The authorities of the Khanty-Mansi region might propose a new draft law to the Duma to replace MET with tax on financial results (TFR) by the end of the year, Vedomosti reports. The tax could be 60% of revenues decreased by operating costs. The authorities are considering a number of fields, including Lukoil, Gazprom Neft, Salym Petroleum and Surgutneftegaz, to serve as pilots to analyse the new rules over the course of three years. The Ministry of Finance has yet to examine the document.
Given the lack of details, it is difficult to calculate the exact impact on the industry and individual companies. Our calculations suggest that the new tax rate (based on USD 70/bbl) would stand at around USD 21-23/bbl, which is comparable to the standard MET rate of US 21.7/bbl. Taking into account that the potential tax would not be applied to all fields, we do not expect a sizable effect on Russian oil companies’ financials overall if the new tax were introduced. Nevertheless, we continue to believe that the current tax system stimulates Russian oil companies to improve operating efficiency with the corresponding cost-saving and FCF maximisation approach. We think there is some probability that financial discipline might deteriorate if oil taxation in the country is transferred to the TFR scheme.
To recap, in September, the Ministry of Energy suggested two approaches to excess profit tax for the sector. First, an excess profit tax (EPT) with oil operating income (which is to have the potential to be reduced by capex) being subject to the tax. Second, a tax on financial results (TFR), with oil revenues decreased by an ‘uplift’ (current opex, DD&A, prior year losses and a capex rebate for the previous four years), which cannot exceed 10% of revenues. The rate for both taxes was suggested by MinEnergo at 60%.