Page 12 - FSUOGM Week 25 2021

FSUOGM COMMENTARY FSUOGM

per barrel. The field still enjoys reduced MET payments), it seems unlikely that such relief will
until the cumulative production exceeds 15mn come, as the state believes it has already provided
tonnes, which is anticipated to happen in 2023- substantial tax privileges. At the same time, a
2024 based on current production levels. After switch to the completely new AIT system looks
that, MET will be applied in full. The operator more realistic from the government’s perspec-
has proposed to either shift the field to the AIT tive. To make this switch, the Korchagin field
regime, or extend the MET breaks for an addi- needs to lie in a separate licence block, which is
tional five years or until the cumulative produc- currently not the case, as it shares block borders
tion reaches 20mn tonnes (till 2028-2029). with the Vladimir Filanovsky field. The latter
Figure 5 shows the field’s economic profile in field started production in 2016 and is therefore
the current tax regime (where MET reliefs are classified as a new offshore field operating under
effective until 2023 only, and export duty reliefs a special tax regime. Russian tax parameters are
are abolished) and in the best case with export currently applied at block level, and no provi-
duty incentives still in place and MET reliefs pro- sion of different tax parameters on the fields in
longed for five years. In the second scenario, the the same block are allowed. Lukoil is pushing
Korchagin field would generate positive free cash for a bill that would allow licences to be divided,
flow until 2029, while in the current tax environ- which has already been submitted to the govern-
ment, free cash flow turns negative after 2023 ment. This amendment must come into force by
when MET rates are applied in full. This may the end of 2021 so that the operator can switch
force the operator to reduce future spending at to the AIT regime, so the deadline is quite tight.
the field, and we would expect a sharp decline If Lukoil’s negotiations with the state regard-
thereafter. There is also a possibility that Lukoil ing tax reliefs are successful, the company will
may abandon the field in the absence of tax be able to resume operations at the fields and
exemptions, as costs will rise by about one third reach its target production levels set before the
and render production unprofitable. tax changes. If the talks fail, all three projects will
Although additional MET reliefs would make most likely experience steep declines and may
sense both for the operator and the government even be shut in once operational costs exceed
(as continued production would generate tax the revenue generated. ™

PIPELINES & TRANSPORT

Gazprom reveals Chinese

gas supply details

RUSSIA RUSSIA’S Gazprom has for the first time publicly pricing formula. It also includes a take-or-pay
disclosed how much it is earning from natural provision that means that China must pay for
Russia's gas was more gas supplies to China via the Power of Siberia 85% of agreed volumes each year, whether it
competitive than other pipeline. takes that much or not.
supplies that head to In an investor presentation on June 17, Gaz- China was meant to take 5 bcm per year of
China last year. prom’s deputy chairman Famil Sadigov said the gas from Russia last year, but likely took less
company had delivered 4.1bn cubic metres of than that because of the coronavirus (COVID-
gas to China in 2020 and earned RUB44.3bn 19) pandemic’s impact on demand. According
($608mn) from those sales. This means that to Sadygov, Gazprom expects to ship 8.5 bcm
Gazprom sold its gas to China’s CNPC at an per year of gas to China in 2021 and double its
average price of around $150.2 per 1,000 cubic revenues. This means China is taking the mini-
metres last year. mum amount of gas from Russia under current
This is more than the price that Gazprom obligations.
set for its gas supplies to Europe in 2020. Its gas The latest information means that Russian
sold in non-CIS markets for only $143 per 1,000 gas is competitive versus other supplies that
cubic metres during the year. head to China. According to Chinese customs
Gazprom signed a 30-year deal to supply data, China paid $180 per 1,000 cubic metres for
gas to China in 2014. These deliveries began in Uzbek gas in 2020, $210 for Turkmen gas, $340
December 2019, when the 3,000-km Power of for Myanmar gas and $230 for LNG imports. The
Siberia pipeline was brought online. Supplies are cheapest LNG during the year came from Nige-
set to ramp up to 38 bcm per year by 2024. ria and Malaysia and was priced at around $200
The contract indexes gas prices to the price per 1,000 cubic metres, while the most expen-
of oil products with a nine-month lag, although sive came from Qatar at $275 per 1,000 cubic
Gazprom and CNPC have never disclosed the metres.™

P12 www. NEWSBASE .com Week 25 23•June•2021