30 years on Sakhalin: why Exxon renounced claims to the Ministry of Finance

The dispute settlement agreement assumes that ExxonMobil’s subsidiary will pay a profit tax of 35%, while Russia will extend the right to extract oil until 2051 as part of the production-sharing agreement.
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The government disclosed the terms of the settlement of the tax dispute between Russia and ExxonMobil because of the Sakhalin-1 project. They stipulate that Exxon Neftegaz (operator of Sakhalin-1), a subsidiary of American ExxonMobil, and the other parties to the agreement will give up attempts to switch to a reduced income tax rate of 20% and pay it at a fixed amount of 35%. Russia, in turn, within the framework of this agreement, will not compensate ExxonMobil for $ 637 million, as the company demanded, but will have to grant the right to extract oil under a production-sharing agreement (PSA) until 2051 (the license term for Sakhalin-1 "ends in the middle of 2021). This is stated in the government report on the implementation of the PSA, reports "Interfax".

In particular, the document, according to the agency, states that, according to the provisions of the settlement agreement, Exxon Neftegaz and other members of the PSA consortium will waive tax claims against Russia and the Sakhalin Oblast, the purpose of which is to repeal or challenge the application of the aggregate fixed tax rate 35% profit. Meanwhile, the Russian Federation and Sakhalin Oblast “will give the consortium the right of arrangement and production under the PSA for three consecutive periods in such a way that the period of arrangement and production will expire on December 3, 2051,” the report said.

In September last year, the manager of one of the companies - shareholders of the Sakhalin-1 project operator, an official close to the PSA management board, and a source close to Rosneft (owns 20% in the project) told about such conditions of the peace agreement with Exxon. ).

The right to extend the terms of production members of the consortium, as indicated in the government report, has already been granted. "The refusals of the consortium participants from the requirements to reduce the tax rate on profits are presented," - the document says. “On the basis of the payment notifications, the Sakhalin branch of Exxon Neftegaz paid the difference between the amount of income tax specified in the payment notifications and the amount of tax paid on the basis of the tax returns on income tax“ under protest, ”the report explains.

The Sakhalin-1 oil and gas project involves the development of the Chayvo, Odoptu and Arkutun-Dagi fields on the northeast shelf of Sakhalin Island. The participants are Exxon Neftegas Limited (30% in the project), Rosneft, Indian ONGC (20%) and SODECO (30%).

The dispute about the flow of oil

Rosneft settled a dispute with other shareholders of Sakhalin-1 about oil flows from its plot to consortium sites, Indian ONGC Videsh head Narendra Verma told Bloomberg. The consortium will pay Rosneft $ 230 million (15 billion rubles at the current exchange rate of the Central Bank), including ONGC - about $ 50 million, said a top manager. The court hearing on this case is still scheduled for November 2, it follows from the file of the Arbitration Court of the Sakhalin region. The representative of "Rosneft" information about the agreement does not comment.

«Роснефть» требовала от участниц консорциума «Сахалин-1» более 89 млрд руб. за переток нефти с ее участка на месторождении Чайво на участок «Сахалина-1» на том же месторождении. Более 81,7 млрд руб. она сочла «неосновательным обогащением» партнеров, а еще примерно 7,3 млрд руб. хотела взыскать с них в качестве процентов за «пользование чужими денежными средствами», начисленными в период с 10 июля 2015 года по 31 мая 2018 года.

In early 2015, Exxon Neftegaz demanded that Russia return about $ 500 million paid by it as a tax on project profits. According to company representatives, ExxonMobil's subsidiary has overpaid this amount since 2009, when the tax rate on profits in Russia dropped to 20%, and ExxonMobil, under the terms of the PSA, continued to pay a tax of 35% of profits. The Russian side, in response to this, stated that the PSA project has the status of a law and the basic conditions for its implementation should be unchanged from the time of the conclusion of the agreement, and any amendments can be made only by the court.

In March 2015, ExxonMobil addressed this issue to the Stockholm arbitration. By March 2017, the amount of the company's claims increased to $ 637 million. In response, the Russian Ministry of Finance announced that they were ready to out-of-court settlement of a tax dispute on mutually beneficial terms. Six months later, on September 7 last year, Russian President Vladimir Putin announced that Russia had agreed to settle the dispute with Exxon. On September 12, 2017, the Ministry of Finance and the American company signed a settlement agreement, on December 8 last year, it was approved by the Arbitration Institute of the Stockholm Chamber of Commerce.

Far Eastern LNG plant fell to $ 10 billion

The cost of the Rosneft and Exxon project to build the De-Kastri Far Eastern LNG Plant dropped to $ 9.8 billion from $ 15.3 billion announced last year. “The planned capacity of the LNG plant at the moment is 6.2 million tons per year (previously - 6 million tons per year), the company's total capital expenditures are estimated at $ 9.8 billion, including the LNG plant - $ 6.9 billion, the upstream sector - $ 1.6 billion, pipelines - $ 1.3 billion, indicates Interfax a reference to a government report on the implementation of production sharing agreements (PSA). At the same time, Rosneft is studying the possibility of building a plant within the Sakhalin-1 consortium with the participation of all of its investing companies, including Indian and Japanese partners, and not alone or only with Exxon, Reuters reported, citing two sources. Expansion of the number of participants in the project will allow sharing costs for the project, the agency said.

Mikhail Subbotin, a senior researcher at IMEMO RAS, one of the authors of the PSA legislation, believes that Exxon was forced to accept the conditions of the Russian government to resolve the dispute over the profit tax rate on the Sakhalin-1 project. According to him, the company-operator has paid back its investments in the project and now shares in it the profit with the Russian side. “It is beneficial for her to remain in the project, as long as profit is possible, even despite the actual deterioration of the contract terms during its implementation. The main goal in the tax dispute was precisely the size of the income tax rate for the entire period until the completion of the project, and not the disputed $ 637 million, which the foreign partner initially insisted on paying, ”the expert believes.

He believes that if Exxon decided to defend his case, both about overpayment of taxes and the size of the rate, he would risk seriously spoiling relations with Russia. “We remember well how, with the help of various environmental audits, the state managed to get Shell and its Japanese partners to reduce their share in the Sakhalin-2 project in favor of Gazprom.

Sakhalin-1 is not subject to US sanctions, and from this side, the investor is still protected, but in its relationship with Russia, Exxon chose, in fact, voluntarily-forcibly agree to high taxes, which are already paying in order not to endanger their participation in the project, ”the expert believes.