Page 7 - FSUOGM Week 17

FSUOGM COMMENTARY FSUOGM
market. In 2019, the average MET rate was two times higher than the estimated 2014 value, and for the export duty the situation is the opposite. The tax burden in the export-oriented segment has not changed much, which the domestic seg- ment where the tax burden has increased to 67%. If we extrapolate the 2019 market environment into 2024, domestic-oriented producers could see their tax burden increase to 74%.
Companies paid less tax in 2019
The MET rates and export duties may be signif- icantly reduced by applying various decreasing coefficients which is a wide practice among Rus- sian oil producers. In 2019 when the MET rate averaged $27.6 per barrel, companies actually only shelled out between $20 and $22 per bar- rel (12% savings). The average export duty rate was set at $12.8 per barrel, while the actual rate paid fell in the range between $4 per barrel (paid by Gazprom Neft) and $11.6 per barrel (by Ros- neft). Additional tax savings were derived from transferring some assets to the AIT tax system, though the share of production subject to the new tax regime remains low. On the whole, tax reliefs and other tax incentives within the current tax system became the main drivers of compa- nies paying less tax in 2019 (49% instead of 64% on each exported barrel and 52% instead of 67% on each barrel sold domestically). It is expected that the tax burden will continue to go down with the growth of the preferential royalty production, but will this offset the increase in tax pressure after the tax manoeuvre is complete? The answer to this question will depend on multiple factors including the oil price development, production structure as well as divergent policies of the main decision-makers.
So, what does the current market mayhem will mean for tax burden and tax revenues? The MET rate now represents a complex formula consisting of several components and dozens of parameters. Let’s keep in mind that the MET mostly drops to zero when the Urals price falls below $15 per barrel. Rystad Energy expects Brent price to average $20 per barrel in 2Q20 which means that Urals price will be just close to this threshold (assuming a $3-5 per barrel spread). In April we have already witnessed Urals falling below $15 per barrel. The state budget is in danger as the next couple of months bode few good signs for tax revenues from oil production and exports. Earlier last week the Ministry of Finance announced the May export duty rate will be $6.8 per tonne of Urals (less than $1 per barrel) an almost 80% drop compared to $52 per tonne (about $7 per barrel). To goldilocks Urals price to balance the budget is $42.4 per barrel, in which case the E&P sector generates $23.4 per barrel from each produced and exported barrel.
If the Urals price is $20 per barrel, budget losses may reach $17.5 per barrel, meaning that tax rev- enues from E&Ps will fall to only $5 per barrel, as shown in Figure 6.
In fairness, it’s worth noting that the state budget is now in a better position than in 2014. The existence of fixed components in the MET formula and overall increase in the MET rate guaranty some marginal tax flows to the budget even if the Urals benchmark drops below $15 per barrel. Russia also has a safety cushion – the National Wealth Fund has been accumulating extra tax revenues from when the Urals price is above the set ‘budget-balancing’ threshold ($42.4 per barrel in 2020). As of 1 April 2020, the National Wealth Fund had 13 trillion RUB (about $165bn) in reserves. Additional support is expected from oil refiners which pay into the budget when regulated domestic prices for petroleum products become higher than export netbacks (the so-called damper mechanism introduced in 2019), although this contribution doesn’t come close to compensating for revenues lost in the oil price crash.
Companies that send oil abroad will see their tax burden drop to 25% in a $20 Urals price scenario and to 19% if other tax benefits are accounted for. All large oil producers export about half of their crude production meaning they are more immune to low prices. Domes- tic-oriented small companies find themselves in the most unfavourable position. In the $20 price and the implied RUB5,300 per tonne domestic crude price (about $9.8 per barrel) scenarios these companies will be forced to pay 40% of their revenues into the budget. Now, given the current market uncertainty, smaller producers are concerned that realized prices may fall below the MET rate. In turn, the association of inde- pendent producers is appealing for a tax holiday until the monthly-average Urals price returns to $40 per barrel. Securing this tax help is crucial to the survival of about 100 E&Ps that produce less than 10,000 bpd. ™
Week 17 29•April•2020 w w w . N E W S B A S E . c o m P7