According to Interfax, the Minister of Energy Alexander Novak said that the government might consider switching sector taxation from a revenue-based to a profit-based system, mainly by introducing an excess profit tax. According to RIA Novosti, the new taxation might be tested at several fields, particularly those offered by Bashneft, said Novak. Additionally, Deputy Prime Minister Arkady Dvorkovich said at a government meeting that each tax relief scheme for the sector would be defined by legislation.
Profit based taxation assumes cancelling the mineral extraction tax and substituting it with an additional tax, calculated as a percentage of profit before tax (PBT). Given the current taxation overburden in the Russian upstream, we do not expect the amendments currently under consideration to impair it further. With Brent at USD 100/bbl, the additional excess profit tax would have to be 45% of PBT in order for profitability to be at the same level, which we doubt would materialise.
Moreover, we see this as one of the possible scenarios for implementing the government’s previously voiced intention to support the Russian upstream segment. On the one hand, it might unlock fields which have been previously unprofitable due to a heavy taxation. On the other hand, it would provide additional incentives to develop mature brownfields further.