The majority of new oil projects in Russia will not be profitable even with oil prices at $150 per barrel, according to an Energy Ministry proposal on how to reduce taxes at undeveloped fields.
Based on data from oil companies, the ministry determined that under the current tax regime most new oil projects would not be financially viable. Of the nearly 10 major deposits, just three would make sense to develop, and even then only with a Urals crude price of no less than $60 to $90 per barrel.
Without additional tax incentives for new fields, Russian oil companies will be producing 40 million tons less crude in 2013 than they did last year, the ministry said.
Following a meeting with Prime Minister Vladimir Putin in February, Energy Minister Sergei Shmatko promised oil companies a new taxation system. Shmatko said at the time that under the current system and low oil prices, the development of 94 percent of new fields would be unprofitable.
For undeveloped deposits, he said, taxes will be taken from the real accumulated income, or more simply, from the company's excess profit, Shmatko said.
Officials raised the idea of a tax on additional income after oil prices collapsed late last year. The export tariffs were not dropping quickly enough to keep up with plummeting crude prices, and in October oil companies were reporting losses of $120 to $140 per ton of exported oil.
And while the government will not remove export duties altogether, it is prepared to lower them. The mineral extraction tax could be canceled for new fields or could be calculated based on production and transportation costs, rather than on volume. In return, a new tax on additional income could be implemented, the Energy Ministry proposal says.
The document does not give any figures on the rates for the new taxes. So far, it is merely a framework proposal, in which the general focus of the reforms has been determined but not the details, an Energy Ministry spokesman said. This week, the ministry submitted it for consideration to an intergovernmental group that will need to develop a consensus version, he said.
Deputy Finance Minister Sergei Shatalov said Wednesday that it would be a "good" result if the government was able to rework the taxation system by the end of the year. The main task is to "minimize the taxes on the initial and final phases of the development" and to "collect more, when the field is producing more," he said, Interfax reported.
Under the Finance Ministry's proposal for tax policy until 2012, a tax on additional income would take effect no sooner than 2011 or 2012, with the rates ranging from 15 to 60 percent.
Russia is one of the few countries with export tariffs for the oil and gas sector, said Simon Wardell, energy analyst at IHS Global Insight. Switching the tariffs, which fluctuate with the price of oil, in favor of another tax would allow Russian companies to plan more effectively, he added.
From January to April, the federal budget took in 2.2 trillion rubles ($70.5 billion), of which 11.5 percent was from oil export duties and 9 percent from the mineral extraction tax on crude. But the Energy Ministry's proposals will not likely lead to a noticeable decline in budget revenue, said Alexandra Suslina, of the Economic Expert Group.
"Some of the new fields have already received holidays on the mineral extraction tax — no one was expecting an increase in tax revenue from them," she said.
So far, there is no set understanding of what qualifies as a new field, said Valery Nesterov, an analyst at Troika Dialog. He said he did not expect to see any tax changes for the oil industry before the end of the crisis.
Oil executives, however, have their hopes up. Introducing a tax on additional income is among the proposals backed by the industry, TNK-BP spokesman Nikolai Gorelov said. Ideally, oil companies would like all taxes replaced by a tax on profit that would be paid when oil fields become profitable, he said.
The tax system should allow for strategic fields to be developed profitably at a normal oil price of $60 to $80 per barrel, a Gazprom Neft representative said, adding that his company supported the ministry's proposals.
The oil companies declined to share their calculations regarding the possible savings and profitability of new projects under the proposal. Shell chief Jeroen van der Veer told participants at the St. Petersburg International Economic Forum earlier this month that if nothing changes, extraction costs could reach $80 per barrel in eastern Siberia. And if Russia doesn't start developing new regions, it won't be able to maintain its status as the world's largest oil and gas producer, Van der Veer warned.
Based on data from oil companies, the ministry determined that under the current tax regime most new oil projects would not be financially viable. Of the nearly 10 major deposits, just three would make sense to develop, and even then only with a Urals crude price of no less than $60 to $90 per barrel.
Without additional tax incentives for new fields, Russian oil companies will be producing 40 million tons less crude in 2013 than they did last year, the ministry said.
Following a meeting with Prime Minister Vladimir Putin in February, Energy Minister Sergei Shmatko promised oil companies a new taxation system. Shmatko said at the time that under the current system and low oil prices, the development of 94 percent of new fields would be unprofitable.
For undeveloped deposits, he said, taxes will be taken from the real accumulated income, or more simply, from the company's excess profit, Shmatko said.
Officials raised the idea of a tax on additional income after oil prices collapsed late last year. The export tariffs were not dropping quickly enough to keep up with plummeting crude prices, and in October oil companies were reporting losses of $120 to $140 per ton of exported oil.
And while the government will not remove export duties altogether, it is prepared to lower them. The mineral extraction tax could be canceled for new fields or could be calculated based on production and transportation costs, rather than on volume. In return, a new tax on additional income could be implemented, the Energy Ministry proposal says.
The document does not give any figures on the rates for the new taxes. So far, it is merely a framework proposal, in which the general focus of the reforms has been determined but not the details, an Energy Ministry spokesman said. This week, the ministry submitted it for consideration to an intergovernmental group that will need to develop a consensus version, he said.
Deputy Finance Minister Sergei Shatalov said Wednesday that it would be a "good" result if the government was able to rework the taxation system by the end of the year. The main task is to "minimize the taxes on the initial and final phases of the development" and to "collect more, when the field is producing more," he said, Interfax reported.
Under the Finance Ministry's proposal for tax policy until 2012, a tax on additional income would take effect no sooner than 2011 or 2012, with the rates ranging from 15 to 60 percent.
Russia is one of the few countries with export tariffs for the oil and gas sector, said Simon Wardell, energy analyst at IHS Global Insight. Switching the tariffs, which fluctuate with the price of oil, in favor of another tax would allow Russian companies to plan more effectively, he added.
From January to April, the federal budget took in 2.2 trillion rubles ($70.5 billion), of which 11.5 percent was from oil export duties and 9 percent from the mineral extraction tax on crude. But the Energy Ministry's proposals will not likely lead to a noticeable decline in budget revenue, said Alexandra Suslina, of the Economic Expert Group.
"Some of the new fields have already received holidays on the mineral extraction tax — no one was expecting an increase in tax revenue from them," she said.
So far, there is no set understanding of what qualifies as a new field, said Valery Nesterov, an analyst at Troika Dialog. He said he did not expect to see any tax changes for the oil industry before the end of the crisis.
Oil executives, however, have their hopes up. Introducing a tax on additional income is among the proposals backed by the industry, TNK-BP spokesman Nikolai Gorelov said. Ideally, oil companies would like all taxes replaced by a tax on profit that would be paid when oil fields become profitable, he said.
The tax system should allow for strategic fields to be developed profitably at a normal oil price of $60 to $80 per barrel, a Gazprom Neft representative said, adding that his company supported the ministry's proposals.
The oil companies declined to share their calculations regarding the possible savings and profitability of new projects under the proposal. Shell chief Jeroen van der Veer told participants at the St. Petersburg International Economic Forum earlier this month that if nothing changes, extraction costs could reach $80 per barrel in eastern Siberia. And if Russia doesn't start developing new regions, it won't be able to maintain its status as the world's largest oil and gas producer, Van der Veer warned.
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