4 Dec 2023 11:24

Russian MinFin opposes expanding excess profit tax to additional oil blocks in W. Siberia - paper

MOSCOW. Dec 4 (Interfax) - Russia's Finance Ministry is opposed to a proposal from oil companies to switch new blocks in Western Siberia from the regular taxation system to the excess profit tax (EPT).

The government discussed this idea in the fall after an August meeting in the Khanty Mansi Autonomous District, but the ministry fears expanding the EPT could lead to a loss in budget revenues, as companies would shift production to fields eligible for preferences instead of maintaining output at fields subject to the full mineral extraction tax (MET) rate, national daily Kommersant reported on Monday, citing sources.

The Finance Ministry does not support expanding the scope of the EPT by including new Group Four blocks. This refers to new fields in Western Siberia that are less than 5% depleted with total reserves of up to 50 million tonnes per year.

The proposal to consider expanding the EPT came from the Energy Ministry and Khanty Mansi leader Natalya Komarova, who said oil companies would like to switch 70 blocks from the regular tax system to the EPT.

The Finance Ministry confirmed its opposition, the paper said. Expanding the scope of the EPT would create more favorable economic conditions for developing these blocks compared to producing oil at blocks subject to the MET without tax breaks, the ministry said, adding that oil production in Russia is not trending downward at the moment.

"Consequently, there is a likelihood that current oil production subject to the MET without preferences will be pushed out by oil production to which the preferential tax regime is applied, which will lead to a decrease in planned budget revenues," the ministry said.

The ministry said it is prepared to consider tax incentives for oil and gas production starting in 2027 given the presentation of the "corresponding financial and economic rationale."

The ministry also recalled that a decision was made in 2022 to expand the scope of the EPT to a number of resource blocks in Khanty Mansi Autonomous District-Yugra, the Yamalo-Nenets Autonomous District, Komi and Tomsk and Omsk regions. Furthermore, fields where extra heavy crude accounts for at least 70% of annual output will be transferred to the third group of the EPT as of 2024. Previous MET tax breaks for extra heavy crude were eliminated in 2021, which primarily affected Lukoil and Tatneft .

The key difference between the EPT and MET is that the tax base for the former is revenue less expenses rather than production volume. This approach improves the economics of developing new fields, as well as mature fields with high costs to maintain production.