Russia Looks to Tax Overhaul to Boost Oil Output, but Impact on Fuel Oil Still Unclear

A new system could cut tax on brownfield sites by between 16 and 20 percent depending on the oil price.

The Russian government is contemplating a move away from an oil industry tax that currently focuses on production and exports and leans more towards a profit-based system in order to better reflect costs and risks - but it's unclear how fuel oil will fit into the new schematic.

According to documents verified by industry sources and viewed by Reuters, Russia's energy and finance ministries have developed a new system for mature and new fields that would first be applied to pilot projects with total production of between 10 million and 15 million tonnes per year, or between 200,000 and 300,000 barrels per day.

For brownfield sites, the system could cut tax by between 16 and 20 percent depending on the oil price, and the internal rate of return for greenfields in Eastern Siberia could rise to 19.3 percent, compared to16.9 percent under the current tax system

However, the new taxation may cost the state budget up to 50 billion roubles ($771 million) in losses based on $50 per barrel oil prices - but it is estimated that these losses could be eliminated if overall production increases by a third.

While the energy ministry told Reuters the proposal is "under discussion," an industry source said several unresolved issues preventing the proposal from moving forward include fuel oil: "Debates are still raging about whether to hike the export fee for fuel oil or not."

This is a significant issue in that an increase in fees would impact companies that have not kept abreast of a massive refineries modernization initiative that was launched in 2011 to improve oil product quality.

It's also unclear which greenfields would continue benefiting from the lower tax rate (the proposal states that those currently benefiting from lower taxes will increase their payment into the budget by 6 percent); the government is reportedly examining Lukoil 's new Imilor and Shpilman fields.

No timelines for ratification of the proposal were offered, but the finance ministry is said to oppose the idea of profit-based tax on the grounds it would allow producers to conceal income in order to minimise tax payouts.

Russia's last oil-related policy change, at the country's Central Energy Customs, caused bunker volumes to plummet in the Far East and local players to risk bankruptcy, it was reported last month.