State regulation of oil and gas sector in 2013, prospects for 2014

This is a traditional report by NESF that sums up main developments and tendencies in 2013.

The year was marked by new mergers and acquisitions, debates on nationalization or privatization in the sector, new export contracts and attempts of the state to change taxation procedures and simultaneously not to affect current budget revenues.

Key topics of the report:

• Production results of the year

  • The 2013 turned out to be formally positive: both oil and gas production advanced. Oil exports somewhat dropped, but the condition of gas exports was very favorable. However, the situation in the upstream segment causes more and more concerns: oil production growth is already on the level of statistical error, and, most importantly, there are no projects or ideas that can accelerate it.

• Struggle for property

  • New acquisitions by Rosneft triggered expectations of total nationalization and restoration of something similar to the Ministry of Oil Industry of the USSR. But in reality it is unlikely to happen. Moreover, the merger of Rosneft and TNK-BP has not produced any synergy effect yet. But it is more important to point out that Russian elites prefer being legal billionaires rather than Red Directors. This is why preparations for privatization were carried out in the sector throughout the whole year.

• Taxation policy

  • Results of application of the 60-66 system, logic and practice of reforms in the fiscal system. The lack of new sources of revenues to cover swiftly growing budget expenses in fact deprived the FES of a chance of real reduction in the general tax burden.
  • To close budget gaps the finance ministry unavoidably addressed the constant donor. No wonder the year 2013 is remembered by a number of decisions rather unpleasant for the sector. The replacement of the export duty with a new rate of the minerals production tax alone will lead to additional $170bn in taxes on oil companies in the next three years.
  • The innovative fiscal system for offshore deposits and tax preferences on hard-to-recover oil should not mislead us. The logic of taxation changes is very simple. It is necessary to collect as much money from oil companies as possible “here and now” by providing them with tax preferences that will work in the rather distant future.

• Exports dilemma

  • Russia keeps expanding oil supplies to China by signing new contracts. Amid stagnating production they raise quite an acute question: does it mean that we are surrendering our positions on the European market? Certainly, we need to examine economic expediency of such policy.

• Domestic market

  • Supplies of oil products to the domestic market are growing simultaneously with their prices. The reasons are the state excise policy and rather weak competition.

• Medium-term forecast of developments

Contents of the report: