Reference
The document was drafted by the Ministry of Energy to ensure the application of Article 31 of the Federal Law On Customs Rates, which stipulates a special (reduced) export duty on crude oil with specific chemical and physical properties produced in the areas that are fully or partially located in the Republic of Sakha (Yakutia), the Irkutsk Region, the Krasnoyarsk Territory, the Nenets Autonomous Area, north of the 65th parallel north, fully or partially in the Yamal-Nenets Autonomous Area, in the Russian sector of the Caspian Sea, in the bed of the Russian internal sea and territorial sea, as well as in the continental shelf.
The resolution outlines the procedure for drafting proposals on the use of special duty rates and on inspecting the grounds for their application.
Previously, the lack of criteria for approving reduced rates and a mechanism for calculating them along with the loose application deadlines hindered the adoption of investment decisions regarding new deposits. The development of new deposits is a priority condition for achieving the goals set to the oil industry: notably, to increase oil production and to ensure Russia’s energy security.
In accordance with the resolution and the general rule, a special export duty rate can be denied if the project’s internal rate of return (IRR) is higher than 16.3% as of the filing date of the application, or if the depletion of the field exceeds 5% as of January 1 of the filing year of the application.
The procedure for calculating the IRR is to be regulated during the analysis of the grounds for the reduced rate approved by the Ministry of Energy in coordination with the Ministry of Finance, the Ministry of Natural Resources and Environment and the Ministry of Economic Development.
According to the Ministry of Energy, the proposed procedure will guarantee that investors pay a reduced tax until their field reaches the specified level of IRR. Besides, the size of the duty can be calculated in advance depending on the project’s IRR. This will increase the economic attractiveness and profitability of projects which currently cannot achieve the level of IRR suitable for investors.
The resolution also stipulates quarterly and annual monitoring of the projects’ IRR in order to determine whether they comply with reduced export duty conditions, to calculate the precise volume of oil to which a reduced export duty rate is applied, or to adopt a decision to apply a standard export duty rate to these projects.
This monitoring will therefore ensure a predictable and substantiated increase in taxes after a project reaches the specified level of IRR.