The Russian government is expected to consider in December the "innovative" new tax regime drawn up by the natural resources ministry which aims to make a number of capital-intensive offshore oil and gas projects profitable, deputy natural resources minister Denis Khramov said Tuesday.
"The 'innovative' program would allow a reduction in the minimum size of [offshore] reserves that is economically feasible for development to 55 million mt of crude oil and 150 billion cubic meters of gas, and would reduce the number of fields for which development is not economically rational to 27% from 73% under the current tax regime," Khramov told a gas conference in Moscow.
The ministry expects the innovative scenario would help increase annual production from Russia's offshore to around 40-80 million mt of oil and condensate and 190-200 Bcm of gas, he said.
In 2010, offshore output amounted to 16.7 million mt of crude and 41.6 Bcm of gas, Khramov added.
The innovative scenario provides for a flexible customs regime for offshore projects and more favorable conditions to attract private investment in offshore exploration, Khramov said.
The ministry has also prepared another scenario that envisages a continuation of the existing tax regime, which includes tax holidays for the mineral extraction tax (MET). But Khramov said this would not be effective.
Under the current tax regime, the internal rate of return is estimated to be below 10% for nearly all offshore projects, the first deputy head of Gazprom's department for gas and oil production, Nikolay Kabanov, said in September.
TAX INNOVATIONS
The ministry is proposing to introduce "a revenue tax or a sort of royalty tax instead of the MET, which will be implied from the first steps of the project's development and will have no tax holidays," Khramov said.
"The royalty tax is to be set as an ad valorem rate, i.e. a percentage rather than a fixed figure in rubles," Khramov said adding that such a mechanism would be "adaptive" to volatility in oil and gas prices.
In addition, the ministry is proposing "to even the tax burden between profit (or financial results) and revenue, rather than base it on revenue," he said.
The ministry is also proposing to introduce an additional tax on financial results, a sort of an excess-profits tax, he said.
"We see its optimal level at 15%, which could be increased when the project's internal rate of return rises. Thus, the rate may be set at 15-20%," he said.
As a result, "the total burden on company's financial results will amount to about 35%, including profit tax," Khramov said, adding that that level of taxes would be sufficient to meet the state's budgetary needs.
The innovative tax scenario does not envisage the use of export duty, Khramov said.
The new tax regime would drive a "significant" expansion of offshore hydrocarbons production and also increase state income from offshore projects by around 45% compared with the no-change scenario, Khramov said.
"These are significant sums, around Rb7 trillion [$229 billion], including Rb2 trillion in additional income due to an increase in the number of projects [profitable for development]," Khramov said.
In September, the deputy head of the natural resources ministry's department for state policy on geology and subsoil use, Darya Vasilevskaya, said the ministry was proposing splitting Russian offshore reserves into five clusters in line with certain parameters such as the level of exploration, climate and ice conditions, and market accessibility.
The five clusters could have different tax regimes corresponding to their unique geographical and geological parameters, she said then.
Russia is currently the biggest hydrocarbons producer in the world but the bulk of its output comes from onshore fields. As fields in the traditional provinces are largely mature, Russia is increasingly looking at new provinces, including offshore reserves, to maintain production.
