WATCHING THE WORLD BLACK CLOUD OVER WHITE NIGHTS

With David Knott from London Winston Churchill once said of Russia's war strategy, "I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma." Brian Lavers, chairman of Phibro Energy Production Inc., London, thinks much the same of Russia's recent petroleum tax strategy. Phibro is chief western partner in the White Nights joint enterprise, holding 43%. Russian production association Varyeganneftegaz (VNG) has a 56% stake and Anglo-Suisse

Nov. 8, 1993

3 min read

Winston Churchill once said of Russia's war strategy, "I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma."

Brian Lavers, chairman of Phibro Energy Production Inc., London, thinks much the same of Russia's recent petroleum tax strategy.

Phibro is chief western partner in the White Nights joint enterprise, holding 43%. Russian production association Varyeganneftegaz (VNG) has a 56% stake and Anglo-Suisse Inc., Houston, 5%.

White Nights was set up in November 1990 to develop and produce oil and gas from Tagrinsk, West Varyegan, and Roslavi fields in Tyumen province of western Siberia.

"White Nights was a pioneering project," Lavers told a recent conference. "It has been successful technically, increasing production by 35%."

Oil production currently amounts to 27,000 b/d, of which 18,000 b/d is sold by VNG and 9,000 b/d is incremental production assigned to the joint venture.

TAXES MULTIPLY

In November 1990, the venture was subject to four taxes: a 10-20% royalty on exports, workers' income tax of 40%, a 32% profit tax, and a 15% profit repatriation tax.

A Jan. 1, 1991, government decree set a tax on exports and imports. Since then, eight more tax rulings have been enforced. Now White Nights is subject to 13 taxes.

The four original taxes remain in place. Now there also is a 20% value added tax on goods and services purchased in Russia. An oil export tax is set at 30 ECUs ($26)/metric ton.

There is a mineral use tax of 8% of the world market oil price, a mineral resource tax at 10% of the domestic market oil price, an excise tax of 0-30% of the world market oil price depending on geological characteristics of deposits, and port charges of $3.50/metric ton of oil.

Then there is the mandatory conversion tax, under which 50% of hard currency is converted into rubles within 14 days of receipt; and a wage excise tax that requires companies to pay an equivalent of as much as 50% of wages in excess of four times the Russian minimum wage.

Finally comes the price regulation fund mandatory contribution, which is set at 30% of the domestic oil price in excess of certain allowances.

UNCERTAINTIES

"Interpretation of the present tax situation contains many uncertainties," said Lavers. "If all the taxes were levied on the export price of oil, foreign joint ventures would be paying over 100% of gross revenues in tax."

Ventures set up before January 1992 are supposed to get export duty refunded until they have recouped their investment. But the government has not yet implemented the exemption.

"White Nights has paid $14 million to the government in export duty alone," said Lavers. "Unless this tax exemption is obtained soon, White Nights will inevitably fail."