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cancellation of export duty breaks on the Korchagin field last year, the company could see losses of RUB 10bn at the current exchange rate and oil price, according to an unnamed source quoted in Kommersant. This could eventually lead to Lukoil decreasing its investment in the Caspian Sea or even ending production at the Korchagin field.
Lukoil has proposed two options to offset the forecast losses. The first is to transfer the Korchagin field to the second group of the excess profit tax (EPT) scheme, while the second is to extend tax breaks on the mineral extraction tax (MET). The first proposal would require a change to the law, as EPT is not allowed for fields located on a shelf. The second proposal would also require a change in the law, as the Korchagin field is located in the same license block as other fields that get breaks for being new offshore fields.
MinFin is against allowing the Korchagin field to be switched to EPT, stating that the IRR of the project exceeds 16.3% and is in line with the target level set by the government. The Ministry of Natural Resources is open to the idea of splitting license blocks from fields, which could open up tax breaks for other fields and blocks as well.
Unrelated to tax breaks, Lukoil’s bid to buy 100% of FAR Limited may not go through, as FAR Limited issued a press release on Thursday, 1 April, stating that “FAR has been advised by Lukoil that the Lukoil Proposal is not proceeding to a legally binding offer.” For details, see our story from 18 February (https://research.sovacapital.com/#/equities/daily/10832). FAR directors support its shares being purchased by Woodside Petroleum.
Getting breaks on the Korchagin field could be more difficult than reaching an agreement on high-viscosity oil, which President Vladimir Putin ordered the government to look into earlier this year. Since Mr. Alekperov and Mr. Putin discussed tax breaks on fields in the Komi Republic where Lukoil’s HVO production is located, there has been little in the way of headlines on changes. We note that the RUB 10bn estimated in losses is less than 1% of our 2021E EBITDA forecast.
Though Lukoil conducted due diligence and seemed determined to acquire a stake in the Rufisque, Sangomar and Sangomar Deep (RSSD) project, we see Lukoil not acquiring FAR Limited as neutral.
● Other
Surgutneftegas has published its FY20 and 4Q20 RAS results. In 4Q20, operating profit was up 14% q/q to $875mn, due to the 6% rise in net revenues. The net loss was reported at $2.3bn, after the $6.3bn in 3Q20, due to the $3.9bn net other expense. FY20 net profit was RUB729.6bn ($10.8bn).
161 RUSSIA Country Report May 2021 www.intellinews.com