Fossil Fuels – At What Cost? Government support for upstream oil and gas activities in Russia

Attributed Authors: Ivetta Gerasimchuk Published: Feb 2012

The value of the Russian government’s support to the upstream oil and gas activities is very significant. The subsidies to oil and gas producers in Russia that have been identified and quantified in this report amounted to 4.2 per cent and 6.0 per cent of the total value of oil and gas production in Russia in 2009 and 2010 respectively. These subsidies also amounted to 8.6 per cent and 14.4 per cent of the industry’s total tax and other payments to the federal government in 2009 and 2010 respectively.

At the federal level, the study has identified 30 schemes of conferring subsidies to oil and gas producers in 2009 and 2010. Some of these schemes serve as umbrella categories for several subsidy programs. Of these 30, the study has been able to quantify the value of 17 subsidy schemes totalling US$8.1 billion in 2009 and US$14.4 billion in 2010. The rapid increase in cumulative subsidies from 2009 to 2010 occurred due to the introduction of an exemption from export customs duty on oil produced at new onshore oil fields in East Siberia, as well as due to an increase in oil production at new fields in East Siberia, the Nenets Autonomous Okrug and some other areas, which are eligible for tax holidays with respect to the mineral extraction tax.

Relief on the mineral extraction tax and export duties accounts for most of the value of the identified and quantified subsidies (US$9.8 billion in 2010, or 68 per cent of the total value). Importantly, more schemes of reducing the extraction tax and export duty rates for new offshore fields and some onshore fields are scheduled or discussed for the future. The Russian government and the oil and gas industry generally agree that development of petroleum reserves in Russia’s frontier areas, especially the Arctic, would be impossible without reducing their fiscal burden, as compared with the regular regime.

Other significant types of Russian government support to oil and gas producers at the federal level in 2010 included: the reduced tariff for transportation of oil through the East Siberia-Pacific Ocean pipeline (approximately US$1.1 billion);  deduction of research and exploration costs from taxable profits (at least US$0.6 billion); accelerated depreciation allowance (at least US$0.6 billion); and federal budget spending on oil and gas exploration (US$284 million).

Importantly, the summary values above are exclusive of the identified types of government-provided income and price support in Russia that the study has failed to quantify but that are likely to be very significant. In particular, a form of income support such as regulatory loopholes creating opportunities for tax minimization through transfer pricing is likely to confer benefits to companies in the order of several billion U.S. dollars.  In 2011 Russia adopted new legislation with respect to transfer pricing, effective January 1, 2012, that is expected to phase-out this form of price support to the industry.

Subsidies to oil and gas producers are also conferred at the level of Russian regions, mainly in the form of tax expenditures. However, the legislation and materials reviewed suggest that the cumulative value of the regional subsidies to the industry is likely to be much less significant than that at the federal level due to the high degree of centralization in the budgetary and fiscal system of Russia.

In addition to the federal and regional jurisdictions, oil and gas are also produced under three production sharing agreements: Sakhalin-1, Sakhalin-2 and Kharyaga. By comparing these with the national taxation and royalty regime, the minimum cumulative amount of subsidies under Russia’s three production-sharing agreements has been estimated at US$5.4 billion in 2008, US$3.5 billion in 2009 and US$4.9 billion in 2010.

Tags: state-owned enterprises production sharing agreements pipelines oil and gas subsidies