Reform and amendment of Russian petroleum fiscal term: trends and implication to asset acquisition

Abstract

This article analyzes reform and amendment of petroleum tax policy in Russia to investigate instability of tax regime which is one of the main concerns for decision making in asset acquisition. Historical and recent amendments of upstream fiscal terms in Russia are reviewed and studied in an attempt to understand the trends of reform. Tax burden of four different cases is modeled with the change of tax policy to analyze the effect of tax incentives. The recent “tax maneuver” of transferring export duty to Mineral Extraction Tax (MET) is studied in detail to analyze effects to upstream, refinery, and customers. Net present values of three field cases under previous tax regime and new Added Income Tax (AIT) regime are comparatively studied with cashflow modeling. The article concludes that recent “tax maneuver” has indirect influence on upstream sector but may lead to upward pressure on retail. New AIT regime introduces a universal taxation system and requires less government intervention, which may reduce aboveground risk of unstable fiscal regime and boost international investment in Russia. Also, key suggestions are summarized for international investors who are interested in oil and gas asset in Russia.