All Russian oil to be subject to excess-profits tax?

 All Russian oil to be subject to excess-profits tax?

After monitoring and analyzing the impact of a pilot project of introducing the excess-profits tax in the oil industry, the Russian Ministry of Energy may propose the final transition to the excess-profits tax in the oil industry, the Russian Energy Minister Alexander Novak said.

"This year we will monitor the effectiveness of the new tax system. Within two years we will conduct a detailed analysis of the impact of the excess-profits tax on the oil production, and if the result is positive, and I am sure it will be positive, we will offer to extend this tax system to the entire industry" RIA Novosti cited him as saying.

The minister said that the adoption of the excess-profits tax law was a significant step towards a more efficient system, which makes it possible to increase companies' investments, stabilize production at mature fields in Western Siberia, as well as develop additional reserves.

Excess-profits tax has become operational from January 1, 2019. Its rate will be 50%, but unlike the MET, it will be levied not on the amount of oil produced, but on the sales revenue less the export duty, reduced MET and extraction and transportation costs.

The tax system is extended to four groups of deposits: new deposits in Eastern Siberia with a depletion of less than 5%; deposits with the export duty exemption; operating fields in Western Siberia with a depletion of 10–80% (with a total production volume of no more than 15 million tons per year); new deposits in Western Siberia with a depletion of less than 5% and total reserves of not more than 51 million tons per year.

Deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, speaking to Vestnik Kavkaza, noted that the minister talks about the entire industry's transition to the excess-profits tax only in a presumptive way, because it's not possible to judge the effectiveness of replacing the MET with a new tax after three months of the experiment on a rather small number of fields. Initially, it was assumed that it would take 1.5-2 years to get more or less complete results,” he recalled.

“So far, neither the Ministry of Energy, nor the Ministry of Finance, nor oil-producing companies can say whether it is profitable for them to replace NDI with the excess-profits tax. Only practice will show it - by the way, that is why fields with very different production conditions were included in the pilot project. The experiment has two goals. The first is to prove that the excess-profits tax is economically efficient for both the subsoil users and the state. The second is to make a decision on additional adjustment of the excess-profits tax parameters," Alexey Belogoriev stressed.

A leading analyst of the National Energy Security Fund, a lecturer at the Financial University under the Government of the Russian Federation, Igor Yushkov, agreed with Belogoryev. “Under the current tax system, it is not profitable to develop new oil and gas deposits. On the other hand, the state fears that as a result of tax reform, oil companies developing new fields will pay almost nothing to the budget, explaining that they incur enormous costs,” Igor Yushkov added.

Meanwhile, with the fair use, the excess-profits tax will be beneficial to both companies and the budget. "This is a global practice: while you invest money and the project does not make a profit, you pay little to the state, but as soon as the project becomes profitable, you start to pay more. Then the deposit is depleted and brings less money, therefore, taxes are reduced. In any case, the existing tax model in the industry has exhausted itself, it is necessary to find something new. If we preserve the current inertial path of development, the decline in production will begin," the economist concluded.