Russian ministries have second thoughts on how to differentiate extraction tax on oil
MOSCOW. Aug 23 (Interfax) - The issue of differentiating natural resource extraction tax (NRET) rates for fields with reserves of difficult to recover oil depending on the permeability of reservoir rock needs further work, and the government should assess the possibility of differentiating rates depending on the economics of resource development projects in general, the Finance Ministry believes.
This position is laid out in a letter Finance Minister Anton Siluanov sent Prime Minister Dmitry Medvedev in the course of preparations of documents for differentiation of NRET rates aimed at encouraging development of deposits with oil reserves that are difficult to recover, the Finmarket agency reported. The document was prepared by the Finance Ministry jointly with the Energy Ministry and Natural Resources Ministry.
The government in May 2012 approved an Energy Ministry proposal to classify projects to develop such properties based on permeability of reservoirs and oil viscosity.
The Finance Ministry, Economic Development Ministry and Energy Ministry were ordered to submit to the government by October 1 draft regulations needed for differentiating rates, including for setting NRET rates for each project category.
The letter states that the Finance Ministry sent enquiries to relevant government agencies, and held working meetings on this issue in May-July. As a result, it was found that the issue of differentiating rates based on permeability of reservoirs needs additional work, the letter states.
Debates over permeability
There are three types of reservoir permeability - absolute, relative and effective, but the government balance of mineral resource reserves cites only absolute permeability for gas. And only this type of permeability can be used as the basis for differentiating NRET rates, because lab tests of absolute permeability for gas are done commonly according to standardized methods, the letter states.
Furthermore, it would be difficult in the current conditions for booking reserves to identify three categories of projects to recover difficult oil that differ in permeability by 0.5 millidarcy, the letter states. The state balance of reserves does differentiate reservoirs by permeability with such precision, and the margin of error with existing technical capabilities exceeds 0.5 millidarcy.
In addition, a preliminary analysis of the effectiveness of NRET taxation by differentiating according to reservoir permeability showed that the permeability figure does not directly affect the size of reserves. And the level of permeability is not confirmed by government review when calculating geological oil reserves, so the state balance of reserves indicates bed permeability, as determined in the lab according to selected samples, rather than the average for the bed.
Laboratory measurement does not provide the precision needed for tax administration, while the state balance of reserves might indicate permeability ranges characteristic for a specific deposit.
The Natural Resources Ministry and Federal Subsurface Resources Agency have developed a method for determining permeability, but it can only be applied for the most traditional reservoirs, the letter states. For nontraditional deposits, which are the main target of the tax stimulus, lab measurements cannot provide objective results, so tax breaks for such deposits can only be given based on an expert confirmation of the poor economics of the project.
The letter also states that effective administration of the tax breaks is impossible without changes to the procedure for compiling project documents for field development. These documents are now compiled for fields as a whole, which makes it impossible to put the project into any tax break category depending on the permeability characteristics of a given reservoir.
Economics or permeability?
"We believe that permeability of reservoirs is not the only parameter determining the economic effectiveness of projects to develop subsoil properties containing reserves of difficult to recover oil," the letter states.
Other factors include the geographical location of the field, the development of infrastructure, bed thickness, oil viscosity, deposit depth and initial flow rate (amount of liquid or gas discharged in a unit of time from a natural or artificial source).
Therefore, it is necessary to assess the viability of differentiating NRET rates depending on overall project economics, the letter states.
The letter also states that Russia does not have regulations that establish the procedure for accounting of oil, including for taxation purposes. Therefore, it is necessary to develop a procedure for maintaining a separate record of oil by reservoir (bed, deposit) within a given resource property.
In order to determine the budget effectiveness of the system of tax breaks, additional work is needed on the criteria for determining the mechanisms for stimulating projects, the letter states. The ministries believe it is necessary to conduct an audit of difficult oil reserves, and to indentify the reserves that will not be developed because they are not economically viable, while at the same time assessing the influence of the reservoir's geophysical, porosity and permeability properties on the economic effectiveness of oil production projects.
The ministries are therefore asking the prime minister to issue instructions to the Energy Ministry, Natural Resources Ministry and other relevant agencies to work out these issues, including the preparation of draft regulations to create the conditions for the development of a bill to introduce a system of tax incentives for extraction of difficult to recover oil.