Oil and Gas Sector Faces Inevitable Structural Reform

23 june 2015 | Rossiyskaya Biznes-Gazeta

The 13th biennial Moscow International Oil & Gas (MIOGE) Exhibition was opened at the ExpoCentre as an annual event demonstrating to both businessmen and industry experts the latest achievements in scientific research and implementation of advanced technologies of oil and gas extraction, processing, transportation and storage.

Victoria Gimadi
Victoria Gimadi
Department for Fuel and Energy Sector

According to the Head of Department for Fuel and Energy Sector of the Analytical Centre Viktoria Gimadi, quoted by Rossiyskaya Biznes-Gazeta, the situation in the industry is not at all rosy, the oil sector being confronted with three key problems. One of these is the large share of semi-crude oil products delivered by Russia’s outdated refining facilities and subsequently exported for the most part for further processing at Europe’s refineries. The second is the constantly decreasing oil production at the traditional oilfields of Western Siberia, the need to tap hard to recover reserves and to start work at new oilfields of Eastern Siberia, the Far East and the continental shelf (this means the Siberia Arctic shelf as well), which involve way more difficult production and transportation conditions, and to increase the oil recovery rate at the operating currently fields. And finally the third problem is the slow growth of the demand for oil and oil products at markets that Russia traditionally counted upon (the domestic market and the European countries' market) and the need to switch to more promising Asia Pacific markets. “This sector is therefore facing the task to improve the quality of petroleum refining (on account of the government’s tax measures promoting specifically the upgrade of refineries on the part of companies), reduce costs at new oil fields (owing, among other, to tax incentives) and to search for new markets, as well as promote eastward development of its oil and oil products delivery and export,” Ms. Gimadi said.

As for the gas sector, now the key problem is the slumping demand for natural gas in foreign markets (for example, Italy or Ukraine). The domestic market is not promising any sharp consumption growth either, the expert considers. The biggest challenge here is in large investment projects (LNG refineries, new oil pipes and oil fields) the implementation of which will require significant investments. “And, - alas! – in dealing with these problems we are  partly restrained by the current financial and technological sanctions: oil and gas companies need significant investments and, in some cases, foreign technologies to implement the above-mentioned“, Ms. Gimadi added.

It is clear that a structural reform of the oil and gas sector is inevitable. “The oil sector must make up its mind as to the choice of taxation system to be used henceforth. Such may involve keeping the mineral extraction tax and resorting as a result to regular tax manoeuvres, or it may mean changing the taxation system altogether, like, for example, opting for taxation of the financial result instead. Each of the taxation options available has its advantages and disadvantages alike. For instance, administration is an easier task with the mineral extraction tax in place, that is, aside from the impressive amount of incentives and allowances, the tax on financial result is also more effective in terms of keeping account of the expenditure amounts and costs run at different oil fields, nor does it require the creation of a sophisticated system of allowances and exemptions from the basic system of taxation regulations. A stable taxation system will make it possible to create incentives for the oil industry’s progress along the planned path, but the actual principles of the industry’s operation will remain unchanged”, Head of Directorate for Strategic Research in Energy at the Analytical Centre Alexander Kurdin said in an interview to Rossiyskaya Biznes-Gazeta.

According to him, the gas sector is confronted with the need to implement much more fundamental structural changes: the task is to choose a market system to be used henceforth. So far, market participants and regulators are lacking a single, consistent concept of such model for the future. “This is first of all about choosing a pricing pattern – will the practice of controlling gas prices persist or will the choice be in favour of transition to uncontrolled prices, while regulation will only be applied to main gas transportation pipelines. Secondly, we have arrangement and the cost of access for all market participants to the pipeline transportation and to the export channels on the agenda. The existing system is widely criticised by the experts,” Mr. Kurdin stressed in his interview.

Another challenge for the oil and gas sector is the implementation of the import substitution programme. Experts of the Analytical Centre noted, however, that total substitution of foreign equipment or products with domestic production is not what is to be expected, and that is why the stipulated objectives are fairly attainable. “In some areas it is unreasonable to expect that total independence from foreign partners when it comes to technology can be achieved: that is when it comes to development of hard to recover reserves and to specific aspects of petroleum processing,” Mr. Kurdin considers, “yet in actual practice, of much greater importance is the implementation of the commissioning of new capacities in equipment production intended not only the domestic market, but for export as well which will enhance the competitiveness of the production, making its manufacturers important participants of the global markets, thus mitigating the risks of more severe sanctions.”