On the amendments in taxation of oil and gas sector

Over the last months the RF Government drafted a number of new proposals aimed at amending taxation in the oil and gas sector. These proposals were part of the federal laws which should be reviewed by the State Duma during the autumn session. New amendments will come into force starting with 1 January 2011.


Draft Federal law “On introducing amendments in articles 342 and 361 of the second part of the Tax Code of the Russian Federation” envisages slight increase of oil tax rate and significant increase of natural gas tax rate. Base rate of oil tax will be indexed according with expected inflation in 2012-2012 up to 446 Rb/t in 2012 and to 470 Rb/t in 2013. Mineral tax rate on natural gas will be raised more significantly. This rate remains unchanged since 2006 while wholesale prices on gas over the past period went up 2.12 fold. As a result, mineral tax rate on natural gas over the last years dropped significantly both in real and relative terms (in % to price).


In these circumstances it would be logical to index mineral tax rate on gas extraction according with gas domestic price growth. However, the government has chosen a more moderate approach. From 1 January 2011 this tax rate will be indexed 1.61 times which will equal accumulated inflation for the period 2007-2010. In 2012-2013 additional increase on mineral tax rate on gas is envisaged according with expected inflation rate. As a result from 1 January 2013 mineral tax rate on gas production will come to 265 Rb/thousand cubic m.


In order to stimulate development of small oil fields draft Federal Law “On introducing amendments in article 342 of the second part of the Tax Code of the Russian Federation” envisages introduction of decreasing coefficient to the mineral tax on oil extraction starting with 1 January 2011. This decreasing coefficient will characterize the amount of oil deposits of each specific field – coefficient Кз. This coefficient will be applied to the oil fields with initial recoverable oil (Vз) up to 5 mln t and the level of reserve depletion (Свз) to 0.05.


Coefficient will be calculated according to the following formula:

Кз = 0,125 х Vз + 0,375,
where Vз – initial recoverable oil reserves in mln t, determined as a sum of reserves of categories А, В, С1 and С2 according to the data of state balance of mineral reserves.


The level of reserve depletion of a subsoil area (Свз) is determined as proportion of the volume of accumulated oil production on a subsoil area (N) to the volume of initial recoverable reserves on given area (Vз).


At present procedure for calculating mineral tax in oil production does not envisage differentiation of taxation depending on the volume of oil reserves in subsoil area. As a result development of small oil fields with recoverable reserves up to 5 mln t, as a rule, turns out to be economically unprofitable due to high specific capital investments and operating costs. At the same time the State Reserve Register of mineral resources boasts of about a thousand deposits with recoverable resources up to 5 mln t and reserve depletion at less than 5%, whose total reserves come to 1 bln t of oil.


Application of special decreasing coefficient Кз to the mineral tax rate is aimed at creation of conditions for development of new small deposits whose development under general taxation system is unprofitable. This will allow developing additional oil reserves, increase profitability of production enterprises. According to calculations of RF government as a result of introduction of decreasing coefficient the volume of additional oil extraction on subsoil areas with initial recoverable oil reserves up to 5 mln t will constitute 10.2 mln t in the first year of application of privilege and 214 mln t over 10 year period.


Within the framework of the policy designed to stimulate development of new mining regions, the RF government has developed a draft Federal law “On introducing amendments in article 342 of the second part of the Tax Code of the Russian Federation and recognition to have lost force certain provisions of legislative acts of the Russian Federation”.


This draft legislation envisages extending already applied in several regions “tax holidays” on mineral tax to new oil deposits located in Yamal-Nenetz autonomous okrug northward of 65 degrees of north latitude. For subsoil areas located in this region except those located on Yamal peninsular, zero mineral tax rate will be applied prior to reaching accumulated volume of oil production of 25 mln t on the subsoil area on condition that the period of reserves development does not exceed 10 years for a license giving right to subsoil use for prospecting and production of mineral resources and does not exceed 15 years for a license for the right of subsoil use simultaneously for geological prospecting and extraction of mineral resources starting from the date of state registration of corresponding license for subsoil use.


Such regime will cover also subsoil areas which has licenses for their use given prior to 1 January 2011 and whose level of reserve depletion (Св) as of 1 January 2011 did not exceed 0.05. Period for application of zero rate will start in this case from 1 January 2011.


Adoption of this law should create necessary economic conditions for the development of deposits of Yamal-Nenetz autonomous okrug, whose development under general tax regime is unprofitable due to considerable capital investments linked with building infrastructure, geographic a geological features of deposits of this regions.

Yu.N. Bobylev – Candidate of sciences (economics), head of laboratory of mineral sector economy