Oil companies are ready to invest from 5 trillion to 8.5 trillion rubles in the development of the Arctic, but for this they need unprecedented tax breaks at the price of 2.6 trillion rubles. The plan of the new project is set out in a letter from the chief executive officer of Rosneft, Igor Sechin, which he wrote to President Vladimir Putin on June 26, and in the KPMG calculations attached to it.
“Vedomosti” got acquainted with the documents, seven people confirmed the authenticity of the letter, four of them were officials, two people close to oil and gas companies operating in the region, as well as one of the possible project participants.
To get benefits, Sechin asks Putin to support the draft federal law on the development of the Arctic - this document, developed by the Ministry of the East, provides for a special regime for investors. On the letter, Putin wrote a statement to Prime Minister Dmitry Medvedev: “Work through the proposal and report,” his resolution is confirmed by two interlocutors of “Vedomosti”.
In a letter, Sechin tells Putin about the Vostok Oil oil and gas project, which will unite the Neftegazholding deposits of Eduard Hudainatov (Payakhskoye) and Rosneft - in particular, the Boats, Tagulskoye and the already operating Vankor. In the KPMG presentation, the project’s promising resources are estimated at 2.6 billion tons of hydrocarbon feedstock (proven reserves slightly exceed 870 million tons of oil), it also mentions the inclusion of a joint venture with Yermak Neftegaz and East Timorese fields, which is now Rosneft Conducts geological exploration. The project includes "first-class international investors," writes Sechin Putin, without naming them, with some negotiations are underway, he said.
Investments, according to Sechin, will exceed 5 trillion rubles: 5,500 km of pipelines will be built, sea terminals with transshipment up to 100 million tons per year, airports, power lines, etc. In the KPMG presentation, the amount of investment is even greater - 8.5 trillion rub. This is 300 billion rubles each. per year, for comparison: the entire Rosneft investment program this year is just over 900 billion, notes Dmitry Marinchenko, senior director of the Fitch corporate department. Investments depend on reserves in the region, if they get closer to promising resources, capital expenditures will exceed 8.5 trillion rubles, explains one of the possible project participants. The contribution of the project to the GDP of KPMG experts estimate up to 2% per year until 2050, and the budget benefit is 4.4 trillion rubles. from tax revenues, dividend increases and the effect of related industries.
The project would be workable and without tax breaks, but this would require funding at 4-5%, which is now impossible, says a person close to one of the project participants. Sechin in the letter assesses the cost of project financing in Russia at more than 11–12%, therefore foreign partners are needed, and long-term fiscal conditions are important for them.
Cold tax haven
Long-term fiscal conditions imply tax benefits, follows from a letter to Sechin. The draft law, developed by the Ministry of Eastern Development, provides for a complete exemption from the MET of new oil and gas fields, and for those already operating - a tax deduction from MET for the amount of investment. As well as zero rates of property tax, land tax, reduction of income tax up to 7% (now - 20%) and insurance contributions up to 7.6% (now the base rate is 30%). And all this for 30 years.
Sechin proposes his own version of the bill, one of the key amendments is the mineral extraction tax reductions for the Vankor field and the possibility of tax-free transfer of savings to projects in the Arctic. Last year, the Vankor fields accounted for almost 9% of Rosneft’s production - 21.4 million tons of oil, and Rosneft spends 30–70 billion rubles on them annually. The project has already received benefits - for MET and export duties, but after increasing the return on the project, they were canceled.
For the participants of Vostok Oil, the benefits will amount to 2.6 trillion rubles, according to KPMG experts, thanks to the preferences, the project should reach a positive cash flow of 25 billion rubles. already by 2027. Only the MET benefits will result in losses of 250 billion rubles for the budget. per year (taking into account the already existing discount rate for mineral extraction tax in the Krasnoyarsk Territory), said the representative of the Ministry of Finance. Privileges on property tax and land will hit the budgets of regions and municipalities, he continues, and recalls that the presidential decree provides for the phased abolition of regional and local taxes.
“In our country, by all estimates, the volume of production [in Russia] will decrease by 2 times by 2035, starting from 2022 it should fall <...> Therefore, we need to urgently take appropriate measures,” said the Deputy Prime Minister Dmitry Kozak in December 2018. But the Ministry of Finance proposes not to hurry with the distribution of new preferences. Additional incentives to stimulate the development of Arctic fields should be considered as part of a plan to develop oil fields and increase oil production - the government approved it this year, the representative of the Ministry of Finance said. It is also necessary to identify sources of compensation for lost budget revenues.
The Ministry of Finance proposes not to provide incentives to commodity projects until the end of work on the inventory of deposits, two officials know. First, you need to make an inventory of deposits, evaluate the effectiveness of projects that claim benefits, and then decide whether to provide them, agrees Alexander Suslin from the Economic Expert Group.
Presidential spokesman Dmitry Peskov asserts that the president has not yet taken any decisions, and he traditionally does not comment on the working correspondence. The representative of the Prime Minister Oleg Osipov did not answer the questions of "Vedomosti". Representatives of Rosneft, Neftegazholding, the Ministry of Energy, KPMG, the Ministry of East Development and Kozak declined to comment.
The project has made a serious split among the officials. “If we want to develop something, then we need to create conditions for companies, and not to consider falling budget revenues from projects that would not be under the current fiscal regime,” said one of the officials polled by Vedomosti. But an increase in budget spending, including in the form of benefits, always leads to an increase in taxes, says another official, and in the end, citizens always pay for everything. When deciding on budget support, it is necessary to evaluate the effectiveness of using these funds, he believes: to choose, implement a project at the expense of incomes of the population or companies (depending on whom taxes increase as a result) or abandon it. Budget support - direct financing or subsidizing a credit rate - is a more transparent form of assistance than tax breaks, believes former Deputy Finance Minister Sergei Shatalov, who oversaw the tax system: there are reports, you can check how support works, what effect it has.
Benefits for someone else's account
“Tax privileges are easy to give, but it is very difficult to pick up — temporary benefits can become eternal,” Shatalov argues, and often they go not to those who really need them, but to those who have administrative resources. “Lobbyists take advantage of the fact that a particular project is compared with an unorganized mass of projects, and it takes a long time between receiving resources and paying them through tax increases,” one official notes.
For the budget, the project creates risks - taxes that are not fully received now may not return in the future, Marinchenko admits: oil may become cheaper, demand for it may decrease due to the growth of green energy. Oxford Institute for Energy Studies predicted that after 2040, oil consumption in the world would peak, then start to decline dramatically and stop this trend will be impossible. “We are holding back oil production under the OPEC + agreement, but we have a lot of incentives to boost it. We have normal reserves, and companies are arguing over whether it is necessary to extend the agreement with OPEC. Is there a need in such conditions to spend enormous resources on mining in the Arctic in difficult conditions and at high costs? ”Notes Shatalov. “In a deal with OPEC and non-OPEC countries, only the most efficient projects should receive benefits,” says a senior official. The mining conditions in the Arctic are difficult, the effect on the economy of its development is not obvious, but the burden on the budget with such benefits will be serious, says Oleg Shibanov, a professor at the Russian School of Economics.
“Benefits are not free, they are always at someone’s expense - we either increase the tax burden, or lose the opportunity to reduce it,” Shatalov warns. “Russia is very dependent on raw materials and external shocks, so there is a risk that with a decrease in budget revenues, taxes will have to be raised, and most likely - to the population.” It is unlikely that the new benefits will lead to another tax increase, but rather it will be necessary to adjust the budget rule in order to increase the use of oil and gas revenues, Shibanov says. But Suslin thinks that the Ministry of Finance would prefer to take the path of reducing other expenses, but it’s categorically unfair to give Rosneft such big benefits: there are no objective reasons for such a preferential treatment.