Major Tax Maneuver Targets Large Companies

7 february 2017 | Rossiyskaya Gazeta

The tax maneuver the government has been implementing in the oil industry since 2015 turned out to be a better fit for vertically integrated companies, i.e. major business and state-owned players. Independent oil and natural gas producers, including small ones, are finding it more of a challenge to adapt to new tax rules, primarily because some of them, as opposed to VINCs do not export their products, and their operations focus mostly on diligent development of minor deposits. Those are the conclusions that Analytical Center experts draw in their monthly energy bulletin, writes the Rossiyskaya Gazeta.

Daria Nester
Daria Nester
Department for Fuel and Energy Sector

The tax maneuver reduces the export tariff on crude oil (down to 30% in 2017), while raising the tax on the extraction of natural resources (up to RUB 919 per ton). The readjustment of these rates aims to increase the depth of oil processing. The greater is the oil processing depths, the more petroleum products are made from each ton of raw materials, the bulletin notes.

"The idea behind the tax maneuver is to stimulate production with a view to increasing budget revenue. But under the current conditions it is the big vertically integrated companies that gain from it since they have diversified operations that include both production and processing and exports," the Analytical Center expert Daria Nester told a correspondent of the newspaper.

But if the new changes in the taxes push independent oil companies to the brink of bankruptcy, will the big vertically integrated companies be able to take up the slack after the small companies' production drops? "They sure will be able to do that, but because of the particular character of their work, it is unprofitable for them to develop small deposits. In the meantime, small independent oil companies have been very effective at extracting hard-to-recover hydrocarbons, as well as working with low margin deposits or squeezing profit from the assets that big vertically integrated companies leave behind," the analyst explained.

In addition, small independent companies focus on in-depth exploration, which stimulates more efficient use of natural resources, increases the amount of usable deposits and drives the development of advanced technologies. Thus, in the US and Norway it is small independent oil companies that are driving competition in the industry by deploying innovative technologies to get a competitive advantage, the expert pointed out.

In the face of the tax maneuver and the possible reduction of the export tariff on crude oil to zero in the future, small independent oil companies may eventually get partial compensation for the losses they stand to incur in the form of additional tax deductions on geological exploration and regional tax breaks for the development of hard-to-recover hydrocarbon deposits, as has already been done in Tatarstan, Ms. Nester believes.

Source: The Rossiyskaya Gazeta