CGES: Russia reworking faulty export tax system

Sam Fletcher
Senior Writer

HOUSTON, Dec. 1 -- Russian producers and the government have been hit hard by a crude export tax system that has proven incapable of coping with the rapid drop in oil prices since early July.

Since October, the government has been forced to make unscheduled reductions in the export tax rate, twice cutting tax rates for November and December. "Had they not done so, oil producers in the country during October would have received just $1.43/bbl on average to cover production and transportation costs and pay mineral extraction taxes," said analysts at the Centre for Global Energy Studies in London. "In November the situation would have been even worse, with the formula derived export tax exceeding the average price of Urals by more than $15/bbl during the first half of the month."

Lowered export tax rates have improved the situation "somewhat," CGES said. But the high cost of transporting oil from West Siberian fields to export terminals on the Baltic and Black seas has many producers are still operating at a loss, even after the export tax has been reduced. Reductions have at least kept the tax "only just below" the monthly average Urals prices. "The margin in October was $17/bbl and fell to less than $12/bbl during the first half of November," they said.

"The problem for Russian oil producers lies in the formula adopted by the government for calculating oil export taxes," CGES analysts reported. Under the current system, taxes are changed every 2 months based on the average price of Urals crude over a 2-month period prior to the effective date of the new tax rate. Thus, the tax rate for October and November was based on the average level of Urals oil prices during July and August.

"This meant that, according to the formula, producers would have been required to pay $485.80/tonne ($66.60/bbl) in October and November 2008, but this rate was initially cut for both months to $372.20/tonne ($51/bbl), with the November rate subsequently cut again to $287.30/tonne ($39.40/bbl). Crude oil export tax for December and January was originally set at $306.50/tonne ($42/bbl), was first cut for December to $287/tonne ($39.30/bbl), and then again to $192.10/tonne ($26.30/bbl)," analysis reported.

Under pressure from Prime Minister Vladimir Putin, the Russian government is revising the methodology for calculating the oil export tax. As proposed, the new export duty will be based on the average Urals price over a 30-day period ending in the middle of the month prior to implementation. Thus, the January export duty for would be based on the average Urals price over the period from the Nov. 16 to Dec. 15, said CGES.

"Putin wants the new export duty rules approved and in place by the beginning of December, allowing them to take effect in time for the beginning of 2009, although by then it is hoped that oil prices will have stopped falling quite as fast as they have been in recent months," the analysts reported.

Changes to the export duty may provide short-term relief for Russia's oil producers but "will do little to boost investment in the new exploration and production that is needed to reverse this year's decline in the country's oil output, which now looks likely to be around 0.5% down on last year," CGES analysts said.

"Although new fields have been brought into production in East Siberia and Timan Pechora, they have yet to have much impact on overall production levels. Rising production from Surgutneftegaz's Talakan field and the TNK-BP-operated Verkhnechonsk, both in East Siberia, and the Lukoil-Conoco Yuzhno-Khlyuchu (YK) field in Timan-Pechora, together with the expected startup of Rosneft's Vankor field and TNK-BP's Uvat development and the beginning of year-round production from the Gazprom-led Sakhalin-2 project should all help to stabilize Russian production next year and return the country to year-on-year output growth," the analysts said.

However, they added, "The next stage of the country's oil development requires massive investment in East Siberia and much greater changes to the oil taxation regime."

In an Oct. 29 report, CGES noted that most of the new fields that Russia hopes to bring on stream are in East Siberia and will be linked to the new East Siberia-Pacific Ocean (ESPO) pipeline that will transport oil to Skovorodino for delivery by rail to an export terminal on Russia's Pacific coast near Nakhodka.

In that report, CGES said oil production data from the central dispatching unit of Russia's Ministry of Industry and Energy showed a year-on-year drop of 370,000 tonnes (90,000 b/d), a fall of 1%, in August. Aggregate Russian oil production over the first 8 months of 2008 was reported a little above 325 million tonnes, equivalent to 9.73 million b/d, using a conversion factor of 7.3 bbl/tonne for Russian oil. Production during January-August was 1.4 million tonnes lower this year than last, a dip of 0.42%. Allowing for an extra day as a result of 2008 being a leap year, daily production was down by 80,000 bpd, a fall of 0.8% compared with the same period in 2007.

Russia's oil production growth has shown previous signs of faltering, most notably in early 2005 when production rates fell from peak levels reached in the third quarter of 2004. However, CGES analysts said the recent slowdown has been more protracted, extending from a month-on-month decline in production to the first year-on-year drop since the revival of the Russian oil industry in the late 1990s.

The Russian government expects its total 2008 oil production to be up 1% (4.9 million tonnes) above last year's 491 million tonnes total. "It will be helped, of course, by the extra day this year, which is worth an additional 1.34 million tonnes of oil at the current average rate of production. Were this rate to be maintained for the rest of the year, aggregate oil production for 2008 would be just short of 489 million tonnes, 2.2 million tonnes down on last year's level," said CGES analysts. However, they said prospects for a surge in Russian output in the last quarter of this year are mixed.

Contact Sam Fletcher at samf@ogjonline.com.

Related Articles

Mexico uses PSCs in first Round One step

12/19/2014 Mexico is offering production-sharing contracts to companies incorporated in the country for exploration of 14 shallow-water areas in Round One bid...

BASF, Gazprom cancel asset swap

12/19/2014

BASF and OAO Gazprom have agreed not to complete an asset swap that was scheduled for yearend.

Wintershall hikes estimates of recoverable resources for Maria field

12/18/2014 Wintershall Holding GMBH reported higher recoverable resource estimates for the Maria field in the Norwegian Sea. The revised estimate is 180 milli...

Moody’s: Mid-term elections dim federal fracing regulation prospects

12/18/2014 Results of 2014’s congressional elections have reduced the prospect of the federal government enacting its own hydraulic fracturing regulations, Mo...

MEG Energy cuts capital spending for 2015 to $305 million (Can.) from $1.2 billion

12/18/2014

MEG Energy Corp., Calgary, is reducing its 2015 capital spending plans to $305 million (Can.) from the original budget of $1.2 billion.

Severance tax would backfire, Pennsylvania association leaders warn

12/17/2014 Enacting a severance tax aimed at Pennsylvania’s unconventional natural gas activity would substantially harm the commonwealth beyond the industry ...

New York state moves to ban hydraulic fracturing

12/17/2014 High-volume hydraulic fracturing will be banned in the state of New York, Gov. Andrew Cuomo’s administration announced Dec. 17, citing health risks...

Rumaila to ramp up production 50% by end of decade

12/17/2014 The Rumaila Operating Organization (ROO)—a partnership of South Oil Co., BP PLC, PetroChina Co. Ltd., and Iraq’s State Oil Marketing Organization (...

Norway production declined in November, NPD says

12/17/2014

Norway’s liquids production averaged 1.939 million b/d in November, about 1% less than October, the Norwegian Petroleum Directorate reported.

White Papers

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Plant Design for Lean Construction - at your fingertips

One area which can provide improvements to the adoption of Lean principles is the application of mobil...
Sponsored by

How to Keep Your Mud System Vibrator Hose from Getting Hammered to Death

To prevent the vibrating hoses on your oilfield mud circulation systems from failing, you must examine...
Sponsored by

Duty of Care

Good corporate social responsibility means implementing effective workplace health and safety measures...
Sponsored by

Available Webcasts


On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Utilizing Predictive Analytics to Optimize Productivity in Oil & Gas Operations

Tue, Nov 18, 2014

Join IBM on Tuesday, November 18 @ 1pm CST to explore how Predictive Analytics can help your organization maximize productivity, operational performance & associated processes to drive enterprise wide productivity and profitability.

register:WEBCAST


US HYDROCARBON EXPORTS Part 3 — LNG

Fri, Nov 14, 2014

US LNG Exports, the third in a trilogy of webcasts focusing on the broad topic of US Hydrocarbon Exports.

A discussion of the problems and potential for the export of US-produced liquefied natural gas.

These and other topics will be discussed, with the latest thoughts on U.S. LNG export policy.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected