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Friday, February 13, 2009

Hopes dashed for oil tax reform

//The government has decided to postpone a full-scale tax reform in the oil industry
10 February 2009 - RBC News - Although government is not yet prepared to grant significant tax cuts to oil companies, it supports producers in their efforts to modernize production and develop new fields. Thanks to the government’s measures, the tax burden on the oil industry has already dropped by RUB 500 billion (approx. $14.5bn), Prime Minister Vladimir Putin said at a conference focusing on the problems facing Russia’s oil sector. More measures could be approved before the end of the year, including the lifting of export duties on East Siberian oil, and the replacement of the mineral extraction tax with a new windfall profit tax for new deposits. The mineral extraction tax rate was lowered from January 1; the oil export duty was also reduced, and a more flexible formula was adopted for its calculation. As a result, the tax burden on the oil sector eased by about RUB 500 billion (approx. $14.5bn), Putin stressed, while instructing both the Finance Ministry and the Economy Ministry to develop new support measures for the country’s oil industry. Among other measures, the oil export duty could be lifted altogether for oil coming from East Siberia, for a period of three years, according to Energy Minister Sergei Shmatko. In addition, the mineral extraction tax on oil from new deposits may be replaced with a windfall profit tax. “We call it taxation of the results of operations, which means that the tax will not be paid on gross revenue,” he explained. Thus, producers developing new oilfields will have more cash left for investment, Shmatko emphasized. Under the existing taxation rules, the development of 36 percent of explored reserves and 93 percent of new reserves remains unprofitable. The measures taken by the government are expected to cover an investment deficit of RUB 2.8 trillion (approx. $81bn). In this case, Russia’s oil production will rise to 511 million tonnes by 2013, an increase of 155 million tonnes in five years. With taxation as it is now, oil production will drop by 110 million tonnes during the same period. Shmatko also pointed out the need for tax changes in the oil refining industry. Refineries producing heavy oil products enjoy profit margins of about 30 percent, while the producers of light oil products - which requires bigger investment - have margins of less than 10 percent. As a result, fuel oil becomes the most popular oil product. Shmatko suggested solving this discrepancy by equalizing export duties on light and heavy oil products from 2012. He also called for revising the formula for calculating export duties on oil and oil products. Oil refineries modernizing their production could receive state support, Putin said. Shmatko explained that such companies could get state guarantees and affordable loans, helping them to revamp their businesses and produce a higher quality and environmentally friendly gasoline. The government could also simplify VAT return rules for the acquisition of imported equipment for advanced oil refining, according to Finance Minister Alexei Kudrin. New tax rules will come in handy for companies operating in East Siberia, says Vitaly Kryukov, an analyst at IFD Kapital. Oil projects in this region have bigger operating and capital costs than those in West Siberia, which affects the profit margins of East Siberian projects. The proposed tax measures would be of particular benefit to Surgutneftegas, Rosneft and TNK-BP – the leading operators in East Siberia. Lower export duties on East Siberian oil will not produce any immediate effect, according to Mikhail Krutikhin, a partner at RusEnergy consultancy. “Very little oil is being produced in East Siberia now, and it will take a long time to begin oil exports from the region,” he explained. The government is trying to keep a steady balance between the interests of the state budget and those of the oil industry, reckons Dmitry Abzalov, an analyst at the Center for Current Politics. “With low oil prices, the introduction of a windfall profit tax will effectively ease tax pressure on oil producers. Otherwise, many smaller companies could face bankruptcy, which means that the budget would receive smaller revenues, to say nothing of an oil production decline threat,” he said. Yet the government had to drop plans for a number of radical measures, such as the lifting of the oil export duty, for fear of adding to the budget deficit, according to Abzalov. However, Artyom Konchin, an analyst at UniCredit Aton, is convinced that more radical tax measures are needed, focusing on the actual results of oil companies’ operations, not on current oil prices.

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