Russian New Oil Tax to Spur Production

Russian New Oil Tax to Spur ProductionRussian New Oil Tax to Spur Production

Russia took another step toward changing how it taxes the oil industry after its finance ministry proposed reducing its reliance on duties tied to crude production with a new levy on earnings.

The ministry sent this month a preliminary plan on new taxes to oil producers and officials, two people with direct knowledge of the matter said, who asked not to be identified because the matter is confidential.

The proposal would keep Russia’s export tax, reduce its production levy and introduce a charge of 70% on profit from oil projects, Bloomberg reported.

“Discussions will continue, but this is an important step forward,” Alexey Kondrashov, Ernst & Young LLP’s global oil and gas tax leader based in Dubai, said by phone.

“Russia taxes primarily oil production and export, thus heavily relying on a royalty-based system. The share of profit-based taxes is almost negligible,” which prevents development of more sophisticated extraction projects, he said. The world’s second-biggest oil exporter is seeking a tax system to spur development of distant or hard-to-recover resources amid falling production at fields set up mainly during the Soviet era.

Under the current system, which taxes oil revenue without accounting for costs, Russia may lose about 100 million tons of output in 10 years at its key West Siberia fields, Energy Minister Alexander Novak said in June.

Russia relies on crude for about a third of its budget income. Oil export duties and taxes on crude totaled $37 billion in the first seven months of the year, according to Russia’s Treasury. That’s down 16% from the same period in 2014 due to lower oil prices, as the nation is in its first recession in six years.

The oil industry is hopeful a new system “at least will not worsen the situation for fields with tax breaks and will improve it for the brown fields,” Leonid Fedun, vice president of Lukoil PJSC, Russia’s second-biggest crude producer, said on a conference call on Friday.

The Russian government ordered the preparation of tax proposals in June after its energy ministry offered to test its plan on 16 oilfields operated by the four largest producers: Rosneft OJSC, Lukoil, Surgutneftegas OJSC and Gazprom Neft OJSC.

The finance ministry expects a final decision on the system from the Kremlin, the Russian-language business daily Vedomosti reported.

Russia’s lawmakers may approve a plan as soon as this year, the paper said.