24 september 2012

Dmitry Medvedev holds a meeting on stimulating hydrocarbon production

Dmitry Medvedev’s opening remarks:

The issue of improving taxation in the oil and gas industry has been among the priorities of the Government and, of course, of analysts. I held a meeting on this subject in June and also issued a number of other relevant instructions within the framework of the presidential commission.

As you know, the tax and customs payments of the fuel and energy industry constitute the lion’s share of deductions to the federal budget, and are clearly a vital component of our development. But in addition to this fiscal element, we must also ensure the progressive development of the industry – that is, we must plan its development for an extended period and make the industry more attractive to Russian and foreign investors. In other words, the Government must not only collect money from the industry, including from state companies – even though we have to do this from time to time – it must also bolster its development, and then there will be more money to collect.

But to be able to do this, we must look ahead and attract additional resources for the development of new fields, which will create jobs both in the fuel and energy industry and in related industries. Such projects usually need major investment, modern technologies and a relevant regime of regulation that would ensure the payback of investment, increase efficiency and create economically substantiated profitability standards. What are we suggesting? I will outline several positions, as this is what we have come here for.

First, we must introduce a standard transparent mechanism for stimulating the development of new hydrocarbon deposits. I am referring to the procedure for calculating export customs duties on crude oil and a number of products made from it. This will allow extending the planning horizon for investors, and will also make the Government’s policy in the oil and gas sector more predictable, which is vital. By the way, this is what all of our colleagues say, including the heads of state and private companies and foreign investors. They say that the predictability of the Russian market is even more important than the terms of operation themselves. In this sense, far from everything is as it should be, and we must do our best to reduce the range of changes, or better still, to rule out any change of terms for the foreseeable future.

Second, we must extend our previous decisions on mineral production tax rebates for oilfields located in several regions, in particular the Republic of Sakha, the Irkutsk Region and the Krasnoyarsk Territory. I am talking about the period until 2022. Eastern Siberia and the Russian Far East obviously need new growth points, as well as investment and skilled professionals.

And third, we must differentiate the mineral production tax rates for the gas industry. I’d like to remind you that the Government has recently discussed the issue of increasing the financial burden [on the gas industry], including by approving a new procedure for calculating the mineral tax for it, but only with due regard for the situation in the industry and for current trends on the gas market. It has been estimated that this would increase deductions to the federal budget by a certain sum, which may not be very large but it will still be considerable – around 17 billion roubles. On the other hand, it is obvious that we will also need to apply a stimulating approach to the development of new natural gas fields.

I also issued instructions to consider the possibility of introducing a formula for calculating the mineral tax rate for natural gas from 2014. The idea is to differentiate tax rates depending on the mining, geological and geographic factors.

We can also speak about what has been done and discuss new proposals, if any. This is the agenda for today. Let’s start working.


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Energy Minister Alexander Novak answers journalists’ questions after the meeting

Alexander Novak: Today, Mr Medvedev chaired a meeting to follow up on the execution of his order. Prior to 1 September 2012, we had to prepare proposals regarding the provision of export duty concessions to encourage the development of new fields in Eastern Siberia, including the Krasnoyarsk Territory, the Irkutsk Region, the Republic of Sakha (Yakutia), the north of the Yamal-Nenets Autonomous Area and the Nenets Autonomous Area. The point is that the existing tax system does not make it possible to carry out cost-effective development of these fields as there’s no proper infrastructure in place. Therefore, the proposal is to introduce a system of benefits known as the formula, which will allow investors to make decisions about the development of new fields in the areas that I mentioned. In addition to the fields located in these regions, also included are fields with reserves of over 10 million tonnes and with a depletion rate of less than 5% as of 1 January 2013. Concessions will be provided for a certain amount of oil, and the duties for this oil will be 45% of the price of over $50pera barrel. In fact, this means the tax burden on export duties will be reduced by about half. Further, we will determine the volume of oil needed to allow oil companies to sell at reduced export customs tariffs so that the economic viability of the projects reaches 16.3% of the project’s internal rate of return. Accordingly, we will amend the customs tariff law which sets out these principles. We will prepare and submit to the Government the required Government resolutions by 15 November, which will clearly formulate the rules for granting these concessions to further develop the principles that I have just mentioned, as well as the monitoring procedure to follow up on the implementation of these projects. In addition, the Ministry of Energy will issue an order which will make it possible to carry out the procedure for collecting the necessary information to determine the granting of such concessions and conducting a quarterly analysis of the monitoring results. In addition, as far as the operating fields are concerned, it was also decided to codify the rules and formulas for calculating export rates for the oil produced. As we know, the Government approves oil export duties on a monthly basis. Today, it was decided to codify these procedures in the draft law that is now being considered.

Question: Last Friday Alexei Miller complained that the document on differentiating the mineral tax takes an inordinate amount of time to complete. At what stage is the document now?

Alexander Novak: The question should be divided into two parts. The instruction with regard to developing a differentiated approach has to be fulfilled by 1 March 2013. We are working on it, and today I reported on the approaches that are being considered. We now have a new deadline – November – so we need to prepare the corresponding proposals more quickly. Gazprom has concrete proposals on existing fields that are already being developed. The Government recently decided to increase the mineral extraction tax, so we need to make individual decisions to prevent these projects from becoming economically unviable and inefficient. In this connection, Mr Medvedev spoke about establishing individual mineral tax rates for the Bovanenkovskoey ​​and Chayandinskoye fields.

Question: Do you support this?

Alexander Novak: We have been instructed to prepare proposals by 1 November. Colleagues, I would like to inform you that it was also decided at the meeting to extend the tax concessions on mining operations in Eastern Siberia until 1 January 2022. Previously, the term of the tax holidays was established on 1 January 2007 to last until 2017. But since the decision to build pipelines to these fields has just been taken, the deadline in the investment cycle (10 years) has been shifted to 1 January 2022.

Question: Will there be a need for additional executive orders to be able to do that? Should the law be changed?

Alexander Novak: Of course, we will need to amend the Government resolution.

Question: When will this be done?

Alexander Novak: This will also be done in the near future as part of drafting the regulations that we have actually already prepared. We are now waiting for the order  to finalise and submit to the State Duma a draft law On Customs Tariff by 8 October. As soon as this order is implemented, we will submit the regulations to the Government for approval.

Question: Did you discuss the off-the-shelf production?

Alexander Novak: No, not today. This will be discussed at another meeting to be held in the near future, as the Prime Minister said. Here too we are currently preparing proposals that are actually also ready and have been agreed with the Finance Ministry. Our deadline was 1 October. This week we will submit them to the Government.

Question: Are these decisions included in the tax regulations? And what exactly do you mean when you talk about shortfalls in revenue next year?

Alexander Novak: You know the issue is not about a shortfall in revenue but about additional payments to the budget because these fields are not being developed. I’d like to give you some figures: we now have 28 billion tonnes of reserves in Russia, and 10 billion of them are located in Eastern Siberia and the northern regions that are not being developed due to a lack of economic incentives. The adoption of these changes to the law and draft regulations will increase development to include an additional 5.3 billion tonnes of oil, or about 70 to 100 million tonnes annually. This will make up for the amounts that are falling out as a result of the depletion of the fields in Western Siberia. As we know, the production output in Western Siberia has been declining by about 1.6% a year over the last six years. If we do nothing and do not create incentives for the commissioning of new fields in the east and the north, we will see a drop in production. Therefore, new solutions bring new fields into play and additional oil, which means additional tax revenues. The financial and economic study that we have prepared together with the Finance Ministry shows that the budget will receive about $300 billion by 2030. If we divide that by 20 years that is about $15 billion a year, or nearly 450-500 billion roubles of additional revenue a year, so not a shortfall in revenue at all.

Question: Do you agree with the forecast by the Ministry of Economic Development which revised the production in Russia down to 510 million tonnes from 514 million tonnes?

Alexander Novak: In 2012 or 2013?

Remark: 2013.

Alexander Novak: We have agreed all our forecasts with the Ministry of Economic Development. This year, we expect to produce about 515 million tonnes. Forecasts for socioeconomic development in 2013, 2014 and 2015 have been agreed and approved by the Government

Question: Did you discuss the Rosneftegaz directive?

Alexander Novak: No, that’s a topic for a different discussion. That’ll be it for today. Thank you.