Section The Real Sector As it is shown by the analysis of the Russian oil export dynamics over the long period of time in 2006 the total net export of oil and oil products reached unprece dented level and exceeded by 59.5 mln. tons the level of 1988, which was charac terized by a maximum oil export volumes (291.6 mln. tons). At the same time the increase in oil products share in oil export was observed, their share increasing from 18.2% in 1990 to 29.5% in 2006 (Table 22). In the environment of the sharp reduction of domestic oil consumption (according to our calculations it has de creased from 269.9 mln. tons in 1990 to 128.9 mln. tons in 2006, that is more than by half) the share of oil and oil products net export in oil production increased over this period from 47.7% to 73.1%. In contrast to oil and oil products export the net gas export and its share in production do not exceed the level of 1990ies in recent years though the share of net gas export in its production is a bit higher than in the pre reform period (29.3% in 2006 against 28% in 1990).
Table Oil Products Net Export in 2002–2002 2003 2004 (estimation) Oil products net export, mln. tons 74.8 78.2 81.4 96.8 103.The share of oil products in net export 29.2 26.8 24.3 27.9 29.of oil and oil products, as percentage Source: Federal State Statistics Service, Federal Customs Service, authors’ calculations.
The given data testifies that the export orientation of oil sector in comparison with the pre reform period has reinforced. It should be, however, taken into ac count that it is connected not only with the increase of the absolute export volumes, but also with a considerable decrease in the domestic oil consumption as a result of Russian economy market transformation.
High level of the world prices for oil, which was observed in 2006, determined considerable incomes growth in the oil sector of the economy. In January November 2006 total earnings from oil and main kinds of oil products export (car petrol, diesel oil and furnace fuel oil) reached USD 129.0 bln., which is a record level over the whole post reform period (Table 23). For reference it can be noted that the minimum level of oil export earnings was observed in the environment of world oil prices fall in 1998, when the export profit was only USD 14 bln.
Table Oil and Oil Products Export Earnings in 2000–2006, USD bln.
2000 2001 2002 2003 2004 2005 (months) Oil and main kinds of oil 34.9 33.4 38.7 51.1 74.6 112.4 129.products export earnings Source: calculated on the basis of the Federal State Statistics Service.
The share of power and energy commodities in Russian export in 2006 was equal to 65.2% (in 2004 this index was equal to 56.8%, in 2005 – 64.1%). The pro portion of the crude oil in Russian export in 2006 was equal to 33.9% (in 2004 – RUSSIAN ECONOMY IN trends and outlooks 32.1%, in 2005 – 34.7%). The data on the structure of Russian export of energy suppliers are demonstrated in Table 24.
Table Value and Share of Fuel and Power Commodities in 2005–2005 USD bln. %* USD bln. %* Fuel and Power commodities, total 154.7 64.1 196.8 65.of which:
oil 83.8 34.7 102.3 33. natural gas 31.4 13.0 43.8 14.* as percentage to the total volume of Russian export Source: Federal State Statistics Service The dynamics of separate indices of oil and gas sector development is shown in Fig. 9–12 (value indices are given in current prices).
Oil Mazut Source: calculated on the basis of Federal State Statistics Service data Fig. 9. Average Export Prices for Oil and Furnace Fuel Oil (mazut) in 1996–2006, as USD per ton Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. MarchMarch March March March March March March March March March Section The Real Sector 80 40 0 Mln. tons (left-hand axis) Mln. USD (right-hand scale) Source: calculated on the basis of Federal State Statistics Service data Fig. 10. Oil and Oil Products Export in Natural and Monetary Terms in 1997–Oil Gas 0 Source: calculated on the basis of Federal State Statistics Service data Fig. 11. Average Producers Prices for Oil (as USD per ton – left hand scale) and Gas (as USD per thou. cu. m – right hand scale) in Dollar Terms in 1996 Jan.Jan.May May May May May May May May May May Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Sept.Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Sept. Dec.
June March March Sept.Sept.Oct.Apr.Oct.Apr.Jan.Jan.Jan.Feb.Feb.Aug.Dec.Nov.Aug.Nov.July July May May JuneRUSSIAN ECONOMY IN trends and outlooks Petrol Mazut Source: calculated on the basis of Federal State Statistics Service data Fig. 12. Average Producers’ Prices for Motor Petrol and Furnace Fuel Oil in Dollar Terms in 1996–2006, as USD per ton A number of factors provide favorable demand and price prerequisites for the further development of oil sector in Russia. The export opportunities of Russian oil to European countries will expand while the demand for oil in the countries of West ern and Eastern Europe is increasing and oil production in the Northern Sea is de creasing. At the same time the growth of export demand for oil in the countries of Asian Pacific Region, China in particular, as well as the predicted considerable ag gravation of their dependence upon the import create favorable opportunities for Russia’s access to the markets of this region’s countries, first of all China, South Korea and Japan and for considerable growth of oil export in this direction. The ex port expansion requires the formation of the necessary transport infrastructure, especially for oil supplies to China, oil resources exploration in the East part of the country.
For oil resources development in East part of the country both direct state participation in the projects of transportation infrastructure formation for oil trans portation and certain tax policy implementation which will stimulate the develop ment of the new oil fields. Since the development of oil fields in Eastern parts of the country is connected with relatively higher production costs, tax policy should in clude certain measures to stimulate the investments.
01.06.11.04.09.02.07.12.05.10.03.08.01.06.11.04.09.02.07.12.05.10.03.08.01.06.11.Section The Real Sector New Elements of Taxation System of Oil and Gas Sector In 2006 Russian taxation system of oil economy sector was supplemented by a number of new elements. The main constituents of the existing taxation system of oil sector are the severance tax and the export duty. Severance tax was introduced from the beginning of 2002 instead of three payments, which were in force at that time: royalty, raw materials and mineral base restoration tax and excise duty for oil.
From the beginning of 2005 severance basic tax rate was fixed at RUR 419 per ton, and the coefficient that characterizes the oil world prices dynamics and is ap plied to the basic tax rate is calculated by a formula:
Cp = (P – 9) х R / 261, where P is the average price level for oil grade Urals in USD per barrel over the taxation period;
R is the average over the taxation period value of USD to RUR rate exchange, which is fixed by the Central Bank of the Russian Federation (Table 25).
Table Severance Tax Rate on Oil Production over 2002 2002 2003 2004 2005 Severance base rate, RUR per ton 340 347 Coefficient, characterizing the oil world prices dynamics (Cp) (P 8)хR/252 (P 9)хR/Source: Federal Law No. 33 ФЗ from 7 May 2004, Federal Law No. 126 ФЗ from 8 August 2001.
As a result of correction factor implementation a real tax rate depends signifi cantly on the level of world prices for oil. Thus, the average dollar exchange rate being 28.28 RUR/USD in 2005, Cp coefficient along with the growth of world prices increases from 0 when the price for oil grade Urals is below USD 9 per barrel to 5.when the oil price is USD 60 per barrel. The applied taxation rate increases corre spondingly (Table 26).
Table Severance Rate on Oil Production in the Taxation System of 2005 2006, as RUR per ton Oil grade Urals price, as USD per barrel 20 30 40 50 Severance basic rate 419 419 419 419 Cp coefficient 1.1924 2.2764 3.3604 4.4444 5.Real severance rate 500 954 1408 1862 The severance tax introduction enabled to increase significantly the taxation system budget efficiency, to neutralize negative taxation effects of transfer price formation, to ensure the transparence of tax rates ranking, to adjust Russian taxa tion system to the world practice.
At the same time the existing tax system, which is based on the flat specific severance rate, is intended to be used chiefly under average conditions and does not take into consideration existing differences in oil production conditions, which are accounted for by field characteristics, its location, as well as the extent of its development. As a result, the economy of production at the fields with higher ex RUSSIAN ECONOMY IN trends and outlooks penses becomes worse, the selective choice of the most effective reserves and the early end of exhausted reserves development is stimulated, oil being lost in the subsoil areas. At the same time the beginning of the development of new oil fields becomes more complicated, especially in unreclaimed regions with undeveloped infrastructure. Higher capital, investment and transport expenses lead to the fact, that in the environment of the existing tax system the realization of many oil fields development projects in new regions does not provide necessary investment re turn.
The disadvantages of the severance flat rate account for the search of the ways to differentiate tax rate depending on the mining and geological, economic and geographic factors, which characterize real oil production conditions. As a re sult, a set of suggestions to differentiate severance tax rate was developed by vari ous government bodies, institutes and individual experts.
The analysis of different conceptions of tax rate differentiation depending on the mining, geological, economic and geographic conditions of oil production demonstrates that in the conditions of present day Russia the complication of ad ministration, potential corruption, the opportunity to manipulate and underdeclare tax liabilities constrain the application of many approaches. The approaches, that can be potentially realized, are only severance differentiation by reserves exhaust and severance differentiation by location, zero rate application in the first years from the start of the development for new oil fields (tax vacations), as well as zero rate application in case of special oil production conditions (superviscous oil).
The existing taxation system was supplemented with a set of new element by the Federal Law No. 151 ФЗ from 27 July 2006, “On amendments to chapter part two of the Tax Code of the Russian Federation and invalidation of specific stat ues of the Russian Federation”. The main amendments, which came into effect on 1 January 2007, are the following.
1. The severance zero rate if fixed for oil fields of East Siberian oil and gas province in the territory of the Republic of Sakha (Yakutia), Irkutsk oblast and the Krasnoyarsk krai till the achievement of 25 mln. tons of accumulated oil production volume on the subsoil area or for 10 years in case of the license to use subsoil with the aim of exploration and for 15 years in case of the license for simultaneous geo logical exploration and oil production from the moment of the state registration of the license.
The severance zero rate for the period before reaching of 25 mln. tons of ac cumulated oil production volume on the subsoil area or 10 year period, calculated from 1 January 2007, is applied to all oil fields of these region in the process of de velopment, if the extent of exhaust does not exceed 0.05.
2. An extra coefficient Ce, which is applied to severance basic rate and char acterizes the extent of oil reserves exhaust in the subsoil area, is introduced. Ce coefficient is applied if the extent of the subsoil area exhaust is in the range from 0.8 to 1 and is calculated by the following formula:
Ce = 3.8 – 3.5 •N/V, Section The Real Sector where N is accumulated oil production in the subsoil area;
V is the initially extracted oil reserves of grades А, В, С1 and С2 at the subsoil area.
Thus, for oil fields with the reserves exhaust extent of more than 80% a reduc ing coefficient, which value varies from 1 (corresponding to exhaust extent of 0.8) to 0.3 (corresponding to exhaust extent of 1), is applied to severance rate. If re serves exhaust rate at the subsoil area exceeds 1, Ce coefficient is assumed to be equal to 0.3.
3. Regulations that fix severance specific rate for oil production and the pro cedure of its application are included directly in the Tax Code of the Russian Fed eration (chapter 26). Before that the application of severance specific rate and Cp coefficient, which characterizes the world oil prices dynamics, was established by the Federal Laws No. 126 ФЗ from 8 August 2001 and No. 33 ФЗ from 7 May 2004, for the period up to 31 December 2006.
Thus, from 1 January 2007, the application of severance specific rate for oil production is fortified in the Tax Code, while the regulation on ad valorem rate of this tax, which was present in the Tax Code, is excluded.
Passed amendments envisage that severance preferences for new and ex hausted oil fields can only be received when applying a direct method of oil pro duction quantity control at the subsoil area. As applied to exhausted oil fields, this regulation limits substantially the sphere of tax remissions application, for not all exhausted oil fields (licensed lots) have got a direct control of oil production quantity.
Severance remission provision for new oil fields in East Siberia gas and oil province does not lead to the reduction of current budget income, for the develop ment of these oil fields in the environment of the existing tax regulations will not proceed because of low investment return.
Adopted amendments are aimed at the stimulation of the development of ex hausted and new oil fields. Severance differentiation with regard to reserves ex haust enables to prolong exhausted fields development periods and increase oil extraction extent. The extension of exhausted fields exploitation provides extra in payments of severance (collected with the lowered rate) as well as other taxes (profit tax, export duties etc.). Severance rate reduction for new oil fields makes it possible to stimulate the development of East Siberia oil and gas province, create the basis for future income of the state budget.
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