Russia in New Drive to Reverse Drop in Oil and Gas Revenues
Kremlin looks to raise sector’s taxes again as international sanctions take toll.
Russian authorities are continuing to step up efforts to reverse the ongoing decline in revenues from the country’s oil and gas sector, which have been falling steadily since March.
The oil and gas sector has been a major contributor to Russia’s budget, but revenues have failed to keep pace with government spending that has increased greatly since the invasion of Ukraine early last year and pushed the budget deficit to 2.6 trillion roubles ($28.9 billion) between January and June this year, according to the country’s Finance Ministry.
New tax increases were imposed in March in an effort to boost revenues, but the ministry has admitted that oil and gas producers paid less in direct taxes in April, after the changes were introduced, than the previous month — 647 billion rubles in April against 688 billion rubles in March.
In a new effort to help combat the decline, the Finance Ministry said the country’s oil export tax, paid by producers as soon as they export volumes outside Russia, will increase by more than 8% to $2.30 per barrel from 1 August this year.
And Russia’s lower house of the parliament, the Duma, has rubber-stamped a government proposal to increase the minimum discount for the country’s most commonly traded oil blend, Urals, against North Sea benchmark Brent.
This measure aims to increase the revenues paid from the oil production tax, which companies have to pay once their oil is extracted from the ground and will need to be approved by the parliament’s upper chamber and signed by President Vladimir Putin before coming into force.
Both measures have come after the Kremlin reportedly instructed state pipeline operator Transneft to reduce the transportation of Urals blend crude to the country’s ports in the north, northwest and south in order to fulfil a promise to the Opec+ group to cut Russia’s oil exports by 500,000 barrels per day.
The Russian Energy Ministry said in a statement that it ordered Transneft to reduce previously agreed pipeline export allocations for country’s producers by 15.4 million barrels in the third quarter of this year.
Urals shipments to fall
Moscow business daily Kommersant suggested that most of the export cuts will be implemented by reducing seaborne shipments of Urals crude, while continuing to send supplies as planned of its ESPO Blend — better quality light oil — from West Siberia to China and Asia-Pacific via the East Siberia–Pacific Ocean trunkline and terminal at Kozmino in the country’s far east.
Also excluded from the Russian oil export cut are development projects in the country’s Arctic, where producers Gazprom Neft and Lukoil operate their own marine export terminals and do not deliver crude into the country’s trunkline network.
ESPO and other Russian proprietary oil blends have been sold this week above the price cap on Russian oil that G7 country set at $60 per barrel in December.
However, pricing agency Argus has reported that Urals continued to be sold below the established price cap limit last week, despite the Kremlin banning Russian producers from agreeing to comply with the G7 price cap mechanism.
The Russian Finance Ministry said that in June, the country’s oil and gas producers paid 529 billion roubles in direct taxes on their production against 571 billion roubles in May.
The year’s highest revenue of 688 billion rubles was recorded in March.
Some industry analysts in Moscow suggested that while the announced oil export reduction may narrow the spread between Urals and Brent — one of the government’s aims — a lower discount may be insufficient to generate the desired growth in oil revenues.
Upstream by Vladimir Afanasiev, August 4, 2023