New taxation may reconcile Russian oil producers with deeper output cuts

Higher taxes imposed on Russia’s energy sector could make prolonged output curbs by OPEC and allied producers easier to stomach for Moscow’s energy majors, says Reuters. Earlier this month, President Vladimir Putin approved a new system of taxes designed to help Russia deal with the economic fallout from the COVID-19 pandemic. The new taxation makes developing mature oil fields and producing heavy crude more expensive for energy companies.

The agreed tax reforms vary from region and type of crude. They envisage cancelling some tax breaks given to output from older oil fields and production of highly viscous oil used to produce a wide range of oil products. The changes mostly affect such companies as Tatneft, Lukoil and Gazprom Neft, as they produce heavy crude oil. Last week, Tatneft said that it didn’t plan to develop new highly viscous oil fields due to the new tax regime.

According to Renaissance Capital, the Ministry of Finance plans to receive 6 trillion rubles ($78 billion) in tax revenues from the oil and gas sector in 2021, which amounts to 32% of its total 2021 budget revenues, under a Urals oil price assumption of $45,3 per barrel. The Ministry told Reuters that the tax changes “should not result in oil output cuts long-term provided that the companies continue investments”.

Analysts believe that the taxation policy can push Russia’s energy sector to accept tighter restrictions from the Organization of the Petroleum Exporting Countries (OPEC) and its allies. “I think that the tax changes in the oil industry were worked out while taking into account the OPEC+ deal and its influence on the output of the Russian companies,” commented Karen Kostanian from Bank of America Merrill Lynch.

Although Minister of Energy Alexander Novak said last month that the taxation and Russia’s approach to the OPEC+ deal are in “different areas”, analysts consider that the fiscal stimulus to pump less may mitigate discussions with Russia’s energy giants over continuing to keep a lid on production to support the market.

Novak has recently had to hold regular meetings with Russian oil majors to agree on joint action before signing any significant deals. Head of Rosneft Igor Sechin has long opposed output cuts in tandem with OPEC. Meanwhile, his company managed to secure tax breaks under a new scheme by promising the state more revenues in exchange for lower taxes.

Under the current deal, cuts exceed 8,5% of global consumption. The cartel was planning to revise output limits upwards in January, but the plan is now in question due to a second wave of the COVID-19 pandemic. Last week, Putin conceded that oil cuts might be extended if market conditions warranted.