Page 4 - FSUOGM Week 32

FSUOGM COMMENTARY FSUOGM

Russian finance ministry proposes

sweeping changes to new profit-

based tax regime

There were hopes that the profits-based system would replace the
current mineral extraction tax regime within a decade.

RUSSIA RUSSIA’S Finance Ministry (MinFin) has filed Yamalo-Nenets and Komi, with depletion rates
a bill seeking to adjust a new excess profit tax of between 10% and 80%, that started produc-
WHAT: (EPT) system applied last year at certain oilfields, tion no later than January 1, 2011. Their oil and
Russia's Finance Ministry in order to reclaim some RUB213bn ($2.9bn) in gas condensate output had to be no more than
has proposed changes to tax receipts that were lost because of the system’s 15mn tonnes (300,000 barrels per day) in 2016.
a trial excess profit tax introduction. But unsurprisingly, the ministry’s The final category covers fields in the Tyu-
(EPT) system introduced plan is strongly opposed by oil producers that men, Khanty-Mansiysk, Yamalo-Nenets and
last year. benefitted from the new regime. Komi regions with depletion rates equal to or
Russia launched the pilot EPT scheme last less than 5% of initial recoverable reserves below
WHY: year at various categories of upstream projects, 10mn tonnes (73.3mn barrels). To be eligible,
The ministry is trying as part of efforts to reform the oil industry’s their total hydrocarbon reserves must not be
to reclaim some $2.9bn complex and problematic tax regime. The initial more than 51mn tonnes (374mn barrels).
in tax receipts lost goal was to expand the new system to the entire The tax rate under the EPT regime was set
because of the system's industry within 10 years, replacing the mineral at 50%, with the tax base consisting of revenues
introduction. extraction tax (MET), which levies taxes based from hydrocarbon sales, minus export duties,
on production volumes rather than profitability. transportation costs, MET taxes, operating and
WHAT NEXT: However, the MinFin later dismissed the capital expenditure and selling, general and
A compromise will likely EPT system’s introduction as a mistake, not only administrative (SG&A).
be reached between the costing the federal budget greatly but also failing For fields in the third category, the sum of
need to replenish the to incentivise investment as hoped. This is at a opex, capital and SG&A is capped at RUB7,140
budget and avoiding time when Russia is grappling with a significant per tonne ($13 per barrel) in the first two years,
too great a hit to oil decline in budget revenues, as a result of the eco- rising to RUB9,500 per tonne after 2021. It will
companies' earnings. nomic fallout from the coronavirus (COVID-19) also be indexed annually by CPI after 2021.
pandemic, low oil prices and OPEC+ production There are no opex limits for other fields dur-
cuts. ing their first three to eight years of production.
Operators are allowed to carry forward project
The regime as it is losses in order to reduce taxable income with
Four categories of oilfield were given the option a 16.3% annual indexation. Historical losses
of switching to the EPT system last year. The first incurred since 2011 for category-1 and cate-
category is fields in the Yakutia, Irkutsk, Kras- gory-2 fields, and since 2007 for category-4
noyarsk and Nenetsk regions, as well as others fields, are taken into account when calculating
partially in the Yamalo-Nenets region and above the tax base.
the 65th parallel north, and in the Russian waters
of the Caspian Sea. To qualify, fields in these Proposed changes
areas should have depletion rates of no higher The MinFin submitted its bill to other relevant
than 5%, or their oil reserves need to have been ministries on July 29, sources told Kommer-
registered with the state no earlier than January sant last week. The bill consists of four main
1, 2017. proposals.
The second category covers fields that already The first and most significant one is that oil
qualify for export duty relief. Cuts in export duty companies should not be allowed to lower the
have mostly been applied at fields that are in tax base under the EPT system by more than
remote areas, or are geologically complex, driv- 50% by carrying forward historical losses. At
ing up development costs. present, up to 100% of historical losses can be
The third category relates to older fields carried forward.
in the regions of Tyumen, Khanty-Mansiysk, Secondly, beginning in 2020, historical losses

P4 www. NEWSBASE .com Week 32 12•August•2020