the RUSSIA oil & gas competitive intelligence report - Report Buyer

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Russia Oil and Gas Competitive Intelligence Report 2010 Overview/State Role The oil sector is concentrated in the hands of several domestic companies, with limited direct IOC involvement. The biggest crude producers, exporters and refiners are state-run Rosneft and Gazprom Neft, plus privately owned Lukoil, Surgutneftegaz, TNK-BP and Tatneft. Following US major ConocoPhillips’ divestment of its 20% stake in Lukoil in 2010, BP is the only foreign palyer with a large interest in Russian oil producers through the TNK-BP JV. The oil pipeline system is managed by staterun Transneft, the gas trunklines by Gazprom. Foreign upstream oil ventures traditionally have been carried out through the Zarubezhneft state vehicle, although the main Russian producers are increasingly venturing abroad directly. Gas activities are controlled by national giant Gazprom, which dominates production and holds a monopoly on exports and, in practice, distribution. Restructuring has been discussed for years with little progress, although domestic gas prices are being very gradually adjusted to international levels, a process that started in the mid 2000s. There were plans to merge Gazprom with Rosneft, but the deal was abandoned. Licensing And Regulation There are three proposed changes to Russia's tax structure. First, from the beginning of 2011, Russia intends to increase the mineral extraction tax (MET) for both oil and gas production, with the increase in the gas MET having been set at 61%. The MET rate is currently RUB419/tonne, adjusted according to the price of Urals crude, the field depletion rate, and the US$/RUB exchange rate. The proposed MET increases will be inflation-adjusted. Second, Russia has proposed increasing the tax on refined products exports, by an amount equivalent to 60% of the crude export duty. The third and final measure being considered is an increase in the gasoline excise tax by RUB1 per litre over the period 2011-2013. On December 1 2009, the Kremlin scrapped export duty on 13 main East Siberian projects and all projects in the Black and Okhotsk seas. Rosneft said in November 2009 that it expects the tax holiday for East Siberian fields, which includes Vankor, Verknechonsk and Talakan, to last until 2013-2015, bringing significant savings to the industry. The government currently plans to end the duty in 2011. Meanwhile, the tax exemptions for Black Sea production have been granted for up to 15 years or until 20mn tonnes (146.7mn bbl) of oil have been produced, while tax exemptions for producers in the Sea of Okhotsk in the Far East would be granted for up to 15 years or until 30mn tonnes (220mn bbl) of oil have been produced. The oil export duty for fields elsewhere in Russia increased by 17% in December 2009 to US$271/tonne, equivalent to US$37.10/bbl. According to anonymous government and industry sources cited by Vedomosti in March 2010, the export duty holiday on the main East Siberian oil fields will remain in place in 2010 but may be revoked in 2011. According to Vedomosti's sources, the re-introduction of export duties on East Siberian crude would cost the major producers in the region, namely Rosneft, Surgutneftegaz and TNK-BP, over US$2bn in total. © Business Monitor International Ltd Page 7
Russia Oil and Gas Competitive Intelligence Report 2010 While the policy shift would reduce the profitability of the fields, it is unlikely to have an impact on the progress of East Siberian upstream developments in the short term. To stimulate projects in the Caspian Sea, Russia has exempted the first 730mn bbl of oil produced in the region from mineral extraction tax. However, Lukoil's president, Vagit Alekperov, has also been calling for an export tax holiday for offshore fields, the fiscal incentive currently enjoyed by operators in East Siberia. At the Yuriy Korchagin opening ceremony, Prime Minister Vladimir Putin said he would consider Alekperov's request and in July 2010 Lukoil said that it had reached a preliminary agreement with the finance ministry to halve export duties on North Caspian oil. Any lasting fiscal concessions, however, are unlikely. First, the Russian finance ministry is strongly opposed to any further loss of state revenue through concessions to oil companies. Second, the shallow waters in the North Caspian do not present the same logistical and technological challenges as the remote East Siberian deposits. Third, Lukoil, which would stand to be the main beneficiary of any further tax breaks, does not enjoy the same influence in the Kremlin as its state-connected rivals Rosneft and Surgutneftegaz, both of which are big East Siberian players. On January 1 2009, the Russian government reduced MET to encourage the reinvestment of corporate profits into E&P. The amendment to the tax code, agreed in May 2008, increased the tax-free MET threshold from US$9/bbl to US$15/bbl. According to the country’s Finance Minister Alexei Kudrin, this would allow oil producers to save over US$4bn annually. According to the Ministry of Natural Resources and Environment (MNRE), the MET and export duties account for about 95% of oil producers’ tax payments, with the tax burden exceeding 68% of their gross revenue. Such a revenue-based system is effective for rent collection and works well for mature projects with low finding, development and lifting costs but fails to encourage new developments. The ministry estimates that if Russia implements the new fiscal measures, the country could increase production to a sustainable 10.2mn b/d by 2013. If it does not reform its tax framework, however, its own projections show production falling to 9mn b/d by 2013. The structure of the tax regime was partly responsible for the fall in the country's oil production in 2008, the first annual decline in eight years, which occurred despite a 30% increase in upstream capex. In July 2009 the Russian government announced that it would not increase gas production and export taxes as had been earlier suggested by the Finance Ministry. Russia has been assessing ways to source extra cash to offset declining revenues in the recession. The Finance Ministry had therefore proposed to increase the tax on gas production from RUB147 (US$4.6) per thousand cubic metres (mcm) to RUB162/mcm and to increase the gas export duty from 30% to 35%. It was estimated that the government would yield an additional RUB60bn (RUB53bn via export tax and RUB7bn via extraction tax) through the suggested tax increases, most of which would be paid by Gazprom. © Business Monitor International Ltd Page 8
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