Although recent tax changes have helped oil and gas companies overall and boosted oil production Russia, fiscal pressures will discourage the government from providing further relief.
In fact, say analysts at BCS Financial Group, Moscow, increased taxation is likely, especially for refiners and producers of natural gas.
Tax breaks have stimulated “greenfield” oil production and will keep total Russian output rising to a peak above 11 million b/d in 2018, BCS says in a new report. But the shrinking share of more heavily taxed production from brownfields will erode revenue for a government that relies on oil to fund 45% of its budget.
Since 2011, the government has offered ad hoc tax breaks to greenfield development, adjusted the crude export duty, and made other adjustments in an attempt to encourage production. Among the results, BCS said:
• Crude oil production increased from 10.2 million b/d in 2011 to 10.5 million b/d last month.
• Many oil fields will be eligible for export duty breaks when the government approves greenfield reform, which will allow companies to approve development. Affected fields include Rosneft’s Yurubcheno-Tokhomskoye; Gazprom Neft’s Novoport, Messoyakha, and Kuyumba; and TNK-BP’s Russkoye and Tagulskoye.
• Rosneft has signed strategic alliances with international oil companies such as ExxonMobil, Eni, and Statoil, to develop offshore resources.
• Refinery upgrades have begun. BCS notes Lukoil and TNK-BP are producing Euro-5 fuels, and Surgutneftegas and Alliance Oil are installing hydrocrackers.
Still, companies seek further easing of the export duties on crude oil and products, saying production costs are increasing.
Citing projections of growth in the federal budget deficit relative to gross domestic product, BCS says “easing taxation on Russian oils may not be timely.”
As tax receipts fall from crude oil, BCS adds, the government will turn to other parts of the oil and gas business.
“Our project profitability analysis demonstrates that oil refining’s and gas projects’ robust returns could handle additional tax increase,” BCS says, although rates increased on both businesses in reforms made since 2011.