A new adjustment to Russian oil and gas taxation will benefit oil companies that export most of their crude oil and high-grade oil products but hurt domestically focused producers, refiners, and petrochemical manufacturers, says Moody’s Investors Service.
The change seeks to redistribute Russia’s tax burden between export and domestic sales by cutting nearly 50% of export duties on crude and oil products over 3 years while increasing the mineral extraction tax by factors of 1.7 for oil and 6.5 for gas condensate, Moody’s reports in a Dec. 1 comment. The law, which was signed Nov. 25 and starts taking effect Jan. 1, also increases the excise on high-grade fuels and imposes a 22% tax on Gazprom’s gas sales to Turkey through the Blue Stream pipeline.
The tax burden on oil exporters will fall 2-3%, the credit analyst says. Rosneft, Lukoil, and Tatneft will benefit most.
For Novatek, Russia’s second-largest gas-condensate producer after Gazprom, mineral extraction taxation will increase by a factor of 6.5 but be more than offset by the lower export duty for oil products.
The effect of the change on Gazprom will be “marginally negative,” according to Moody’s. The new tax on Gazprom’s gas sales to Turkey via Blue Stream will amount to about $1.1 billion/year, about 1.6% of the company’s earnings before interest, taxes, depreciation, and amortization.
Moody’s expects profitability to “come under pressure in 2015” for domestic refiners and petrochemical producers such as Nizhnekamskneftekhim, Gazprom Neftekhim Salavat, Kazanorgsintez, and Lukoil’s LLC Stavrolen. The companies will have limited ability to pass along the cost increases to consumers of fuel and polymers.
The change will increase Russia’s domestic price of crude oil—the export price less the sum of export duty and transport costs—to about 70% of the export price from less than 50% of the export price at present.
With the ruble having lost more than 40% of its value since the beginning of 2013, the higher oil price “would cause a material rise in ruble feedstock costs for domestic producers at a time when global oil prices are weakening,” Moody’s says.
Refiners will have trouble passing along costs from the increased excise tax—5-6% of fuel prices—and of the higher domestic oil price exacerbated by currency translation.
“Because the Russian government will discourage fuel price hikes above the official inflation rate, which we expect will be 10%/year, oil companies will have to absorb lower profitability in the downstream sector,” according to Moody’s.
Overall damage to profitability of the Russian oil and gas industry, which is oriented toward exports, will be low, Moody’s says. Most hurt next year will be Gazprom Neft, which generates half its revenue from the sale of oil products in Russia, especially around Moscow.
