Russia Considering More Significant Changes to its Upstream Oil and Gas Fiscal Regime, According to a New Study on ASDReports

Tuesday 17 February 2015, Amsterdam

Russia’s upstream fiscal regime has undergone key changes in 2014, with a revamped Mineral Extraction Tax (MET) for gas fields and significant incentives introduced for offshore developments, and more important measures affecting oilfields may follow.

The company’s latest report, now available on ASDReports, states that Russia’s Ministry of Finance has already started to implement a gradual shift of the tax burden from export duty on oil to MET. Current legislation means that export duty will be reduced from 59% to 55% by 2016, and the base rate of the oil MET is set to increase from RUB495 ($13)/tonne to RUB559 ($15)/tonne. This base rate is multiplied by a number of other coefficients, including a price factor of around 10.

However, there have been reports of a more substantial change from 2015, which would reduce the oil export duty to 42% in 2015, 36% in 2016 and 30% in 2017, while at the same time increasing the base rate of the oil MET to RUB775 ($21)/tonne, RUB873 ($24)/tonne and RUB918 ($25)/tonne in each of these years, respectively.

This report says: “These changes may improve the profitability of oilfield developments from which the majority of production is exported, given the current price differential to the domestic market.

“The shift in tax burden would also increase the effectiveness of some incentives, such as regional MET holidays and reduced MET for depleted fields, heavy viscous crude and unconventional oil.”

However, even if these changes are introduced, recent experience with the Russian government’s fiscal policy suggests that further amendments could be made, while incentive measures will continue to proliferate, according to the report.

The report comments: “The requirement for tax breaks in order to render certain projects profitable might be even more pronounced if the proposed MET increases are put in place.

“However, any new targeted incentives are only likely to be available for projects that have strategic importance for the government, either from an economic or political perspective. In particular, special incentives for projects supplying China and other Asian markets may become more common.”