Russia abandons tax incentives for extra viscous oil fields while still favouring Arctic developments
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Russia abandons tax incentives for extra viscous oil fields while still favouring Arctic developments

By GlobalData Energy 07 May 2021 (Last Updated May 18th, 2021 16:04)

Historically, all the upstream acreage in Russia had been granted in the form of mining concession agreements to Russian companies, except acreage granted under the three PSAs signed between 1994 and 1995.

Historically, all the upstream acreage in Russia had been granted in the form of mining concession agreements to Russian companies, except acreage granted under the three PSAs signed between 1994 and 1995.

A signature bonus, excess flaring and annual rental fees are payable for concession licenses, which in most cases are awarded through open auctions. Export duty is payable with oil rates depending on the Urals price and a 30% marginal rate whilst the rate for gas is set at 30% (excluding LNG). Mineral Extraction Tax (MET) is payable on all extracted hydrocarbons except for associated gas, with rates depending on factors such as field location and size, the complexity of deposits and the Urals price. The Tax on Additional Income (NDM) is a relatively new tax system introduced in 2019. It’s optional and is only applicable if subsoil plots meet certain criteria in any of the five NDM’s categories. Under the NDM, subsoil plots are taxed on their taxable income at a rate of 50% while MET is paid at a reduced rate. Other taxes of Russia’s fiscal regime include VAT and corporate income tax at 20%, import, property and land taxes.

When compared to other regional producers for comparative development, the Russian regime is only competitive when there are incentive schemes applied. The standard regime that applies MET and export duty at the full rate can be seen to command the highest level of state take compared to regional peers. However, with various regional benefits included, the regime can be brought closer to the other regions. For Arctic offshore exploration the current incentives make Russia the most competitive, but restrictions on participation limit the Russian offshore to Gazprom, Rosneft and Zarubezhneft.

The regressive elements within Russia’s fiscal regime increase state take when price decrease and cost increase, although the rate varies depending on the region and the commodity. The change for gas is much evident than oil due to the fixed export duty rate applied to gas.

Russia’s new fiscal changes related to the abandonment of MET incentives for extra-viscous and depleted fields (effective as of January 1, 2021), as well as the phase-out of Export Duty and the introduction of the Tax on Additional Income (NDM) during the last few years, aim to protect Federal revenues and simplify the regime. The changes have the potential to cause widespread disruption in the project economics of extra viscous oil fields. Instead, they incentivise high capital and greenfield developments in the Russian Arctic. Although the Ministry of Finance is currently working out their potential inclusion of extra viscous oil fields under one of the existing NDM categories, this is not expected to be implemented prior to 2024, the year in which the OPEC+ deal expires.

Enforced sanctions by the EU and the US and structural changes in the energy sector of Russia’s key markets such as the EU and China with the acceleration towards low-carbon energy technologies are a few of the long-term challenges for Russia’s oil and gas sector.

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