30 Jan 2020 15:59

Russian government approves package of bills on preferences for Arctic investment projects

MOSCOW. Jan 30 (Interfax) - The Russian cabinet at its meeting on Thursday approved a package of draft bills prepared by the Ministry for Development of the Russian Far East and Arctic envisaging preferences for investors planning to implement new projects in the country's Arctic territories, the agency said.

At the cabinet meeting, Ministry head Alexander Kozlov presented the key provisions of the package of draft bills, which are aimed at creating more favorable terms for private investment and job creation in the Arctic, thus boosting standards of living in the region. The ministers backed the proposed package of bills, and the documents will be handed over to the State Duma shortly for further consideration.

According to the Far East Development Ministry's proposals, economic support should be provided across the whole territory of the Arctic region, without creating separate priority development areas or economic zones. Only new investment projects will be eligible for preferences, which cannot exceed 25% of investments made. The minimum total for investment in a project is 10 million rubles.

All the Artic preferences are to be provided for four groups of investment projects: production of crude hydrocarbons on the shelf, production in onshore areas, production of LNG (now this includes gas-chemical production), and other projects. For all investment projects, Russian regions are permitted to zero out the regional component of the land tax, as well as profit and property taxes.

Preferences for the first group of projects, associated with hydrocarbon production on the shelf, will be extended in a fashion similar to the current taxation terms for the fourth category of new off-shore deposits: A mineral extraction tax (MET) rate of 5% for oil and 1% for gas over a timeframe of 15 years of commercial production. By the second reading of the draft bills, this group of projects could secure investment tax deductions from the federal component of the profit tax in the amount of 50% of expenditures for exploration and appraisal of hydrocarbons.

The second group relates to support measures for gas-chemical and LNG projects. In this case, ministries have decided to extend preferences granted to Novatek for construction of Yamal LNG to other similar projects in the region. Thus, a zero MET rate is envisaged for LNG producers over the course of 12 years from the moment the first batch of gas is delivered. Russian Presidential Representative to the Far East Federal District Yury Trutnev talked earlier about potential interest on the part of companies in gas-chemical production. In particular, Gazprom Neft is estimating investment in production of ethanol, polyethylene and polypropylene at 1.1 trillion rubles. Lukoil is studying the possibility of building a gas chemical complex on the shores of the Ob Bay, where it will produce methanol, ethane and associated petroleum gas. Investment is estimated at 610 billion rubles.

The third group relates to preferences for onshore deposits in new oil and gas regions - these are largely new Rosneft sections in the Krasnoyarsk Territory, as well as the Yermak JV with BP and Eduard Khudaintatov's Neftegazholding project - Payakha, all united via the Vostok Oil project. This is a new fifth category of deposits within the excess profits tax (EPT), including a zeroed out MET for the first 12 years of commercial production, with a gradual return to the full EPT rate from the 13th to the 17th year of production. For projects on the Taimyr Peninsula: MET tax deductions for the Vankor cluster (for volumes exceeding the budget's base oil and gas revenues, that is 60 million- 70 million rubles per year).

For companies carrying out projects not related to hydrocarbon production, ministries have agreed upon a reduction in insurance premium rates from the current 30% to 7.6%, with the federal component of the profit tax to be zeroed out for a timeframe of 10 years.

For companies that develop solid mineral deposits, there are provisions for an investment deduction from the MET matching expenditures for construction of infrastructure, but no more than 50% of MET which should be paid.

The draft bills envisage support not only for extractive projects, but also for construction of ports, industrial enterprises and other facilities. These projects can count on a zeroed out profit tax rate for 10 years, provided that the federal subject reduces the regional component of the profit tax. Furthermore, the draft bills envisage a zeroing out of VAT payments for maritime shipping of export cargoes and their icebreaker escort, which will stimulate the use of the Northern Sea Route (NSR).

The Ministry for Far East and Arctic Development expects that special economic terms for the Arctic to enter into effect as early as July, provided they secure all the necessary approvals.

Furthermore, the ministry intends to prepare a strategy for development of the Arctic through 2035 by March 20. In December 2019, the Security Council approved the Fundamentals of State Policy in the Arctic, as well as the plan for the development of the Northern Sea Route up to 2035. The Agency for the Development of Human Capital and the Far East and Arctic Development Fund have begun working in the region.