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FEATURE: Russian oil companies clash with finance ministry over tax changes

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FEATURE: Russian oil companies clash with finance ministry over tax changes

Highlights

Ministry looking to retrieve $2.67 billion in losses

Russian output may drop 2.5 billion barrels over 10 years

Moscow — Russia's finance ministry is hoping to pass a law amending the excess profit tax for oil fields as early as this fall, despite open opposition from oil companies warning of a potential long-term slump in production.

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Russian oil producing companies have been enjoying tax breaks on four groups of fields since 2019, when the government applied the EPT tax regime to boost greenfield development by primarily taxing profits from crude sales and reducing the role of mineral extraction tax and export duty.

Now, the finance ministry is proposing changes to correct what it has called "its biggest mistake", which allegedly resulted in a tax revenue loss of over Rb200 billion ($2.67 billion) last year, according to its calculations.

"We will submit a draft law to revise the EPT parameters in any case. We plan to submit it to the government in the next two weeks," deputy finance minister Alexey Sazanov told reporters Sept. 8, as cited by TASS.

The proposed tax amendments will mainly target the first two groups of oil fields -- in East Siberia and fields qualifying for export duty relief.

"This would increase the tax burden for the second group of fields to higher than if they didn't receive tax breaks," Mitch Jennings, Sova Capital's oil and gas analyst, told S&P Global Platts.

"I would expect that a change would again make investment in these greenfields less attractive," he added.

Future oil output at risk

Not surprisingly, Russian oil majors have not been enthusiastic about the idea of yet another tax change, which they argue will undermine their investments.

Rosneft and Gazprom Neft, which stand to lose the most from proposed amendments, have both openly resisted the change whenever it has been proposed previously.

Rosneft CEO Igor Sechin even appealed to President Vladimir Putin for help during their latest meeting on Aug. 18.

"We need a stable tax regime that would allow us to plan the economy of this company for at least 30 years," Sechin told Putin.

Along with other Russian oil companies, they wrote an official letter to Putin, seen by Kommersant daily, arguing that changes to EPT will cause Russia to lose 340 million mt, or 2.5 billion barrels, of oil production in the next 10 years and give its market share to Saudi Arabia and the US.

Although the amendment process is "in the final stage," according to Sazanov, oil companies are still gathering support against the move.

Help may come from energy minister Alexander Novak, who dubbed the current EPT regime "effective" and instrumental in stopping output decrease at those fields eligible for tax breaks.

"It is important to consider this factor further when assessing the current tax system and its further improvement," he said Sept. 2, adding that EPT boosted Russia's annual output by 3 million mt.

Open for dialog

According to analysts, Rosneft and Gazprom Neft are likely to continue to lead their fight against tax changes, arguing that the finance ministry made an error calculating the state budget's losses in 2019, as the tax regime was new and had not yet been studied thoroughly.

At the same time, Russian oil companies haven't ruled out cooperation with the state on how to improve EPT without damage to investment planning.

"The system is promising and unparalleled, but it is quite new and, perhaps, needs additional fine tuning. In this regard, we are ready for dialog with the government," Gazprom Neft Chief Financial Officer Alexey Yankevich said in a call on its second-quarter results Aug. 20.

If allowed, amendments to the second group should be top priority for the producers, Jennings said.

"They would need to adjust the parameters for the second group of fields at least, so that the fields still get some form of tax breaks vs. the traditional regime," the analyst told Platts.