Moscow mulls tax breaks for fields with high water cut

03 August 2017, Week 30, Issue 942

The Russian Energy Ministry intends to submit a bill to the government proposing to cut mineral extraction tax (MET) by 50% at oilfields that contain a lot of water.

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Deputy Minister Alexei Teksler was quoted as saying by Russian business daily Kommersant that the draft law would apply to fields in the Khanty-Mansiysk region containing more than 110-115 million tonnes (806 million barrels) of oil, as well as deposits in Yamal-Nenets with more than 90 million tonnes (660 million barrels). They will also need to have a water cut of over 85% and a depletion rate of 50-80%, Teksler noted.

These requirements narrow down the deposits eligible for the tax break to Samotlor (owned by Rosneft), Fyodorovskoye (Surgutneftegaz), Sutorminskoye (Gazprom Neft) Tevlinsko-Russkinskoye (Lukoil) and Vatinskoye (Slavneft).

The bill is likely to meet resistance from the Russian Finance Ministry.

“This is in fact destructive for the whole taxation system,” a spokesperson for the ministry told Kommersant.

According to the representative, even the oldest of Russia’s brownfields enjoy a MET discount of no more than 25%, while deposits with a high water cut are given a break of just 15-17%. The spokesperson stressed that a 50% cut was economically unsound, claiming that the federal budget could lose out on 130 billion rubles (US$2.17 billion) per year in tax revenues if the bill were passed. A larger break at Samotlor alone would cost the Russian treasury some 70 billion rubles (US$1.17 billion), the representative warned.

According to Teksler, the Finance Ministry raised its estimate for lost tax receipts at Samotlor to 83.5 billion rubles (US$1.39 billion) at recent government meetings. “We think that these estimates are too high, as the Finance Ministry calculates production figures for the field on the basis of five-year-old technological plans,” he said. “These plans have already been de-facto revised owing to changes in macroeconomic parameters and geology.”

Tekskler claimed that output growth at the five fields within three years of the lower MET rate being applied would more than offset the short-term loss of tax revenues.

Moscow has been steadily expanding its use of tax breaks in a bid to maintain production levels at mature and technologically challenging fields. Around 197.6 million tonnes (3.96 million bpd) of oil produced in Russia last year received discounted tax rates, equal to around 40% of national output. This was 7.5 times more than the volume eligible in 2007.

The Samotlor oilfield contains 25 billion barrels of oil, making it the largest of the deposits that could secure a lower MET rate under the new bill. Launched in 1969, the field ramped up production to 3 million bpd in the 1980s, although by 1996, output had slumped to just 300,000 bpd. The deposit was later acquired by TNK-BP, a joint venture between BP and a group of private Russian investors. Using enhanced oil recovery (EOR) measures, TNK-BP was able to lift Samotlor’s production rate to 600,000 bpd in 2009. Rosneft gained the field in 2013 through its US$55 billion takeover of TNK-BP. Output fell 4.7% in 2015 to around 425,000 bpd, according to Rosneft, and slumped by a further 4.1% in the first nine months of last year.

Joseph Murphy

Edited by

Joseph Murphy

Editor

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