What concessions is the oil industry seeking from the government?
Amid the ongoing economic downturn and falling raw materials prices, the oil lobby is demanding tax breaks for the industry. Vedomosti has learned that Vladimir Putin might meet with oil industry representatives this week to discuss the possibility of replacing the mineral extraction tax (MET) and the oil export duty with a tax on windfall profits. Taken together, the current taxes account for one third of the country's budget revenues.
On February 12, Prime Minister Vladimir Putin will preside over a government meeting in the town of Kirishi, near St Petersburg, where oil industry related issues will be discussed with an emphasis on increasing oil production and the degree of conversion.
For the first time in a decade, oil production dropped by 0.7% in 2008, to 488 million metric tons. Lukoil's President Vagit Alekperov stated in an interview with The Wall Street Journal last week that oil production in Russia would continue decreasing unless the industry's tax burden is reduced. He believes the tax burden should be reduced by $10 billion for the industry to continue growing.
Oil industry officials are expected to raise the issue with the government during the meeting in Kirishi, officials from two state agencies and an oil company manager, involved in the preparations of the meeting, told Vedomosti. The meeting's agenda has yet to be finalised, the sources said, but it is likely that the oil industry's proposal on introducing a new tax on windfall profits will be discussed at the meeting.
The new tax could replace the MET and possibly reduce or even completely abolish the export duty on oil. Already in 2008, Energy Minister Sergei Shmatko spoke about the possibility of replacing the MET with a tax on windfall profits. The Ministry of Economic Development is ready to introduce the tax from 2010, another government official close to the discussions, said.
The MET and export duty on oil are the backbone of the federal budget, accounting for 3.1 trillion roubles, or 36% of the revenue (based on the figures for 11 months of 2008). Attempts have been made in the past to introduce an excess profits tax. In 1997, a bill introducing amendments in the Tax Code was rejected by the State Duma, and in 1998, a separate bill was not even considered.
An official involved in the Kirishi meeting preparations does not believe the new tax will be immediately introduced this time either. He added that, for the time being, the possibility of introducing the tax is only being considered with regard to new or very difficult to develop deposits such as offshore deposits or deposits in Eastern Siberia.
The concept of the new tax was described in the analytic materials prepared last year for one of the agencies involved in the discussion of the issue (Vedomosti has the documents).
According to these documents, the minimum tax rate on the profits from oil extraction is to be set at 15% and applied if a company's total profits exceed costs by 1 to 1.2 times. A maximum tax rate of 60% is to be applied if a company's profits exceed the costs by more than two times. The main argument against this plan is that it would be very difficult to calculate the tax and to verify the authenticity of the data, as companies would be tempted to overstate their expenses.
The Dow Jones agency reported yesterday, citing its own sources, that other oil industry proposals might also be discussed during the meeting, including the possibility of raising the MET application threshold from $15 to $25 per barrel, as well as the possible extension of the deadline for the transition to Euro-3 gasoline standards. The oil industry has long promoted the idea of differentiating the MET application based on the deposit's depletion level (the lower a well's production, the lower the tax), added another official.
Since Surgutneftegaz is the receiving party in Kirishi, government officials may as well agree with the company's proposals, one of the officials said. The former has been calling for the reduction of the export duty on oil from East Siberian deposits. After launching the Talakan deposit by Surgutneftegaz, Deputy Prime Minister Igor Sechin instructed the Ministry of Economic Development, the Ministry of Energy, the Ministry of Finance, and the Federal Tariff Service to examine the possibility of providing an export duty discount on the oil from the East Siberian deposits, Vedomosti was told.
Officials from the above Ministries concluded that there were no legal grounds for differentiating the East Siberian deposits, but in January, the Ministry of Energy received a letter from Deputy Prime Minister Sechin's office, urging the Ministry to find the necessary grounds, a source told Vedomosti (we could not verify this information yesterday).
According to an Energy Ministry representative, the second phase of the Baltic Pipeline System and certain oil processing issues will be discussed at the meeting in Kirishi. Representatives of the largest oil companies declined to comment.
Tangible savings
The Ministry of Finance estimates that with the current MET rate and the price of Urals crude at $30 per barrel, investment profitability in East Siberian deposits is 7.2%. It will increase to 14.5% once the windfall profits tax is introduced. If the price of Urals crude rises to $70 per barrel, the profitability will be 26.7% and 42.8% respectively.
Irina Mazneva