Russia Introduces Sweeping Tax Changes to Upstream and Downstream Oil Industry

Strategic Insights -

Russia will introduce significant changes to its taxation of the oil industry on October 1, aimed at giving upstream players more room to breathe and making refiners shape up or cease to exist. The new "60-66" fiscal regime, a lower export duty on crude oil of around 7%, and a unified tax on products, will largely come at the expense of mazut fuel oil. However, analysts note that the monthly revision of crude export duties does potentially give the government the opportunity to deviate from the new system if needed. The changes are expected to have both winners and losers, with oil majors forced to invest in deeper refining complexes, while some small refiners making their living on mazut exports may disappear.

Key Takeaways:

  • The new "60-66" fiscal regime will give upstream players more room to breathe and make refiners shape up or cease to exist.
  • The crude export duty will be cut to 60% of the difference between the price of Urals and $25, with product duties calculated at 66% of the crude duty.
  • The tax on all products except gasoline will be levied at 66% of the crude duty, while the prohibition on export duties on gasoline remains in place.
  • The changes will largely come at the expense of mazut fuel oil, which will be taxed much more heavily from next month.
  • Analysts believe that a complete overhaul of Russia's tax system is required to help avoid crude production decline.
  • Oil majors will be forced to invest in deeper refining complexes to get high-quality light products, which are more profitable to send abroad.
  • Bashneft, a regional producer, could lose some $180 million due to the tax amendments, while Tatneft may seek compensation if it decides to boost its downstream capacity.
  • Alliance Oil may suffer in the short term, but its upgrade of its Far Eastern Khabarovsk refinery will eventually make it the Russian oil name with the lowest dark product yield.
  • The Russian government will be able to offset any negative impact on tax revenues by hiking the mineral extraction tax (MET) on gas.

Statistics:

  • Crude export duty will be cut to 60% of the difference between the price of Urals and $25, down from 65% (EIF Aug.24'11).
  • Product duties will be calculated at 66% of the crude duty, down from 67% for light products and 46.7% for heavy products.
  • Mazut fuel oil will be taxed much more heavily from next month, while the tax on gasoline will remain prohibitive until further notice.
  • Bashneft could lose some $180 million due to the tax amendments (EIF Sep.14'11).
  • Tatneft may seek compensation if it decides to boost its downstream capacity.
  • Alliance Oil's upgrade of its Far Eastern Khabarovsk refinery will eventually make it the Russian oil name with the lowest dark product yield.
  • Russian crude exports could surge by 400,000-500,000 barrels per day once the new duties take effect (Deputy Energy Minister Sergei Kudryashov).
  • Analysts estimate extra exports at 60,000-300,000 b/d (Troika Dialog's Valery Nesterov), or 300,000 b/d (Bank of Moscow's Denis Borisov).
  • Russian budget assumes an average Urals price of $100/bbl in 2012, total inflows of 11.8 trillion rubles ($364 billion), $97/bbl in 2013, and $101/bbl in 2014 (Russia's finance ministry).

Sources:

  • EIF (The Energy Intelligence Forum) Aug.24'11
  • EIF (The Energy Intelligence Forum) Sep.14'11
  • Otkritie
  • Vladimir Putin (Prime Minister of Russia)
  • Sergei Kudryashov (Deputy Energy Minister of Russia)
  • Valery Nesterov (Troika Dialog)
  • Denis Borisov (Bank of Moscow)
  • Artem Konchin (UniCredit)
  • Vadim Mitroshin (Otkritie)