Russia Said to Forgo $6.7 Billion of Oil Revenue for Investment

Aug 21, 2014 12:53 pm ET

Aug. 21 (Bloomberg) -- Russia may lose as much as 240 billion rubles ($6.7 billion) of oil revenue next year after the government chose a three-year tax plan favored by crude producers, according to two state officials.

Deputy Prime Minister Arkady Dvorkovich picked the lower of two proposed oil output tax rates, leaving an additional 55 billion rubles in producers’ pockets, the officials said, asking not to be identified because discussions were confidential. Dvorkovich, who made his choice to encourage investment, met today with government and business representatives to set the rates before the budget is sent to parliament.

Russia, the world’s biggest energy exporter, is trying to balance the interests of producers and the budget with the $2 trillion economy on the brink of recession amid a standoff with the U.S. and Europe over Ukraine. Oil taxes provide about 45 percent of the country’s budget revenue.

The oil companies got what they wanted, one of the people said. The Finance Ministry had proposed a higher increase in the extraction tax than the one that passed, which would have lowered the budget losses to 185 billion rubles next year, according to the person.

Producers’ Benefits

Dvorkovich approved next year’s extraction tax rate at 765 rubles per metric ton of oil, rather than the 775 rubles that the Finance Ministry included in a draft plan published on a government website yesterday, according to the officials.

The main points of the plan were agreed on today and the ministries will now adjust their budget calculations during the next 10 days, Aliya Samigullina, Dvorkovich’s spokeswoman, said, declining to elaborate. There is now a minimal chance for significant changes in the rates, while the estimate of lost revenue may be cut, according to the official.

State-run OAO Rosneft, which pumps 40 percent of the nation’s oil, may boost earnings before interest, taxes, depreciation and amortization by about $1 billion next year because of the new tax plan, two government officials said before the meeting.

OAO Lukoil, Russia’s second-largest oil producer, may also add about $1 billion to Ebitda, oil analysts at VTB Capital in Moscow said in an e-mailed response to questions.

Rosneft gained 0.6 percent, while Lukoil shares rose 0.8 percent. The Micex Index advanced for a 10th day on bets that President Vladimir Putin’s meeting with his Ukrainian counterpart, Petro Poroshenko, on Aug. 26 will help reduce tensions that have led the U.S. and European Union to impose sanctions against Russia.

New Plan

Russia is bringing its oil export taxes in line with those of Kazakhstan, one of its two customs union partners and the second-biggest producer in the former Soviet Union.

To comply with Kazakhstan’s rates, the government in Moscow is lowering export duties on crude and refined products, compensating by accelerating increases in the extraction tax. Export duties will continue to decline in 2016 and 2017, except for fuel oil, which will rise to 100 percent of the crude tax by the last year of the plan.

A three-year tax plan approved in 2013 and calling for the fuel oil duty to reach 100 percent next year, would have been a shock for the industry, which still produces a significant amount of heavy products, another government official said.

As well as increasing the extraction tax and lowering most export duties, the three-year plan will also cut gasoline excises to prevent jumps in domestic prices.

‘Complex Construct’

Russia’s finance and energy ministries have been trying to reach a compromise on the rates with oil producers since at least May.

While all companies may gain about $3 per barrel in output by 2017 because of the new plan, their refinery profits depend on upgrades, said Denis Borisov, director at Ernst & Young’s oil and gas center in Moscow.

A hypothetical refinery in central Russia may have a negative margin in three years if fuel oil accounts for more than 20 percent of its production, Borisov said today by e-mail. It now makes up 27 percent on average, he said.

The tax plan is a “complex construct,” which cuts the budget by 200 billion rubles in 2015 and then brings in 50 billion to 70 billion rubles a year, Finance Minister Anton Siluanov said in June. The ministry has since cut the estimates for additional state profit in 2016 and 2017 to a range of 4 billion to 10 billion rubles a year, one of the officials said.

“The discussion over the new tax regime for the oil industry is gathering steam and, with half a dozen different proposals, the final shape is starting to crystallize,” Alexander Donskoy, an oil analyst at VTB Capital, said by phone.