Page 5 - FSUOGM Week 43 2019

FSUOGM COMMENTARY FSUOGM
infrastructure to ship oil from these fields to market, potentially requiring construction of a pipeline and seaport. This argument does not hold up for Vankor, which is already linked to Russia’s main pipeline system, explaining why the finance ministry’s tax director, Alexei Sazanov, insisted on October 28 it would not receive the same support as the other projects, according to Vedomosti.
Rosneft may fail to secure anywhere near as much relief as it had originally hoped for.
“Asfarasonshoreoilfieldsareconcerned,the Arctic tax breaks that have so far been agreed are somewhat more modest than what Rosneft orig- inally requested for the yet-to-be-formed Vostok Oil JV in July,” Sberbank CIB said in a research note on October 25.
Rosneft initially asked for 30-year tax holi- days, including zero MET for the new projects and lower MET at Vankor, zero property and land taxes, 7% income tax (the standard rate is 20%) and a 7.6% insurance contribution (ver- sus the standard 30%). Instead, the government instead wants to switch the projects to a new excess profit tax (EPT) regime, provide them with zero MET for only 12 years (or until 1% of reserves have been developed) and a 1% MET rate from their 12th to 17th year of operation, with a gradual increase to the standard rate.
This said, the plans are yet to be finalised and Rosneft has a penchant for getting what it wants, as evidenced when the state-owned firm overcame government opposition to acquire mid-sized oil producer Bashneft in 2016 during a so-called privatisation sale.
Rosneft also argues that the tax breaks are needed to attract foreign investors that can bring expertise and financing to the project. It report- edly plans to sell a 15-20% stake in Vostok Oil, with a group of Indian investors believed to be waiting in the wings.
Under pressure
While Rosneft may be leveraging its influence to try to get more tax relief than is necessary,
government officials agree that state support is vital for Arctic oil and gas projects to be success- ful under current market conditions.
Low oil prices over the past five years stunted Russia’s Arctic development drive. Those projects that have made progress in the downturn have done so largely thanks to government backing. The $27bn Yamal LNG gas liquefaction project launched by pri- vate gas producer Novatek in late 2017, for example, will not pay any export tax, MET or property tax, and is subject to a reduced profit tax, during its first 12 years of oper- ation. Similar concessions are anticipated to be granted to Novatek’s upcoming Arctic LNG-2 project.
Prospects at Russia’s offshore Arctic oil and gas fields are even dimmer. Development on Russia’s Arctic shelf came to a standstill in 2014, following the oil price crash and the introduction of US and EU sanctions prevent- ing Western companies from taking part in projects in the area. US oil major ExxonMobil promptly withdrew from its JV with Rosneft at the Pobeda oil discovery in the Kara Sea, where the pair found an estimate more than 9bn barrels of crude.
Russia has so far managed to launch pro- duction at only one offshore site in the Arctic, the Prirazlomnoye field operated by state-owned Gazprom Neft, and does not anticipate any new fields starting up until after 2030.
Russia depends heavily on oil and gas to supply revenues for its budget, with the fos- sil fuels still accounting for around 54% of its export revenues. The concern is therefore that as the industry becomes ever more reliant on the Arctic and other remote areas for growth, the government will increasingly struggle to afford the tax relief needed to spur develop- ment. Moscow may have to look for cash in other areas, potentially adding to the tax bur- den of its citizens, already irked by a recent increase in VAT and the raising of the retire- ment age.™
Rosneft CEO Igor Sechin discussed
Arctic tax breaks with President Vladimir Putin in April.
Week 43 30•October•2019 w w w . N E W S B A S E . c o m
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