Oil Tax Plan Would Ease Burden on New Fields

The majority of new oil projects in Russia will not be profitable even with oil prices at $150 per barrel, according to an Energy Ministry proposal on how to reduce taxes at undeveloped fields.

Based on data from oil companies, the ministry determined that under the current tax regime most new oil projects would not be financially viable. Of the nearly 10 major deposits, just three would make sense to develop and even then only with a Urals crude price of no less than $60 to $90 per barrel.

Without additional tax incentives for new fields, Russian firms will produce 40 million tons less crude in 2013 than they did last year, the ministry said.

Energy Minister Sergei Shmatko promised oil firms a new taxation system in February, saying at the time that the development of 94 percent of new fields would be unprofitable under the current tax system and low oil prices.

For undeveloped deposits, taxes will be taken from the real accumulated income, or more simply, from the company's excess profit, Shmatko said.

Officials raised the idea of a tax on additional income after oil prices collapsed late last year. The export tariffs were not dropping quickly enough to keep up with plummeting crude prices, and in October oil companies were reporting losses of $120 to $140 per ton of exported oil.

The mineral extraction tax could be canceled for new fields or could be calculated based on production and transportation costs rather than on volume. In return, a new tax on additional income could be implemented, the Energy Ministry proposal says.

The Energy Ministry has submitted it to an intergovernmental group that will need to develop a consensus version, a ministry spokesman said.

Deputy Finance Minister Sergei Shatalov said Wednesday that it would be "good" if the government were able to rework the taxation system this year. The main task is to "minimize the taxes on the initial and final phases of the development" and to "collect more when the field is producing more," he said, Interfax reported.

Under the Finance Ministry's proposal for tax policy until 2012, a tax on additional income would take effect no sooner than 2011 or 2012, with the rates ranging from 15 percent to 60 percent.

Russia is one of the few countries with export tariffs for the oil and gas sector, said Simon Wardell, energy analyst at IHS Global Insight. Switching the tariffs, which fluctuate with the price of oil, in favor of another tax would allow Russian companies to plan more effectively, he added.

From January to April, the federal budget took in 2.2 trillion rubles ($70.5 billion), 11.5 percent of which was from oil export duties and 9 percent from the mineral extraction tax on crude. But the Energy Ministry's proposals will not likely lead to a noticeable decline in budget revenue, said Alexandra Suslina of the Economic Expert Group.

"Some of the new fields have already received holidays on the mineral extraction tax -- no one was expecting an increase in tax revenue from them," she said.