Page 4 - FSUOGM Week 43 2019

FSUOGM COMMENTARY FSUOGM
Russia to award new Arctic
oil tax breaks, adding to
budget strain
As Russia’s oil industry becomes increasingly reliant on the Arctic for growth, the cost to the federal budget will increase
RUSSIA
WHAT:
Russia is preparing to grant tax breaks at an Arctic oil development led by Rosneft.
WHY:
Rosneft claims the relief is necessary for the project, which could yield 2mn bpd of oil, to be realised.
WHAT NEXT:
Russia is heavily reliant on oil industry taxation for its revenues, and the more relief it provides, the greater the burden on its finances.
RUSSIAN oil and gas producers are having to develop increasingly remote and challenging fields to keep their output stable, but the tax relief they are demanding to make these projects fea- sible is putting increasing strain on the budget. State oil giant Rosneft has become the latest company to ask the government for generous tax breaks to help develop oil and gas resources in the Arctic – an area set to grow in importance for Russia’s oil industry as output wanes at Sovi- et-era fields further south.
State support
Back in April, Rosneft’s powerful head Igor Sechin unveiled plans to President Vladimir Putin to establish a new Arctic production hub capable of producing 2mn barrels per day (bpd) of oil – equal to almost 9% of Russia’s total output last year. But such an achievement, Sechin cau- tioned, would only be possible with tax breaks. Rosneft later clarified the request, calling for RUB2.6tn ($41bn) in cuts to mineral extraction tax (MET), income tax and other levies.
Sechin now looks set to get at least some of what he asked for, with the government having broadly agreed on a benefits package for Ros- neft’s Arctic investments, Vedomosti reported on October 24. The projects in question include some fields already in production and others yet to be launched that will be united together under Vostok Oil, a joint venture (JV) between Rosneft and private oil producer Neftegazhold- ing (NGH), run by a former Rosneft executive, Eduard Khudainatov.
Vostok Oil’s principal asset will be the undevel- oped Paiyakhskoye field, controlled by NGH and estimated to contain up to 8.8bn barrels of recov- erable oil. It will also comprise the Vankor field group. Rosneft has been flowing oil for more than a decade and is partnered with a group of Indian investors. Other Rosneft assets in the area may also be brought into the fold, including those operated by its Yermak-Neftegaz JV with BP.
Tax breaks are necessary, Rosneft claims, because of the high cost of developing
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w w w . N E W S B A S E . c o m Week 43 30•October•2019