The Kremlin will not feed Igor Sechin

Russian oilmen will not receive state support in the form of tax benefits, the president decided.
24.07.2019
Forbes
Origin source
It is possible that the industry is facing difficult times, but from the point of view of strategic interests this decision may turn out to be the right one.

The moratorium on tax support for oil companies is introduced until December 31, according to the Kremlin website. At the same time, by December 1, the government should conduct an inventory of oil projects and evaluate their profitability. Thus, the request of Rosneft for state support of its Arctic projects in the form of tax exemption of up to 2.6 trillion rubles was not satisfied.

The issue of benefits for mining companies is becoming particularly acute for the domestic economy. The industry, which provides more than half of state budget revenues, is in a stalemate. Three powerful factors work against it at once, which can lead, if not to a collapse, then to a gradual attenuation of activity.

Difficulties ahead

First, analysts in Russia and abroad have unanimously predicted low oil prices, with its abundance, and not without reason. Shale oil production is getting cheaper, in deep-water fields at sea, new technologies promise a market surplus of oil with low prime cost. The prices above one hundred dollars per barrel will have to be forgotten, for example, according to experts from the Center for Energy Studies of the Moscow School of Management in Skolkovo and the Institute for Energy Studies of the Russian Academy of Sciences in the recent “World Energy Forecast and Russia until 2040”.

Against this background, leading industry experts say, the global oil market will already face a drop in demand by 2035 or even earlier. The rapid development of electric transport, the high energy efficiency of the new economy, coupled with energy conservation and, in general, the strategic focus of the world energy sector on the abandonment of fossil energy sources will hit primarily coal and oil.

Secondly, this scenario will be a sensitive blow for Russia because oil production here is not cheaper, but becomes more expensive every year. The Ministry of Natural Resources and the Ministry of Energy have repeatedly reported at government meetings that of all the remaining oil in the Russian interior, approximately 70% belong to hard-to-recover reserves. New major discoveries are long gone. I remember that Lukoil warned that the development of hard-to-recover oil requires prices of at least $ 80 per barrel. And if we consider that oil projects are long-term and pay off not earlier than seven to ten years from the start of investment, there is no commercial sense to invest in such production at prices around $ 60. There are no guarantees of price increases in the future, as analysts-scriptwriters show.

That is why the strategic line for the main Russian industry has become two directions: stimulating oil recovery in long-standing oil fields and asking for tax breaks from the state. The current level of production is supported mainly by drilling additional wells, commissioning previously bypassed areas and horizons in old fields, as well as technological methods of influencing the reservoir to intensify the flow of oil from the subsoil. And in the conditions of the so-called tax maneuver of the government, that is, an increase in the mineral extraction tax (MET) due to a reduction in export duties, the only salvation of projects requiring additional expenditures was point tax privileges for selected deposits. Existing benefits will be preserved, as promised in June, Prime Minister Dmitry Medvedev.

The third factor negatively affecting the Russian oil industry is international sanctions. If the embargo on the supply of technologies and equipment for the development of shale oil to Russia so far has had little impact on the work of the oil fields, which can work as usual, then the restriction of access to foreign sources of capital already affects the activities of our companies. Russian banks are not able to provide long-term loans on favorable terms, and long-term oil projects suffer from underfunding. In addition, with the exhaustion of reserves of “light” oil, project operators will have to seriously take on hard-to-recover oil from about 2025, which will require advanced production technologies, and these technologies are already banned due to sanctions.

In other words, everything suggests that oil production in Russia should be reduced. Back in September last year, Energy Minister Alexander Novak said at a government meeting that, while maintaining current trends and conditions, production will decline from the peak of 570 million tons expected in 2021 to 310 million tons by 2035. This means that the country will actually leave the ranks of oil exporters and will extract only enough to satisfy domestic needs. To delay the fall, say oil companies and their lobbyist Novak, the industry needs tax breaks.
 
Do you need benefits

Nevertheless, the Ministry of Finance does not just treat the benefits with caution, but is extremely negative. It regards them as “falling revenues” of the state and sees them as a threat to the budget. Low oil prices and the prospect of falling demand are already hitting the budget, and the benefits and subsidies to oil companies further reduce its revenue side. There is a discrepancy between the opinions and goals of the two departments in the cabinet, and it is not clear which of the points of view will win as a result of the planned "inventory" of the industry. Oil industry leaders led by Rosneft head Igor Sechin, supported by the Ministry of Energy, will have the upper hand - the state budget will have a hard time. The Minister of Finance Anton Siluanov will be able to insist on his own - the reduction of oil production will begin, perhaps, earlier than experts assume.

In these circumstances, the white-black look for gigantic tax breaks, which are necessary for the development of oil reserves in the Arctic zone, according to Rosneft. At first glance, plans for the development of the Arctic and Arctic natural resources, including oil and gas reserves, seem to be a promising and necessary business. From this point of view, the intention of the Rosneft management to invest from five to eight and a half trillion rubles in an oil project near the coast of the Arctic Ocean deserves every encouragement. Moreover, according to the Rosneft management, no financial participation is required from the Russian budget: you just need to exempt the project from taxes in the amount of approximately 2.6 trillion rubles.

If you follow the logic of the proposal that Igor Sechin turned to the leadership of the country, then the benefit is obvious: there are no government expenses, but the potential benefits are enormous, all the more considering the strategic task of developing the Arctic. There will be benefits - there will be a project, and there will be no benefits - there will be no project. Exemption from taxes, strictly speaking, is not a subsidy. This is an incentive to invest in a project that, without such incentives, has no chance at all.

Here are just these considerations in assessing the effectiveness of the requested benefits can not be limited. The factors that cast doubt on the benefits of accepting the Rosneft proposal for the country are striking.

This project is not only costly, but also long-term. To recoup the development of several groups of fields in the most difficult conditions of the Arctic, the construction of 5,500 kilometers of oil pipelines and other infrastructure in the tundra, on the permafrost, and oil export terminals on the Northern Sea Route will not work right away. Considering the size of investments, they will pay off no sooner than in 15-20 years, according to the most optimistic estimates, and experts who spoke at a press conference in the Ministry of Oriental Development in May, say that the project will not be paid back in 25 years. The resource base of the deposits to be included in the Arctic project is also in doubt. Proved reserves, according to the Ministry of Natural Resources, still amount to 870 million tons, and this is clearly not enough to justify the investment of 8.5 trillion rubles.

If the oil market really begins to shrink by 2035 under the pressure of falling demand, there is no point in investing huge amounts of money in organizing the extraction of expensive Arctic oil, when there is an overabundance of low-cost oil in the world without it.

In addition, it is necessary to take into account the extreme ecological vulnerability of the Arctic. Many experts oppose oil projects in this area, since even a small accident at oil pipelines or fields can cause irreparable damage to nature.

Where does the money come from

The main tax from which Rosneft is asking for the release of Arctic projects is the already mentioned MET. This is the equivalent of what in other countries is called “royalty” and represents the payment for the use of subsoil resources, which, according to Article 11 of the Constitution of the Russian Federation, are in the exclusive ownership of the state. The refusal of the state from the mineral extraction tax in favor of the subsoil user is actually a gift to the company or a consortium that acquires all rights to the extracted raw materials, leaving nothing to the real owner. Alignment at least ugly. And if we consider that the port infrastructure for the export of oil must be built at the state expense, as it should be according to the law, then the gift looks even more attractive for the recipient of benefits.

And it is completely incomprehensible from what means Rosneft is going to finance a huge project. The company pledged a significant part of its production in order to pay for many years with the Chinese oil supplies for the loans that it needed for a completely unjustified integration in terms of efficiency: acquisitions of private companies, starting with YUKOS, TNK-BP, Bashneft, etc. Igor Sechin’s company cannot get long-term loans abroad - it is under international sanctions, and Russian lenders are ready to provide it with money only for a short time and at a predatory percentage. It is possible, of course, that the leadership of Rosneft is counting on material assistance from the state over and above the planned benefits, but here the Ministry of Finance will be the wall to protect the budget.

And finally, the increase in the market value of Rosneft with the start of investment in the Arctic project - and as a result of the size of its dividends in favor of the state - should not be expected. Suffice it to recall that the company does not transfer dividends due to the state budget into the budget, but to the gas company Rosneftegaz, and all financial transactions are officially classified there. Where the funds from this gasket actually go, it cannot be verified.

For many years, until the conceived undertaking pays off and brings real income, only its initiators will remove the cream from the project, but not the Russian state and certainly not the population of the country.

Now it is impossible to guess what the “inventory” of oil projects will result in. It can be assumed that government departments simply will not cope with this task until December 1. Many instructions of the president remained unfulfilled - it is enough to recall the development of the “General scheme for the development of the gas industry”, the next Energy Strategy and other documents, the preparation and approval of which have been dragging on for years. It is also unclear what will happen with the moratorium on state benefits. It is quite possible that under the slogans of the development of the Arctic, the government will have to retreat under the onslaught of Sechin and Novak and agree to sponsor obviously ineffective and unprofitable undertakings from "political" considerations, as has happened more than once.

Governance

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