OREANDA-NEWS. October 21, 2010. A new tax code for the Russian oil sector could be introduced as early as 2011, according to Deputy Finance Minister Shatalov. As previously reported, the tax changes would encompass both the upstream and downstream sectors, reported the press-centre of OTKRITIE Financial Corporation.

In the upstream, the state wants to shift the tax burden from revenue-based taxes (MET and export duty) to profits-based taxation (via an excess profits tax) to stimulate development of more costly-to-recover oil fields. Shatalov said the change could be introduced in 2012. In the downstream, the government is targeting the convergence of the export duties for crude and oil products, with the average discount for the products duty shrinking from 45% to 10-15%, already from 2011.

View: The proposed changes to the upstream taxation are fully in line with our expectations, in terms of both structure and timing. Although the exact details of the excess profits tax have yet to be announced, we do not anticipate immediate changes to the profitability of existing oil fields, as the new regime should stimulate higher production growth through new investments. The convergence of the export duties on crude and oil products was also expected, although at a slower pace. While the change appears substantial at first glance, we do expect a structurally lower export duty on crude in the new tax regime (from 2012), so the overall changes to the products export duty will be mitigated. Still, the incentive to refine is now likely to be substantially reduced – sooner rather than later – which should result in fewer refining runs.

Valuation and Action: While still not approved, we view the proposed changes as both necessary and likely. The greater relative focus on upstream profitability and growth should support those Russian oil companies that have long reserve lives and that have enjoyed little in terms of tax benefits so far, most notably LUKOIL and Tatneft. On the other hand, companies with high refining cover (such as Alliance Oil, Gazprom neft and Bashneft) could suffer from the double-hit of lower refining margins and throughput, in our view.