Russia, meddling with investment, plans tax changes

Sept. 26, 2011
Russia’s undulating tax regime for oil and gas companies is expected to change again Oct. 1.

Russia’s undulating tax regime for oil and gas companies is expected to change again Oct. 1.

The government wants to boost upstream investment and encourage refiners to modernize.

It plans to cut the marginal tax rate for most crude oil exports to 60% of the price of Urals crude from 65% at present. And it will tax exports of oil products at 66% of the duty for Urals. Duties now are 67% for light products and 46.7% for heavy fuels.

For gasoline and naphtha, duties stay at the level set in April to address local market strains: 90% of the Urals duty.

In its September Oil Market Report, the International Energy Agency says the changes will boost cash flow for producers and hurt profitability of refiners. The government might ease pressure on refiners by trimming other taxes or tariffs, it says.

Russia has been producing crude and condensate at a post-Soviet high of 10.6 million b/d in recent months—much of it from aging fields. IEA thinks the tax changes will help sustain old fields more than they’ll stimulate investment in new development.

While the changes will hurt exporters of heavy fuel oil, IEA says some analysts expect that business to remain profitable. With the domestic market for light products tight and margins “relatively strong,” it says, crude runs probably will stay high, keeping production and exports of fuel oil “close to current levels in the immediate future.”

In the longer term, IEA expects the changes to encourage refinery modernization. The duty on fuel oil is set to increase to 100% of the crude duty in 2015, possibly making fuel oil exports unprofitable and raising the value of upgrading capacity. But implementation is uncertain.

Also, the product-duty order has been signed—but not the crude change. With elections approaching, the government might change taxation again to sustain revenue.

From a government this meddlesome, surprises are always possible.

Meanwhile, IEA isn’t raising its expectations for Russian production much.

(Online Sept. 26, 2011; author’s e-mail: [email protected])