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Russia to use Dated Brent in tax calculations to protect state budget from Urals discount


New baseline fixes maximum discount to Brent

Urals trading at major discounts since Russia invaded Ukraine

New law also includes tax break for hydrocarbons produced in Yamal

  • Author
  • Rosemary Griffin    Elza Turner
  • Editor
  • Alisdair Bowles
  • Commodity
  • Natural Gas Oil Metals

The Russian parliament Feb. 16 approved the use of a maximum discount to the Dated Brent crude oil benchmark, rather than the Urals price, in calculating domestic oil taxation from April.

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The move is a bid to mitigate the impact of lower prices for Russian oil on the state budget. Russia's key crude grade Urals has traded at sizeable discounts to Dated Brent since the invasion of Ukraine last February, which triggered wide-ranging sanctions and a shift away from Russian oil among traditional buyers in Europe.

Russia's move to base oil taxation on a major international benchmark instead of assessments of its own crude comes at a time when its oil industry is becoming increasingly disconnected from areas of the global oil trade.

Russia's new rules cover mineral extraction tax and excess profit tax levied on oil production.

The new legislation sets limits on the Urals discount used as a baseline for taxation. If Urals is trading at a greater discount to Dated Brent than $34/b in April, then the MET and EPT will nevertheless be calculated based on a $34/b discount. This limit will be set at $31/b in May, $28/b in June and $25/b from July until the end of the year, the State Duma said in a statement.

Platts assessed Urals at $45.45/b ex-Primorsk on Feb. 15, putting it at a $38.05/b discount to Forward Dated Brent, according to data from S&P Global Commodity Insights. On Feb. 23, 2022, the day before Russia invaded Ukraine, the discount was $8.10/b.

The finance ministry expects the changes to generate around Rb600 billion of extra revenue, equivalent to around $8 billion at the current exchange rate. The new regulations require presidential approval before coming into force.

Local media reports said that the change may also be applied to Russian crude export duty, which is currently based on Urals. Market sources said however that they expect the export duty, which under current plants is set to fall to zero in 2024, will continue to be calculated off the Urals price.

The new legislation also changes the formula for calculating the damping mechanism for gasoline and diesel, which will result in lower compensation paid to refiners when export prices exceed domestic prices. However, that will be partly offset by using Brent and a fixed maximum discount for calculating the crude excise refund that is paid for every ton of processed crude oil, according to sources.

In a boost to oil producers, the new law also includes a Rb1.1 billion deduction in MET levied on hydrocarbons produced in the far-north Yamal region.

"The deduction will be provided in the taxation periods from April 1, 2023 to March 31, 2029 in the amount of financing the cost of developing infrastructure necessary for transporting liquid hydrocarbons produced in Yamal," the Duma statement said.

Developing oil and gas production exports in Russia's resource-rich northern regions is a major government priority. Output can be shipped via the Northern Sea Route, which runs through Russian territorial waters in the Arctic and is quicker and cheaper than traditional supply routes. This is a key part of Russia's plan to ramp up exports to Asia and mitigate the impact of dwindling supplies to Europe.

Risk of further output fall

"The key risk that the tax shift carries is for oil production to slump further as producers struggle under a double whammy of higher taxes and deteriorating market fundamentals," Paris-based international financial crime analyst George Voloshin said.

This could add to sanctions pressure which is expected to grow in 2023, as embargoes on most seaborne Russian oil and oil products imports to the EU and price caps impact Russian producers.

Russian Deputy Prime Minister Alexander Novak said Feb. 10 that Russia will cut crude oil production by 500,000 b/d in March. Analysts forecast a similar drop in output.

Russian output was 9.85 million b/d in January, according to the latest Platts survey by S&P Global Commodity Insights. This was down 10,000 b/d on the month, and 260,000 b/d below February 2022 levels.