Anti-Crisis Policy in the Oil and Gas Sector And Its Consequences

The oil and gas sector is learning to operate in new realities. Production at traditional deposits in Western Siberia is declining requiring additional investments. Eastern Siberian fields are in fact green fields located far away from the existing transportation infrastructure. Offshore projects need both money and technologies. Competition on international markets is growing. Oil prices are comfortable but not as high as in mid 2008. Meanwhile, the taxation system is still designed to withdraw windfall revenues from the sector.

As a result, Vladimir Putin is facing a necessity to decide on the role the oil and gas industry should play. The selection of anti-crisis measures in the sector depends on that. If the oil and gas industry is just a source of budget revenues, its taxation should be toughened, which will inevitably lead to a fast and sharp drop in production. If the sector is considered the economy’s locomotive, one has to think about its development. But in this case there is a question about the revenue shortfall. If the oil and gas sector is a source of cheap fuel ensuring competitive advantages of other industries, one has to think about wise combination of fiscal and tariff policies.

Different roles Vladimir Putin plays result in some chaos in managing the sector. In particular, on one side, he deals quite willingly with Gazprom’s development. But on the other side, the company is interested in raising domestic gas prices by ensuring equal profitability of exports and supplies to the domestic market. However, this will be a serious blow to the Russian industry Putin is responsible for being the prime minister.

The report will elaborate on the following issues:

• New taxation policy in the oil and gas industry

  • The necessity to invest in new production areas has already made the government introduce some novelties in the oil sector taxation. This includes a zero royalty at new deposits, changes in this tax calculation formula and a zero tax on exports from Eastern Siberian fields. But the key issue is how efficient and sufficient these measures are. And what will the upcoming novelties, e.g. replacing the royalty with an extra revenue tax, result in?
  • Another important question concerns prospects of changes in the gas sector taxation

• Choosing between long-term and short-term tasks

  • The problem of promotion of different types of investment policies in the sector
  • Political decisions regarding the role of the oil and gas sector in the future economy
  • Proposed reforms and their administrative meaning

• Non-residents in the industry

  • Constant revision of the role of foreign companies in the Russian oil and gas sector development, including in offshore projects
  • Prospects of amending the law on foreign investments in strategic sectors
  • Positions of main administrative clans

• Domestic fuel prices

  • Prospects of cancelation of different models of the oil and gas industry (high taxes in the oil industry – high fuel prices on the domestic market; low taxes in the gas industry – cheap gas for domestic consumers)
  • Political aspects of struggle against monopolization of the Russian fuel market
  • The “eternal” issue of the oil product quality
  • Prospects of transfer to a fundamentally new model of gas pricing

• Forecast of developments

The contents of the report: