* Energy Ministry proposes virtual model of profit-based tax
* Finance Ministry says enough tax breaks for the industry
* Putin needs to pay for spending promises
By Vladimir Soldatkin
MOSCOW, March 29 The Russian Finance Ministry
said it opposes a proposed shift to a profit-based tax for oil
companies rather than taxing output and exports, because its
priority is to maximise revenue for state coffers.
Russian tax authorities have long relied on counting barrels
to ensure steady revenues, but with output in the world's
largest oil producer reaching a plateau, the industry has
lobbied for a profits-based system that better reflects
exploration costs and risks.
Energy Minister Alexander Novak said this month the
long-mooted idea of profit-based tax could be tested in a pilot
project this year.
"We are decisively against it. Lots of tax benefits have
already been introduced for the oil companies," Ilya Trunin,
head of the tax, customs and tariff department at the Finance
Ministry, said in an interview on Friday.
The oil-producing heartland of Western Siberia accounts for
60 percent of Russia's production of over 10 million barrels per
day equivalent. Output in the region has been falling by around
1 percent per year.
Analysts say these 'brownfields' will continue to account
for the lion's share of Russian production in the years to come,
despite companies' push to extract oil in new oil provinces such
as East Siberia and the Arctic offshore.
Growth from these 'greenfields' alone would not be enough to
boost overall output, and unconventional reserves such as
hard-to-recover tight oil would need special tax treatment to be
Tweaks to the tax system in recent years have reduced the
marginal tax rate on each barrel of crude exported to 82 percent
from around 87 percent, which an adviser to the Energy Ministry
says is still too high to create an incentive to invest.
"Fiscal stimulus measures should be taken before oil
production starts to decline. And one of the key such measures
should be the introduction of a profits-based tax," Denis
Borisov, director at Moscow's oil and gas centre of Ernst &
INCREASING THE BURDEN
The Russian oil industry pays two main oil levies - mineral
extraction tax (MET) and export duty. Exemptions are available
for new or challenging fields. A proposal is also on the table
to provide easier terms for tight oil.
Putting these tax breaks into effect is vital for an
alliance to progress between state oil major Rosneft
and U.S. major Exxon Mobil, which aims to develop a vast
tight oil play called the Bazhenov formation.
The Finance Ministry cited guidelines set by Russian
President Vladimir Putin, who before his return to the Kremlin
last year promised to increase state salaries and other social
"Our task is to increase the tax burden on the commodity
sector," Trunin said.
Russia, which is heavily reliant on high oil prices to fill
the state coffers, ran a budget deficit of 0.9 percent of gross
domestic product in the first quarter.
Industry experts say profits-based taxation would allow
companies to cut their tax base by artificially reducing their
The tax authorities calculate MET based on Reuters pricing,
and export duties from the Argus agency's average price for
Russian Urals blend.
"The Finance Ministry does not trust oil companies; it would
not believe them should the tax be based on their profits.
Mineral extraction tax based on a certain oil price, which is
impossible to change," said one industry expert.
The government has been tweaking the tax regime with a range
of one-off measures to stimulate production of crude and of
high-grade refined products. In 2011 it implemented the
so-called "60-66" system, which cut the export duty on crude oil
and most light oil products.
"The key problem is not MET in this light but the new export
duty regime, which led to perverse incentives as it increased
the trickle of fuel oil abroad - not a very wise move from the
standpoint of the economy," Alexander Fak, an analyst with
Sberbank Investment Research, said.