Bottom Line: The Russian Finance Ministry’s proposed increase in extraction taxes of 5% for 2014-2016 is intended to raise money for building roads, but the tradeoff is a sweet incentive package for offshore development.
Analysis: Russian officials are describing this proposed tax increase as a back-up plan in the event that officials fail to reach a consensus on oil duties in 2014 (proposals for oil duties could see export duties raised from 66% to 80%). The new proposed tax is part of the Mineral Extraction Tax (MET). Oil producers in Russia pay the MET an export duty.
At the same time, we may see tax breaks for shale and offshore oil developers starting in January 2014, according to the Finance Ministry, as Russia attempts to focus incentives on the unconventional (shale and tight oil). This “special tax regime” for shale and tight oil is in the draft stage right now, but we should see forward movement on it in the coming months. While conventional extraction taxes on oil may be increased, offshore, we should see a scrapping of the export duty and a significant reduction in the MET.
Recommendation: Both of these proposals are likely to be pushed through in a balancing act that is in line with Russia’s aim to produce at least 10 million barrels per day. Russia’s shale and tight oil plays are worth looking at after first quarter next year.