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    Russia Rolls Out Arctic Tax Relief


A raft of projects stand to gain from the package of support measures.

by: Joseph Murphy

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Russia Rolls Out Arctic Tax Relief

Russia has introduced more tax relief for Arctic LNG export projects due to start operations from 2022, under a law signed by Russian president Vladimir Putin and published by the Kremlin on March 18.

A zero rate of mineral extraction tax (MET) will apply to fields that supply gas to liquefaction trains as well as petrochemical enterprises, during their first 12 years of commercial operation or until their cumulative output reaches 250bn m3. Rates of MET vary from project to project, although Fitch Ratings estimates that Gazprom paid on average $17/'000 m3 of gas extracted in MET last year, or 25-30% the domestic sales price.

Only projects north of the Arctic Circle will be able to benefit from the new support.

The tax break will be a major boon for Novatek, which is preparing to launch its next major LNG export terminal, the 19.8mn mt/yr Arctic LNG-2, in 2023. The private gas producer secured significant tax breaks for its first terminal Yamal LNG, which entered production in December 2017. During its first 12 years of operation, the project will pay no export tax, MET or property tax, while the profit tax it pays will be 13.5% lower than the usual rate. What is more, the Russian government helped fund some of the project's infrastructure, including an airport, seaport and a fleet of icebreaking LNG carriers.

The zero rate for Arctic petrochemical ventures will primarily benefit Gazprom, which is understood to be planning a $14bn petrochemical hub on Russia's northern Yamal peninsula. The hub will use ethane derived from gas fields in the area as its feedstock.

MET rates of 1% and 5% will also be set for offshore Arctic gas and oil projects during their first 15 years of production. Gazprom stands to gain here as well, as it operates a number of large fields containing trillions of m3 of gas in the Pechora and Barents seas. The first of these projects expected to enter production is Kamennomysskoye-more, located near land in shallow waters of the Gulf of Ob. It is due on stream in 2025.

Russia's state oil producer Rosneft will also get extra relief for the Vankor oilfield and its satellites, which the company has suggested will form part of an Arctic megaproject that could one day yield 2mn b/day – equivalent to around a sixth of Russia's total production.

The latest package of support measures were drawn up long before the sharp decline in oil and gas prices over recent months, as a result of Covid-19's impact on demand and the breakdown of Opec+ talks. As long as current prices persist, the tax measures are unlikely to motivate producers to sanction any new projects in the high-cost Arctic region. But they may help entice investment if market conditions improve over the coming years.