Vadim Visloguzov, Denis Rebrov
Oil export duties cut retroactively in Russia
A Government Resolution has cut oil export duties by 22.8% since November 1, 2008. The Government approved the Finance Ministry's proposal to calculate the duty on the basis of oil prices slightly below $80 per barrel. The Government's decision, which will take effect retroactively (contrary to legislation), will allow Russian oil companies to save $1.9 billion by the year's end. The companies, which insist that the duty should be based on a price of $60 per barrel, claim that oil export has become a debt-making business for them.
The resolution, signed by Prime Minister Vladimir Putin, bears the date October 31, 2008. It should come into force ten days after its official publication, by mid-November. However, for the first time ever, the Government Resolution on oil export duties will be applied retroactively, starting November 1, 2008. This means that the companies will pay $287.3 (instead of $372.2 collected in October) for the export of a metric ton of crude, $205.9 (compared to $263.1) for light oil products, and $110.9 (compared to $141.7) for dark oil products.
The agencies involved debated the issue of how and when to cut oil export duties for a whole week. Parallel meetings held by Deputy Prime Ministers Alexei Kudrin and Igor Sechin were followed by a meeting on October 31, chaired by Prime Minister Putin.
When announcing its results (the Kommersant business daily wrote about them in its November 1 issue), the Prime Minister did not say a word about the new benefits for oil companies (the Government's Press Service announced them only on November 1). Oil companies, supported by the Economics Ministry, proposed that the new duty rates should be based on the low Urals price ($60 per barrel) as applied in the second half of October, and that the resulting duty rate of $195 per metric ton should be used starting November 1.
The Finance Ministry's proposal was to use the first half of October (with the oil price of $79.4) for monitoring and not to violate the procedure providing for the revision of duties once every two months (as established by the Law On Customs Tariffs). Thus, the new duty of $287 could be introduced only on December 1.
It was up to Mr Putin to choose between the two options. "In keeping with the Prime Minister's decision, oil export duty will amount to $287.3," said First Deputy Prime Minister Igor Shuvalov, summing up the results of the debates. He said the cut was substantial but admitted that the oil sector had hoped for an even better result. "The decision is well-balanced. We must also think about federal budget revenues," Mr Shuvalov emphasised. The Prime Minister also talked about the need to save funds on October 31.
According to Alexander Sakovich, deputy head of the Finance Ministry's customs payments department, the new duty rates will allow oil companies to save 51 billion roubles ($1.88 billion): 40.5 billion roubles on oil exports and 10.5 billion roubles on petrochemicals exports. Note that the duty applied in October was also cut. In September, the Government decided to cut the estimated oil export duty of $485.5 to $372.2 per metric ton, which allowed oil companies to save over 140 billion roubles. However, oil prices continued falling, causing companies to complain to the Government (see the Kommersant issues from October 17 and 23) about losses of $100-$120 per metric ton of exported oil, even with the cut duty rate.
Rosneft, LUKoil, TNK-BP, and Surgutneftegaz refused to comment on the Government's decision. Gazprom Neft said that, despite the cut duty rate, the company would continue to suffer losses from oil exports. In the final count, this may force it to reduce oil production.
Denis Borisov, an analyst with the Solid investment company, has calculated that in November, oil companies will pay $50 per barrel of oil in the form of mineral tax and duties (note that on November 4 Urals crude cost $59.4 per barrel). The margin will merely allow big companies to compensate for their oil production and transportation costs, the expert said.
Yelena Korzun, head of Assoneft, is convinced that small and medium-size companies will operate at a loss and their oil production costs will be higher. According to her, small companies have already begun to cut their oil production.
The Government's hastened move to introduce new duty rates creates legal grounds for questioning the legitimacy of its decision. Under the Law On Customs Tariffs, duties on oil and petrochemicals are "established for a term of two calendar months."
The previous amendment took place on October 1, and the next one could have happened only on December 1 under the law. The law also provides for a period of a month to pass between the completion of the monitoring and the introduction of new duty rates, which means that the new duty rate cannot be applied starting November 1.
However, a source at a major oil company told Kommersant that oil exporters had already received guarantees from the Government that they would not have "any legal problems" related to non-compliance with law.
The Government's Press Service reported that the Prime Minister had also signed instructions to the agencies concerned to draft proposals on a new formula for the customs duty rate, tied to the market price. It is not yet clear what mechanism they will choose. In order to mitigate the effect of the so-called "Kudrin scissors" (the measure providing for the payment of high duty rates when the prices are falling, and vice versa), it was proposed to calculate the duty on the basis of monthly, biweekly, and even daily prices.
However, last week, Urals crude prices overcame the downward trend (they did not fall below $60 per barrel) and began to rise.