-con- secutive years of production after start-up. This group was added to the Tax Code in February this year after Igor Sechin, the head of Rosneft, asked the government to support the ambitious Vostok Oil project which includes the Payakh- skaya cluster.
The new commerciality-based tax system is a tax break for domestic producers that are looking to increase investments in giant mature fields and greenfields, keep long-term produc- tion stable. Sounds great in the long-term, but the budget needs money right now. Russia has always been dependent on oil and gas revenues. During the bout of extraordinarily high oil prices through 2014, the share of the oil and gas sec- tor in the state budget income exceeded 50%, as shown in Figure 3. Each crisis is followed by clarion calls to diversify the economy away from oil. After the oil price collapse in 2014, some state authorities were proudly declaring that the budget became less dependent on the energy
Week 17 29•April•2020 w w w . N E W S B A S E . c o m P5