Russia Proposes Tax Relief for Oil Industry

Russia's energy ministry has proposed measures to provide financial support to the country's energy industry, which has been hit by Western sanctions and a voluntary severing of trade and investment links in response to the invasion of Ukraine.

The initiative is mainly focused on changes in taxation of the industry, which is a crucial pillar of Russia's economy and a major source of revenue for the government.

Upstream

On the upstream side of the industry, the ministry's plans envisage changes in the mineral extraction tax (MET) to help oil producers, which have been trying to maintain prewar levels of production and exports by offering discounts of up to $30 per barrel.

The proposal is to base MET payments on the actual price that a producer receives for the crude oil that it sells, rather than assessments of market prices.

Russian oil companies currently pay MET based on the average monthly selling price for the country's Urals crude blend in the international market. The price in US dollars is then converted into rubles at the applicable exchange rate.

The value of the ruble is currently worth about 26% less in dollar terms than in mid-February.

Analysts at VTB Capital said the ministry's MET proposal could "help companies to reduce the level of their tax burden in the current situation, when they have to sell oil at a discount to world crude prices."

Additionally, the ministry has proposed amending the formula for calculating the excess profit tax (EPT) for oil produced from West Siberian fields.

The EPT was introduced in 2019 for a limited number of fields as part of a plan to transform Russia's taxation of oil to a profit-based system from its revenue-based system, which currently remains largely intact.

Downstream

On the downstream side of the industry, the ministry has proposed allowing companies to delay refinery modernization programs for two years.

The government and the country's largest refiners signed an agreement last year that provided tax incentives to companies that pledged to make substantial investments by 2026 to upgrade refineries and increase the value of their output.

Additionally, the ministry has proposed waiving penalties for refiners if they fail to meet a government mandate to sell 11% of their gasoline output and 7.5% of their diesel via the St. Petersburg International Mercantile Exchange.

Companies usually exceed those levels, but it's still unclear how the backlash to the war in Ukraine will affect Russia's exports of refined products.

Separately, Russia's finance ministry has proposed postponement of planned amendments to the taxation of oil products.

The plan had been to change the so-called buffer mechanism, which compensates refiners for the gap between profits on exports of gasoline and diesel and profits on domestic sales of those products, which are typically less lucrative.

Under the buffer mechanism, refiners currently receive compensation that covers 68% of that gap for gasoline and 65% for diesel.

The plan was to raise the compensation rate to 83% for both gasoline and diesel, but because exports are currently so much more lucrative than domestic sales, the finance ministry believes the current compensation rates are generous enough.