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Table Domestic Prices of Crude Oil, Petroleum Products and Natural Gas Expressed in US dollars in 2000 2011 (Average Producer Prices, USD/ton) 2000 2005 2006 2007 2008 December December December December December December Crude oil 54.9 167.2 168.4 288.2 114.9 219.Motor gasoline 199.3 318.2 416.5 581.2 305.1 457.Diesel fuel 185.0 417.0 426.1 692.5 346.5 394.Furnace fuel oil 79.7 142.7 148.8 276.5 125.0 250.Natural gas, USD/thousand 3.1 11.5 14.4 17.6 18.1 16.cubic meters Jul-Jul-Apr-Apr-Apr-Oct-Oct-Jan-Jun-Jan-Jun-Jan-Jun-Feb-Mar-Feb-Mar-Nov-Nov-Nov-Sep-Dec-Aug-Sep-Dec-Aug-Sep-May-May-RUSSIAN ECONOMY IN trends and outlooks contd 2010 2011 2011 2011 2011 December January March June September December Crude oil 248.2 269.2 304.4 302.7 273.2 303.Motor gasoline 547.9 524.9 556.7 647.7 607.5 576.Diesel fuel 536.1 570.9 584.5 605.2 553.0 644.Furnace fuel oil 246.3 264.0 281.7 308.8 303.0 274.Natural gas, USD/thousand 20.5 21.9 23.1 26.8 25.7 21.cubic meters Source: calculations are based on data provided by the RF Federal State Statistics Service.

At the same time, Russias domestic oil prices, as before, remain at a level significantly below that of international oil prices. The gap between the international and domestic oil prices is caused by objective factors: the export duty on oil and the additional transportation costs associated with oil exports. As for the domestic prices of natural gas, these so far have been subject to government regulation. In order to sustain the competitive capacity of Russias national economy, the RF government maintains the domestic prices of natural gas at a significantly lower level that the prices on the European market.

An extraordinary event for Russia was the so-called gasoline crisis in April May 2011, whose manifestation was an acute shortage of gasoline in some regions. As a result, these regions experienced a rapid surge of gasoline prices (thus, for example, in mid-May in the Republic of Tyva the prices of gasoline at independent filling stations that did not belong to the vertically integrated structures of oil companies were as high as 50 Rb/liter, while Russias average price was only 24.8 Rb/liter). Such a situation became possible due to increasing gasoline exports coupled with their shrinking supplies on the domestic market. In this connection, in order to limit exports and fill the domestic market, the export duty on gasoline from May onwards was raised from 67% to 90% of the export duty on oil.

500 250 Oil Gas 0 Source: calculations are based on data provided by the RF Federal State Statistics Service.

Fig. 50. Average Producer Prices of Oil and Natural Gas in Dollar Terms in 20002011, USD/ton, USD/1000 m Jul-Jan-Jun-Jan-Sep-Feb-Oct-Dec-Aug-Apr-Dec-Mar-Nov-May-Section The Real Sector of the Economy Petrol Fuel oil Source: calculations are based on data provided by the RF Federal State Statistics Service.

Fig. 51. Average Producer Prices of Motor Gasoline and Furnace Fuel Oil in Dollar Terms in 20002011, USD/ton The gasoline crisis had two main causes: the governments pricing policy namely, the freezing of the prices of gasoline on the domestic market; and the introduction of new technical standards for motor fuel. In January 2011, in response to the rise in international prices and increased rates of excises, the domestic price of petroleum products also climbed up.

However, already in early February the RF government, operating, as it frequently happens, in micro-management mode, recommended Russias oil companies that the prices of gasoline and diesel fuel should be reduced, after which the prices obligingly dropped. In February, March and April the retail prices of gasoline in Russia were below the January level and only slightly above the December 2010 level, while the producer prices were below their December level (Table 32).

Table Prices of Motor Gasoline in Russia in 20102011, ruble/liter 2010 2011 2011 2011 2011 December January February March April May Consumer prices of Au92 motor 23.42 24.25 23.66 23.42 23.63 25.gasoline (Au93, etc.) Au95 and higher 25.29 26.11 25.60 25.42 25.56 26.Producer price of:

Au92 12.33 11.48 11.98 11.56 12.21 13.Source: RF Federal State Statistics Service.

At the same time, the prices of oil and petroleum products on the world market displayed rapid growth. The price of Urals on the European market rose from 89.5 USD/barrel in December 2010 to 119.2 USD/barrel in April, or by 33%. The price of gasoline on the European market (less indirect taxes) over the same period rose from 0.566 euro/liter to 0.738 euro/liter, or by 30% (Table 33). In Russia, on the contrary, the domestic price of gasoline Jul-Jan-Jan-Jun-Oct-Sep-Feb-Apr-Dec-Dec-Mar-Nov-Aug-May-RUSSIAN ECONOMY IN trends and outlooks (producer price) in April was below its December level by 1%, while the retail price of Augasoline rose only by 0.5%. As a result, exports turned out to be more profitable than supplies on the domestic market, and so oil companies responded to that situation by increasing their volume of gasoline exports. According to Rosstats data, exports of motor gasoline in January April 2011 rose on the same period of 2010 by 16.0%, while the share of exports in gasoline output increased to 13.6%.

Table Prices of Motor Gasoline in Germany* in 20102011, euro/liter 2010 2011 December March April Consumer price 1.453 1.587 1.Tax on consumers 0.887 0.908 0.Price less taxes 0.566 0.679 0.* Price of Au95.

Source: OECD/IEA.

In this connection, an important role was also played by the introduction of new technical standards for fuel. From 1 January 2011, Russia introduced Euro-3 fuel standard for motor gasoline, with the result that class 2 gasoline (of lower quality) was either no longer produced, or was produced exclusively for exports. Some oil companies, for technical reasons, were unable to replace the production of that class of gasoline by class 3 gasoline, which had a negative impact on the overall gasoline supply. In January April 2011, the volume of gasoline production amounted to 99.7% of that in the same period of 2010; in particular, the April 2011 volume was only 96.4% of the volume produced in April 2010.

In these conditions, the introduction of an elevated (restrictive) export duty on gasoline in the amount of 90% of the rate of the export duty on oil, as well as a weaker administrative pressure on prices made it possible to increase the supplies of gasoline on the domestic market and thus bring the situation back to normal. Later on, it was decided that this rate of the export duty on gasoline should be maintained.

4.4.5. Tax Regulation of the Oil and Gas Sector A positive influence on the oil sector was produced by alterations in the system of taxation designed to lower the tax load, create incentives for deeper oil extraction from existing oil fields and to encourage the development of new oil deposits in untapped regions and on the continental shelf. From the year 2009 onwards, the non-taxable minimum in the formula for calculating the Cp coefficient (which reflects the movement of world oil prices and is applied to the Mineral Resources Extraction Tax (MRET) basic rate for oil) was increased from 9 USD per barrel to 15 USD per barrel (Table 34). This resulted in a significant reduction in the MRET rate for oil extraction. Besides, the requirement that the direct method for calculating the physical quantity of oil extracted from each ring-fenced field should be used when applying the regressive coefficient to the MRET rate for highly depleted deposits was abolished.

This measure made it possible to extend this benefit to all depleted deposits, thus creating incentives for the prolongation of their exploitation and making some additional oil extraction feasible.

Section The Real Sector of the Economy Table The MRET Rate for Oil Extraction in 2005 2005 2006 2007 2008 2009 2010 MRET basic rate for oil extraction, 419 419 419 419 419 419 Rb/ton Coefficient characterizing move- (P9) R/261 (P 15) R /ment of world oil prices (Cp) Coefficient characterizing degree of 3.83.5N/V deposit depletion (Cd) Note: P = average price of one barrel of Urals (USD per barrel) for tax period; R = average Rb / USD exchange rate for tax period as established by the RF Central Bank; N = cumulative oil production per ring-fenced field; V = initial producible oil reserves of , , 1, and 2 categories per ring-fenced field.

Source: RF Tax Code; Federal Law of 22 July 2008, No. 158-FZ; Federal Law of 27 July 2006, No. 151-FZ;

Federal Law of 7 May 2004, No. 33-FZ.

In order to stimulate the development of untapped basin provinces, tax holidays with regard to MRET were established for the new oil fields situated in territories with no infrastructure (Table 35). Thus, for example, for the development of new oil fields in the East Siberian Oil and Natural Gas Basin Province within the border of the Republic of Sakha (Yakutua), in Irkutsk Oblast and in Krasnoyarsk Krai, the zero rate export duty was introduced on oil production up to the volume of 25m tons per ring-fenced field if the established period of years for its development is not exceeded; or for a period of 10 years under a license obtained for the use of land for the purpose of exploration and extraction, or for a period of 15 years under a license obtained for the simultaneous geological prospecting and exploration work and extraction, beginning from the moment of State registration of a license.

In order to additionally stimulate the development of the oil deposits of the East Siberian Oil and Natural Gas Basin Province, the RF Government introduced, from 1 December onwards, the zero rate export duty on oil from new oil fields in East Siberia, which was applied until 1 July 2010. Then the RF Government with regard to that oil switched over to a lower rate of export duty. From December 2010, the lower rate of export duty was also applied to the oil fields in the Caspian Sea.

Table Russias Regions Eligible for and the Parameters of MRET Tax Holidays Applied to Oil Extraction Cumulative oil ex- License period for License period for Region traction per ring- exploration and ex- geological prospecting Date of introduction fenced field, m tons traction, years and extraction, years 1. Republic of Sakha (Yakutua), 25 10 15 01.01.Irkutsk Oblast, Krasnoyarsk Krai 2. Continental shelf north of 35 10 15 01.01.Arctic Circle 3. Nenets AO, Yamal Peninsula 15 7 12 01.01.4. Azov and Caspian Seas 10 7 12 01.01.5. Black Sea 20 10 15 01.01.6. Sea of Okhotsk 30 10 15 01.01.7. Yamalo-Nenets AO north of 25 10 15 01.01.65N Source: RF Tax Code; Federal Law of 21 July 2011, No. 258-FZ.

The year 2011 saw the introduction of some more amendments to the RF Tax Code in connection with the alteration in the taxation of the oil and gas sector, which came into force from January 2012. In order to create incentives for developing small oil fields, from the year 2012 onwards a downward coefficient is to be applied to the rate of MRET levied on oil ex RUSSIAN ECONOMY IN trends and outlooks traction, which specifies the size of oil reserves in a given ring-fenced field (Cr). That coefficient is computed by applying a special formula to ring-fenced fields with initial producible oil reserves of up to 5m tons and depletion of up to 0.05. Prior to that, the procedure for computing MRET levied on oil extraction envisaged no gearing of the tax rate by the size of oil reserves. The result was that, as a rule, the development of smaller oil fields with producible oil reserves of up to 5m tons was not feasible due to the high per unit capital and exploitation costs. At the same time, the register of state reserves of mineral resources incorporates about one thousand oil fields with producible oil reserves of up to 5m tons and depletion of less than 5%, with cumulative untapped oil reserves of 1bn tons.

The downward coefficient Cr when applied to the rate of MRET must create appropriate conditions for developing new small oil fields the operation of which would not be feasible under the generally applied taxation system. Thus, it will become possible to recover some additional oil reserves accumulated in such fields.

Within the framework of implementing the policy designed to stimulate the development of new region for oil production, in 2011 the MRET holidays regime was extended to the new oil fields situated in Yamalo-Nenets AO north of 65N. It is suggested that, to the oil fields situated in that region (with the exception of those in the Yamal Peninsula), the zero rate of MRET is to be applied until the cumulative oil production volume of 25m tons per ringfenced field is achieved, or for a period of 10 years under a license obtained for the use of land for the purpose of exploration and extraction, or for a period of 15 years under a license obtained for the simultaneous geological prospecting and exploration work extraction, beginning from the moment of State registration of a relevant license.

The MRET holidays regime was also extended to the oil fields situated in the Black Sea and the Sea of Okhotsk.

These measures are designed to create the necessary economic conditions for developing the oil fields in Yamalo-Nenets Autonomous Okrug, the Black Sea and the Sea of Okhotsk, the operation of which under the generally applied tax regime is not cost-effective because of the huge capital inputs needed for building an appropriate infrastructure compatible with their geographic and geological specificities.

It appears feasible to introduce, within the framework of the existing tax system, differentiated tax loads for regions where mineral resources extraction is associated with higher costs, because this will ensure adequate returns on the investments in the development of new deposits. At the same time, the mechanism of tax holidays, while being simple to apply from the point of view of tax administration, is rather imperfect. It means one and the same generalized approach to all the oil fields situated in a given region (or shelf zone), which does not take into account the real (very broad) variations in the cost of development of each specific oil field. As a result those fields that require highest investments may remain undeveloped.

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