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Russia mulls fiscal changes to boost less-advantaged oil

Russia mulls fiscal changes to boost less-advantaged oil

The Russian government is discussing options with its largest oil producers to amend the country’s fiscal system to stimulate development of fields with difficult geology and those with heavy crude output. These more challenging deposits are viewed as key to supporting oil reserve replacement as ageing existing sites face decline over the next decades.

Russia government officials reported in December that growth in crude and condensate reserves in 2021 was more than 628mn t. The increase was largely achieved through additional appraisal work over the last 12 months on existing producing fields. With overall production levels in 2021 estimated at 517mn t, Russia has achieved reserve replacement above 100pc.

But there is disagreement on the sustainability of this replacement rate. At current production levels, there will be sufficient crude reserves in Russia for the next 58 years, in the view of Alexander Kozlov, the country’s minister for natural resources and environmental policy.

But officials within Kozlov’s ministry are of a different opinion. They see resources extending for only another 21 years unless Russia improves technologies for extracting crude from reserves with more complex geology. Western Siberia is seen as one of the most promising areas for research into such technologies, according to Yevgeny Petrov, acting head of the Federal Subsoil Resources Agency. But Kozlov warns that an absence of necessary infrastructure in western Siberia will pose a significant obstacle to developing new fields.

Tax breaks

Until last year, Russia’s oil operators were offered economic incentives for developing new projects with challenging geology or producing heavy crude. A tax discount meant zero export duties were applied to the latter, while heavy crude sent for exports was taxed at minimum levels. As a result, Russia’s Tatneft, for example, increased heavy crude production from 0.8mn t to 3.4mn t in the 2016-2020 period, taking its share in overall company output from 3pc to 13pc. Peer Lukoil has increased heavy crude output from its Yaregskoye and Usinsky sites from 56,000bl/d to 94,000bl/d.

But the favourable fiscal situation changed last year when the government abandoned export tax breaks, with an immediate chilling effect on heavy crude development. Russia’s autonomous republic of Tatarstan lost c.RUB30bn ($380mn) of 2021 budget revenues due to a fall in heavy crude production as a result of the cancellation of tax privileges, Rustam Minnikhanov, the republic’s president, told the state-owned Tass news agency in January.

The decision to abandon the tax breaks came after a rapid growth in volumes of crude produced on privileged fiscal conditions in recent years, says Kirill Rodionov, an expert at Russian thinktank the Fuels and Energy Technology Development Institute. By his calculations, from 2013 to 2019, the share of tax-advantage crude in Russia’s output almost doubled—from 26.7pc to 46.3pc.

“The way tax breaks are distributed is not transparent and, in many ways, depends on administrative weight of the companies,” says Rodionov, “A reform is needed that would fully abandon privileges on the mineral exploration tax.

“A mathematical model should be introduced, which would be a base to calculate the tax on grounds of physical and chemical qualities of crude, such as sulphur content and density, as well as location of sites in relation to presence of major pipelines in the area. Most of these parameters are already included in the licences for their sites, but they should be published in open sources,” he continues.

“Automatisation and transparency would, on one hand, make the industry’s fiscal policy flexible and, on the other, would simplify the administration of tax legislation, which is still becoming more and more fractured.”

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