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Public companies to get tax, customs benefits to extract hydrocarbons offshore

October 01, 2013, 18:08 UTC+3 Alexandrova Lyudmila

MOSCOW, October 1 (Itar-Tass) - Russian President Vladimir Putin has signed a law on benefits for the companies producing hydrocarbons on Russia’s continental shelf, which will make the Russian tax regimen one of the mildest in the world. Experts believe that two state-run giants, Rosneft and Gazprom, will get the greatest benefits from it.

The law identifies tax and customs incentives for those organizations that implement hydrocarbons investment projects in offshore areas, located entirely in Russia’s internal waters and in the territorial sea on the continental sea shelf of Russia and in the Russian sector of the Caspian Sea. The law establishes special rules of calculating the mineral resources production tax and tax exemptions for developing new offshore fields.

Also, the amendments envisage discounts off the transport tax and the tax on the property of organizations. Also, there is a possibility of introducing a zero value added tax on the marketing of hydrocarbons produced at a certain deposit or products of their refining and on services of transporting this kind of raw materials.

Those enterprises which extract hydrocarbons offshore are to pay a 20% profit tax. The entire sum raised in that way will be transferred to the federal budget.

Alongside this amendments were approved to the law on the continental shelf of Russia, crucial to improving the mechanism of creating artificial islands, facilities and structures offshore.

Russia’s offshore resources are estimated at 76 billion tonnes of equivalent fuel.

The government issued instructions for drafting such a bill back in April 2012. All offshore projects were divided into four groups depending on conditions - from basic to Arctic. Discounted mineral resources production tax rates have been established for all - from 30% of the cost of raw materials for the basic level projects to five percent for Arctic ones (they will begin to be charged only when after a certain amount of reserves has been extracted.)

Offshore projects operators are guaranteed the tax regimen will stay unchanged for periods ranging five to fifteen years. Also, they are exempt from paying the export tax, and the import tax and VAT tax on the imported high-tech equipment. Such measures will be spread to deposits which will begin to be developed in 2016.

As the daily Vedomosti says, the authors of the bill have taken into account the companies’ requests. For instance, the zero mineral resources production tax for the Prirazlomnoye oil deposit will stay effective from 2019 through 2022 (just recently the top managers of the project’s operators - Gazpromneft Shelf - warned that without extra benefits the project will be balancing on the brink of profitability).

The operator of the Kirinsky gas condensate deposit (Gazprom Dobycha Shelf) will be relieved of taxes until January 1, 2021, if the depletion of reserves on January 1, 2015 is less than five percent.

The reserves of hydrocarbons on the Caspian Sea shelf belong with the second class of complexity (the mineral resources production rate set at 15%), although in the past such deposits were not considered as offshore ones at all. A proposal to that effect was earlier voiced by LUKOIL president Vagit Alekperov.

These are not just tax breaks, but a fundamentally new approach to taxing upstream activities, a partner of the tax and law consultancy department of the KPMG in Russia, Mikhail Orlov, is quoted by the daily as saying.

The need for such changes stems largely from the rigorous production conditions implying high costs. Oil workers and officials have mentioned different levels of costs of developing offshore deposits - from 300 billion dollars to 700 billion dollars.

It is expected that the new law will spell the greatest benefits for the main users of the Russian offshore areas - Rosneft and Gazprom. The two giants hold nearly all licenses to develop the distributed offshore areas.

Vitaly Kryukov, of the IFD-Capital is quoted by the daily Kommersant as saying the new tax breaks are colossal. He remarks that Rosneft and Gazprom have achieved the easiest tax regimens in the world.

Narek Avakian, of AForex, has calculated the tax benefits may help companies save up to 20 billion dollars a year.

Analysts believe that the tax breaks encourage the implementation of the already declared major offshore projects that have been stalled somewhat. Rosneft has already concluded agreements with ExxonMobil, Eni and Statoil to develop offshore oil and gas deposits in the Kara, Barents, Okhotsk, Black and Laptev seas. Rosneft’s most significant offshore project is the development of three blocks in the Kara Sea east of the Novaya Zemlya archipelago in cooperation with Exxon.

When at the end of the summer 2012 Rosneft concluded an agreement with ExxonMobil to jointly develop deposits in the Arctic, the Russian state-owned company asked Russian President Vladimir Putin to consider extra tax incentives for joint projects.

Gazprom may become a trailblazer on the Arctic sea shelf soon. The company plans to start oil production at the Prirazlomnoye deposit in the Pechora Sea at last. The beginning of production there has been postponed several times.

Major tax breaks for offshore projects will speed up Rosneft’s and Gazprom’s projects, analysts say. Private companies are unlikely to be allowed to tap offshore resources in the near future. In their opinion this may happen only after the most lucrative deposits have been distributed.