RUSSIA - The Tax Effect

The combination of income tax, excise duties and VAT to the government has cost the oil companies more than 80% of their net revenue from new projects and over 50% from old production system. The taxes were raised to boost government revenues in view of a severe cash-flow crisis. Gazprom has been paying a 30% excise duty and 22% VAT and has had problems with the government in paying arrears (see background).

In June, Moscow issued a decision requiring oil companies with tax arrears to pay off their debts in three monthly installments or face export curbs and confiscation of assets. Excluded from that order were exports used as security on loans. In July four oil companies led by LUKoil urged the government to shift the tax burden to the retail sector. By mid-August, oil companies' tax debts to the federal government had exceeded $4 bn.

Sidanco saw its access to export pipelines cut by 223,000 tons on Aug. 1, though the major said it had complied with a debt repayment schedule agreed with the tax office at the end of June. Onaco faced an August export cut of 73,000 tons and seizure of assets.

On Aug. 5, the tax problem was discussed at a closed meeting between PM Kiriyenko, Finance Minister Zardonov and CEOs of the main oil companies. Later the government decided to form a commission to study recommendations to revise the tax system. This body was headed by Deputy Premiers Boris Nemtsov and Viktor Khristenko. The members included the CEOs of LUKoil, Yukos, Sidanco, Tyumen Oil, Onaco and Bashneft (see companies' profiles), as well as representatives for the tax office, the ministries of energy, finance and economy, the World Bank and its unit International Finance Corp. (IFC). While the Russian side was to work out a better tax system, the World Bank and IFC were to determine whether the oil firms were in a position to pay their taxes and whether the current financial situation and tax burden was affecting their ability to repay loans issued by the WB.

Crude Oil Export Movements: Of the current crude oil exports of 2.6m b/d, 1.41m b/d are moving to the sea as follows: 720,000 b/d from the Russian Black Sea terminal of Novorossyisk; 310,000 b/d from the Baltic terminal of Ventspils; 230,000 b/d from the Crimean terminal of Odessa; and 150,000 b/d from the second Russian Black Sea terminal at Tuapse.

Another 1.09m b/d are moving through the Friendship Pipeline (Druzhba) to Germany (365,000 b/d, up from 310,000 b/d in mid-1996); Poland (355,000 b/d, up from 170,000 b/d in mid-1996); the Czech Republic (120,000 b/d); Slovakia (110,000 b/d); and Hungary and Slovenia (140,000 b/d).

A further 100,000 b/d are moving to Lithuania, compared to almost 125,000 b/d in July, 155,000 b/d in June and 135,000 b/d in May this year.

Transneft, in charge of Russia's pipeline system, has been instructed by the government to help tax-paying exporters maximise throughputs and facilitate the movement of over 1.4m b/d to the sea outlets mentioned above. In September 1994, 1.285m b/d were shipped out of the four terminals, and 890,000 b/d went through the Friendship Pipeline to the countries mentioned above.

Use of the Friendship Pipeline has risen in recent years as integrated Russian producers have accelerated their marketing drive in Germany and East Europe. In June 1996, for example, only 860,000 b/d of Russia's crude oil exports moved through the pipeline compared to 800,000 b/d in the first half of 1995.

Sales to fellow CIS republics and the three Baltic states have been falling steadily since 1991. The main reasons have been a rise in the price of Russian crudes and a resultant fall in CIS demand, followed by cuts in supplies to non-paying CIS customers. The same is true in the case of Latvia and Estonia.

Russia's main export grade Urals is a blend of sour crude oils officially specified at 32.5 deg. API but occasionally found to be a 30.80x grade. It is priced relative to the spot market quotations for Dated Brent. The blend is traded freely, once cargoes reach their markets. Other crudes exported by Russia include Siberian Light, which trades freely as well.

There are three main markets for Urals: North West Europe, which is the best for Urals exporters at present because there the differential below Dated Brent is the lowest; the Mediterranean, now a market of 4m b/d receiving the Russian crude from the Black Sea; East and Central Europe, receiving the crude through the Friendship Pipeline, where prices have been lower and the transit cost for Russian exporters has been relatively high.

There are several problems with turning Urals into a marker. The volume of Urals allocated for export from Russia can drop sharply in cold winter months as a result of Russian demand and loading disruptions at the Black Sea ports. The volume of Urals moving from the Black Sea in warmer months can exceed 900,000 b/d. But in winter it could be less than 500,000 b/d. The blend's gravity tends to change frequently. Despite a better organisation of exports by co-ordinators on the Russian side in recent years, loading schedules can be erratic occasionally. High demurrage costs have discouraged buyers from using their own tankers.