RPT-Fitch: Russian refiners may face margin hit from tax changes
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Oct 14 (Reuters) - (The following statement was released by the rating agency)
The burden of higher Russian oil taxes over the next three years will be split between the ultimate consumers and the refining sector, possibly leading to weaker margins and earnings, Fitch Ratings says. The impact, however, will probably not be enough to drive rating downgrades, especially as the refining margins in Russia are currently far higher than in Europe.
The Russian authorities recently enacted a plan to gradually increase the mineral extraction tax (MET) over the next three years while cutting oil export duty by the same amount. This should increase net tax revenue by RUB175bn (USD5.5bn), as only around a half of Russia's oil is exported, while almost all oil produced in the country is subject to MET. We believe this will have no material effect on integrated companies with larger upstream divisions, like Rosneft, Tatneft and LUKOIL. This is because total tax on exported oil will remain the same, while the lower export duty will push up unregulated domestic oil prices, offsetting the higher MET. Refining margins, however, will probably be squeezed.
Higher domestic oil prices could result in refiners raising fuel prices to maintain stable margins. However, they will probably face pressure from the state to keep unregulated fuel prices unchanged or to increase them only gradually to curb inflation.
Even if fuel prices were unchanged, we still expect oil refining to remain profitable in the medium term due to the difference between taxes on crude and taxes on oil products. At USD8-10 a barrel, Russian refiners' margins are two-to-three times higher than those of European peers.
If fuel prices do remain unchanged, the tax move will probably have the biggest impact on Alliance Oil, where refining volumes exceeded oil production by 49% in 2012, and Bashneft, where the refining excess was 34%. We estimate that Alliance Oil and Bashneft's EBITDA could fall by up to 10% in absolute terms by 2016 under these circumstances. However, the more likely scenario is that the state will allow oil companies to pass on at least a part of higher costs to final customers, leading to the higher tax burden being divided between refiners and households.
Plans to equalise export duties on crude and fuel oil in 2015 could squeeze margins further, however we believe that this is likely to be delayed by at least one or two years to give companies time to complete facilities upgrades and maintain their profitability. Russian refineries generally have relatively low complexity and low light product yield, while fuel oil production is high. Therefore, if fuel oil duties were raised, this would reduce the downstream profitability of companies such as Rosneft that are falling behind on their modernisation programs.
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