[GGP] Gas and Taxes: The Impact of Russia’s Tinkering with Upstream Gas Taxes on State Revenues and Decline Rates of Legacy Gas Fields
The following is an excerpt of a paper originally published by the Oxford Institute for Energy Studies in October 2017.
The fall in natural gas prices over the past year is putting the Russian government and the Russian gas companies yet again against each other in a high-stakes battle over the division of mineral rents. The past 25 years have seen many episodes of this never-ending struggle (Gustafson, 1999). Today’s challenge, which confronts all countries like Russia that receive significant revenue from gas, is how to deal with the coming reduction in tax revenue. The battle is over the very nature of the rules by which the composition of tax take from natural gas and its impact upon Russia’s long-term gas production trends is going to evolve. The matters have become complicated by a recent tax change that unintentionally introduced ambiguity into companies’ tax obligations and may distort their production plans. Defying the famous idiom, upstream gas taxes for some of Russia’s producers have become not a certainty but a matter of choice between “high” and “low” fiscal burden. This became possible since the introduction of a formula-based mineral resource extraction tax (MRET) for natural gas in 2014.
MRET is a tax that applies to all mineral resources produced in Russia, but the rates and the rules of tax calculation vary depending on the type of resource. Gas MRET accounts for about 3% of Russia’s federal budget revenues and represents 13% of overall MRET collections (for all mineral resources). For natural gas a single specific rate in rubles per thousand cubic metres existed in 2005-2011. Companies simply had to pay a fixed fee of 147 rubles/Mcm of natural gas produced (from $4.6 to $5.9/Mcm, depending on average annual exchange rates). The rate was set at a relatively low level reflecting low regulated domestic gas prices in Russia. After a series of regulated gas price hikes in Russia during 2005-2010, the effective tax take from gas MRET fell almost two-fold as a percentage of domestic gas sales revenue. The Russian government realized it was shying away from significant rents and decided to act. As Deputy Finance Minister Sergey Shatalov put it at the time, regulated gas price hikes were going to give gas producers additional windfall revenues that they “did not earn”, so they needed to return to the state its fair share of the run-up (Shatalov, 2012). There were two annual gas MRET rate hikes in 2012 and 2013 along with the introduction of two tiers: a higher one applied to Gazprom and a lower one - to independent gas producers (IGPs). The corresponding rates in 2013 were 622 and 402 rubles ($19.5 and $12.6)/Mcm. This simple differentiation reflected the perceived gap in profitability as Gazprom’s export monopoly provided exclusive access to lucrative European gas market while Russia’s IGPs could only sell their gas at home at prices that were significantly lower than the export netbacks.
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