OREANDA-NEWS. August 26, 2011. It now appears almost certain that Russia will move to the 60-66 (60-66-90, to be exact) oil tax regime from Oct 2011.

The new regime implies a decrease in the marginal export duty rate on crude oil to 60% from the current 65%, and unification of the export duties on heavy and light products (with the exception of gasoline) at 66% of the export duty on crude.

For petroleum products, roughly speaking, the change implies an increase in the marginal export duty rate to 40% from 30% for fuel oil (a heavy product) and a decrease to 40% from 44% for light products other than gasoline (diesel, gasoil, other middle distillates).

Worryingly, it seems that the government does not plan to bring the current 90% rate on gasoline in line with the rate for other products (66% from Oct 2011) any time soon. To recap, Russia increased the export duty on gasoline to 90% of the export duty on crude oil (marginal rate of 59%) from May 2011 as a temporary measure to address domestic gasoline deficit. Following the 60-66-90 change, the export duty on gasoline decreases to a marginal rate of 54%, remaining the highest among the petroleum products (for the rest of the products the marginal rate will be unified at about 40%)

Overall, the introduction of the new tax regime is a short-term positive for most oil companies in Russia with LUKOIL, Rosneft and TNK-BP and independent E&Ps (Exillon Energy, PetroNeft Resources, Volga Gas, etc ) benefiting most from the change (we estimate that the reform contributes about 11% to the value of VICs). The losers from the reform are Bashneft, Tatneft (via its new TANECO refinery) and Gazprom Neft. Bashneft and Tatneft expect the government to come up with certain tax breaks on high sulphur fields, somewhat offsetting the negative effect of the reform. Gazprom Neft officially claims that it would benefit from 60-66, a conclusion with which we strongly disagree.

We always argued that 60-66 was only a temporary relief for oil companies as increasing MET and rising costs would wipe away the benefits of the reform by 2014. This is even more the case now, with the increased export duty on gasoline sustained for longer than initially planned.

Our current target prices for the oil companies in our universe assume the introduction of 60-66 from Jan 2012 or three month later than it seems may now occur. However, the positive effect of the earlier introduction of the reform is mostly balanced off by the fact that the increased export duty on gasoline will be maintained for much longer than initially promised.