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Russia Set to Enact Oil Industry Tax Reform

The Russian government plans to make sweeping changes to its oil tax structure and transform it to a profit-based model, according to reports from Reuters and industry sources.

The current tax structure is centered on production and exports, and has come under attack by companies claiming profit-based taxation would provide a welcome boost to output and is a more accurate reflection of exploration costs and risks. On the other hand, the finance ministry has typically opposed a profit-based tax that it feels will allow producers to conceal income and minimize tax payouts.

Pilot projects with production levels of between 200,000 barrels per day and 300,000 barrels per day would be the first to be affected by the proposed new plan. Yet Russia’s energy and finance ministries have purportedly worked out the new system for both mature and new fields.

Brownfields may see a tax cut from 16 to 20 percent depending on the price of oil, whereas greenfields in Eastern Siberia will need to pay a higher tax from 16.9 to 19.3 percent.

Other greenfields enjoying low tax rates would see increase by as much as 6 percent, per the draft of the new tax system.

The plummeting price of crude has hurt numerous countries worldwide dependent on oil for revenue and Russia has certainly not been an exception. The oil tax system has become a very sensitive topic regarding jump-starting the Russian economy as was the case earlier this year over the government’s proposal to tax funds used by oil firms for investment in developing projects.

The Russian Central Bank recently claimed national economic growth is “imminent” based on the steady price of crude at around US$45 per barrel, though the International Monetary Fund found the economy would shrink another 1.2 percent this year prior to anticipated recovery in 2017. Furthermore, an energy ministry study leaked last March predicted Russia would cease being a major oil producer as output could nosedive to half its current level by 2035.

By Erwin Cifuentes for Oilprice.com

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