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Crude-export duty

Renaissance Capital

20 June 2019

Russian oil & gas

In late 1998, the Russian government reintroduced export duties on hydrocarbon exports, having abandoned the practice at the request of the International Monetary Fund in 1996. The measure was introduced administratively, with no law backing it. At the outset, i.e., on 1 January 1999, the export duty rate was set at EUR5/t ($0.91/bl at the current euro/dollar exchange rate). This was raised to EUR7.5/t ($1.37/bl) with effect from 1 October 1999, while a rate of EUR15/t ($2.74/bl) came into effect on 1 January 2000.

From April 2000, the government introduced a sliding scale for crude export duties linking rates to Urals blend quotes. Subsequently, though, this was applied in a haphazard way. Specifically, from early 2001, rates that did not appear on the scale were applied in an effort to dollarise the scale and compensate for the slide in the value of the euro. In September 2001, however, the Law On Customs Tariffs was amended to establish the rates of export customs duties for crude oil based on the average price of Urals blend for the two preceding months, with the Urals crude oil blend price calculated as the price for the grade on world markets (Mediterranean and Rotterdam) for the two months immediately preceding the current two-month export duty period. The rates were revised as follows:

▪When the average price for Urals did not exceed $109.5/t ($15/bl) in the previous two months, then no export duty was levied.

▪If the price for Urals was $109.5-182.5/t ($15-25/bl), the threshold for export duty was set at 35% of the difference between the average price for Urals in the previous two months and $109.5/t.

▪If the price for Urals in the two previous months was $182.5-255.3/t ($25-35/bl), a cumulative threshold equivalent to 40% of the further difference between the average price for Urals in the previous two months and $182.5/t was applicable.

We note that the thresholds were set in dollars rather than euros. The new export duty thresholds were kinder at lower prices, but potentially more punitive at higher Urals prices than the haphazard scale that had been used previously.

In April 2004, as part of government efforts to tax the oil-extracting industry more heavily, amendments to the Law On Customs Tariffs were introduced. These came into effect on 1 August 2004, and meaningfully increased crude export duties:

▪No duty was payable below $15/bl Urals, as was the case previously.

▪The prior export duty rate (of 35%) was maintained with Urals at $15-20/bl.

▪However, this was accompanied by substantial rises above this. In particular, the rate climbed to 45% above $20/bl, vs 35% previously, and to 65% above $25/bl, vs 40% previously.

▪Effective 1 October 2011, the maximum rate was reduced to 60% as part of the so-called 60-66-90 tax regime, which sought to rebalance the tax burden between crude and oil products exports.

We note that following the 72% drop in global crude prices in 2H08, which seriously hurt Russian crude producers, the Russian government reduced the export duties lag, and crude export duties have been revised monthly since October 2008 (vs a two-month revision cycle previously).

In December 2013, the government approved the so-called tax manoeuvre, which envisaged rebalancing of the sector’s tax burden between export duty and MET, and between upstream and downstream. The 2013 plan was further accelerated in November 2014 and has resulted overall in a reduction in the maximum tax rate in the formula above to 59% from 1 January 2014, 42% from 1 January 2015, 36% from 1 January 2016 and

Government reintroduced export duties in 1998

2000 adoption of sliding scale turns it into a windfall tax

Capping returns at high oil prices

2013 saw the start of the tax manoeuvre, aimed at replacing export duty with a higher MET

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30% from 1 January 2017. With the final stage of the tax manoeuvre, adopted in August 2018 and in effect from 1 January 2019, the export duty rates will be gradually reduced to zero by 2024 and replaced with a higher mineral extraction tax, as detailed in Figure 132.

Renaissance Capital

20 June 2019

Russian oil & gas

Export duty is now set to expire from 2024

Export duty exemptions

From 1 December 2009, the government introduced a temporary export duty holiday on crude exports from East Siberia. Originally approved for 13 oil fields, the list was extended from 19 January 2010 to include 22 oil fields, although this change was rather theoretical given that only four fields were producing at the time. No timeline was provided for the duration of this tax holiday at the time it was introduced, and the rules have changed rather swiftly since July 2010:

▪The zero export duty regime has been abolished.

▪The new regime set the marginal export duty rate at 45% above the cut-off price of $50/bl.

The list of oil fields that are subject to a reduced export duty rate was subsequently expanded to include LUKOIL’s new fields in the North Caspian region (from January 2011) and Gazprom’s Prirazlomnoye field on the Arctic shelf (from 1 July 2012). The government also removed three fields (Vankor, Verkhnechonsk and Talakan) from the reduced tax regime, effective 1 May 2011.

New methodology was introduced from 2013, which formalised zero export duty rates for new offshore oil fields (launched after 1 January 2016) and introduced reduced export duty rates for other applicable categories of oil fields.

Zero export tax regime for new offshore oil fields (launched after 1 January 2016) has been developed in government Decree No. 443-r, dated 12 April 2012, and implemented in the Tax Code from 2013:

▪All offshore fields are classified into four risk categories depending on their geological and technological complexity, climate conditions, sea depth, distance from the shore and availability of onshore infrastructure. The first “easy complexity” category includes basic projects including those in the Azov and Baltic Seas. The second “intermediary complexity” category includes shallow parts of the Black Sea (less than 100 metres depth), Caspian, Pechora and White Seas, as well as the southern part of the Okhotsk Sea (to the south of the

55th parallel), including the Sakhalin shelf. The third “high complexity” category includes deep Black Sea (more than 100 metres depth), the northern part of the Okhotsk Sea (to the north of the 55th parallel) and the southern part of the

Barents Sea (to the south of the 72nd parallel). The fourth “Arctic” category incorporates Arctic projects, including those in the Kara Sea, the northern part of the Barents Sea (to the north of the 72nd parallel) and in the Arctic east (the Laptev Sea, East-Siberian Sea, Chukotsk Sea and Bering Sea).

▪Zero export duty rate is applied until 31 March 2032 for the first and the second categories, until 31 March 2042 for the third category, and indefinitely for the fourth category.

For all other oil fields, a unified methodology for granting export duty exemptions was introduced from 1 April 2013. From then on, any oil producer that fits the following criteria can apply for the reduced export duty rate for a limited duration, until a certain level of economic return has been achieved over the life of the project (IRR of 16.3%):

New methodology in place from 2013, separating exemptions…

… for new offshore fields…

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Renaissance Capital

20 June 2019

Russian oil & gas

▪The oil field must be located in a “new” production province, which includes East

Siberia, Nenets Autonomous District (Northern Timan-Pechora), the YamalNenets Autonomous District (to the north of the 65th parallel), Russia’s continental shelf, and the shelves of all internal seas, including Russia’s segment of the Caspian Sea.

▪Reserve depletion rate should be below 5%.

▪Initial recoverable crude oil reserves must be equal to or greater than 10mnt, if applied before 31 December 2013, or 5mnt thereafter.

The formula for the discounted export duty rate (in $/t exported) is as follows:
Discounted export duty = (Urals – 182.5) * 30% – 56.57 – Urals*0.14
or zero, if the formula yields a negative number
We estimate that this formula produces a negative result (which means a zero export duty
rate) until the Urals oil price is above $95.3/bl – a scenario we do not envisage in the
foreseeable future.
An additional export duty break was introduced for highly viscous crude (with viscosity of	… high viscous crude…
over 10,000 cP) from 1 July 2012, which was given a 90% discount to the statutory rate,
valid for 10 years but not later than 1 January 2023. In July 2013, the State Duma also
approved lower export duties for fields where the percentage of Tyumen suite oil
represents more than 80% in the total quantity of reserves (the percentage was reduced
to 75% 2017; and then this exemption was eliminated altogether from 1 January 2019).

As of the date of this report, the official list of oil fields that are subject to reduced export duty rates (as per the Federal Law No. 305-FZ On amending article 3.1 of the Custom Law of the Russian Federation, dated 3 August 2018) includes 15 oil and gas condensate fields, including:

▪For Rosneft: Srednebotuobinskoye, Vostochno-Messoyahskoye (50-50 JV with Gazprom Neft).

▪For Gazprom Neft: Novoportovskoye2, Vostochno-Messoyahskoye (50-50 JV with Rosneft).

▪For LUKOIL: Korchagina.

▪For Surgutneftegas: Vostochno-Alinskoye, Yuzhno-Talakanskoye.

▪For Slavneft: Kuyumbinskoye.

▪For Irkutsk Oil Company: Danilovskoye, Markovskoye, Zapadno-Ayanskoye, Ichedinskoye.

▪For Dulisma (operated by RusOil): Dulisminskoye.

▪For RusVietPetro: Zapadno-Khosedayukskoye.

▪For Independent Oil Company (NNK): Kolvinskoye.

▪For Ruspetro: Krasnoleninskoye (Vostochno-Inginskiy and Pottymsko-Inginskiy licence areas).

It is worth noting, that the level of tax exemptions will not change with the forthcoming abolition of export duties from 2024. Respective provisions of the Tax Code were amended from 1 January 2019 so that gradually lower levels of absolute export duty tax

2 Although included in the official list, this benefit is no longer relevant for Novoportovskoye field following its transition to the Excess Profit Tax regime from 1 January 2019

…and all other applicable oil and gas condensate fields, currently amounting to 15

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Renaissance Capital

20 June 2019

Russian oil & gas

breaks, associated with the tax manoeuvre are compensated by like-for-like gradually higher MET breaks, calculated under identical formulas.

Next steps?

With the export duty set to expire in 2024, we expect little change to the current formulas or the list of exemptions.

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