Russia Gas-Tax Shift to Help Producers From Gazprom to Novatek

Russia plans to switch from a flat rate of tax on natural gas producers to a formula that takes into account energy prices and the difficulty of extracting the fuel, according to a draft released today.

The formula reflects depletion rates, depths of reservoirs and the location of producing fields, and is linked to domestic and export gas prices, as well as the price of oil, according to the proposal published on the Finance Ministry’s website. Expert feedback is invited through June 5.

The draft, the result of months of discussion with companies, must be signed into law by President Vladimir Putin. Linking the tax to regulated domestic gas prices, which the government may decide to rein in, reduces risks for both OAO Gazprom, which holds the monopoly on exports and transport of gas in Russia, and independents such as OAO Novatek, said Ronald Smith, an oil and gas analyst at Citigroup Inc. in Moscow.

Gazprom will get “more flexibility on taxation should oil prices and/or European realized gas price go into decline,” he said in a note today.

The draft is welcome because “it brings clarity and keeps the current level of the tax rate for both Gazprom and independents, meaning there won’t be any sharp increases,” Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow, said by phone today.

Novatek “will continue to enjoy a substantially lower average tax rate than Gazprom, of approximately 35 percent,” analysts at Otkritie, led by Alexander Burgansky, said in a research note.

Novatek may benefit from the discount on deeper deposits, while Gazprom’s key savings are “in the production shift to Yamal assets and core fields depletion” Artem Konchin and Andrey Gromadin, analysts at JPMorgan, said in a note.

While not introducing tax breaks for specific fields, the formula sets coefficients for fields located in the Yamal and Gydan peninsulas in the Arctic region, southern Astrakhan region, eastern Siberian Irkutsk region, in the Far East and the Sea of Okhotsk, according to the draft.

The document also sets the mineral extraction tax formula for gas condensate, while the gas tax rate will depend on the share of condensate in the total production mix.

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