Page 6 - FSUOGM Week 17

FSUOGM COMMENTARY FSUOGM
sector. But this is simply an arithmetic rule: if oil and gas revenues decrease faster than non-oil and gas tax flows, then the share of non oil/gas revenues in the budget income grows.
Despite the turbulent decade of the oil cri- sis, the Russian economy continues to depend heavily on oil and gas. That’s why all tax relief initiatives face a lot of pressure from the Minis- try of Finance, which is more concerned about keeping the state budget balanced than giving a break to oil companies. Each time a new tax relief is approved and implemented, the Ministry immediately starts to seek opportunities to offset budget losses. In August 2019 after the giant Pri- obskoye field received a special tax deduction, a tax on associated gas was proposed.
The government takes more money per barrel when oil prices are below $25
Since 2015, a so-called ‘big tax manoeuvre’ has been taking place in Russia. The main idea of the tax overhaul is to phase out export duties on oil and petroleum products and proportionally raise the MET rate. The government is expected to be the prime beneficiary of the reform since MET is the main contributor to the budget. For an E&P company if every barrel of oil is subject to MET and only every second barrel is exported, this will definitely increase the tax burden. Rystad Energy compared the tax burdens in 2014 and 2020 (MET and export duty before any adjustments to tax reliefs) under different Urals price scenarios. The results are presented in Figure 4. It becomes clear that tax changes taking place in the last five years have led to more tax pressure as the oil price ticks lower. In other words, all things equal, in a $25 per barrel price environment the state gets $3 more revenue from each barrel exported than in 2014. However, the difference between tax sys- tems is almost non-existent when oil prices are above $70 per barrel. The tax manoeuvre which is planned to be finalised in 2024 will get rid of export duties, while the average tax burden on export-oriented oil volumes is not expected to change.
Small domestic-oriented producers will feel the most pain from the tax overhaul. It is expected that the growth of domestic realised prices will not be able to offset negative effects from the increasing MET. To provide some
quantitative estimates of the tax manoeuvre impact on domestic and export supplies, Rystad Energy looked at the average MET and export duty rates in 2014, the beginning of the tax manoeuvre, and in 2019, the midpoint of the tax manoeuvre, and 2024, the last year. In 2019 when Urals was $63.4 per barrel (which we calculated using the domestic oil price of RUB12,000 per tonne and an average yearly exchange rate of RUB64.7 to USD). (Figure 5). In such market conditions, the MET rate in 2014 would amount to RUB6,000 per tonne, and the export duty would be $26.7 per barrel, meaning that tax bur- den would total 62% for each exported barrel and 46% for each barred realised in the domestic
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w w w . N E W S B A S E . c o m Week 17 29•April•2020