Octane-Based Excise Taxes on Gasoline Slammed

A government plan to differentiate gasoline excise taxes based on fuel quality will raise the tax burden for the country's oil companies, benefiting only a few firms owning sophisticated refineries, analysts said.

Troika Dialog brokerage said the Finance Ministry's proposal could raise the tax burden for the oil industry next year to $4.9 billion, or $260 million more than it would otherwise pay. By 2010, the industry may end up paying an extra $1 billion.

"The Finance Ministry seems either to be living in a dream world or is not supportive of the oil industry to propose such measures," Troika said in a research note.

The ministry has proposed reducing the excise tax on high-octane gasoline of Euro 4 and 5 standard by 12.6 percent, while increasing the tax by 7.5 percent on Euro 3 standard gasoline from 2010, Interfax reported Tuesday.

It said the ministry proposed raising the tax for gasoline with lower octane numbers of 92 and 80 by 7.5 percent and 46.8 percent, respectively, from 2009.

The current rates, introduced in January 2005, are $153 per a ton of high-octane gasoline and $112 per ton of low-octane gasoline.

"With current prices at the pump, we very much doubt that oil companies will be able (or allowed, for that matter) to pass the tax increase on to the end consumer, especially agricultural ones that use mainly low-octane gasoline," Troika said.

Analysts at Deutsche Bank and UniCredit said the measure, designed to stimulate the production of more value-added and environmentally friendly oil products, could be positive for companies with more sophisticated refineries.

"We expect the changes to have a positive effect on those companies which have already modernized their refineries, such as LUKoil, TNK-BP and Gazprom Neft," Deutsche Bank said in a research note.

"But other companies ... will have to make investments to improve the quality of refined products that they produce."

Alfa Bank said the suggested proposals, which are likely to have a negative short-term impact on oil firms, might be positive in the medium and long term.