Rosneft proposed to abandon Urals quotations in Europe for calculating the mineral extraction tax

As Kommersant learned, Rosneft (MOEX: ROSN) proposed to abandon the use of Urals quotes in European ports for calculating oil taxes. In practice, the company explains, Urals is not delivered to European ports and we are talking about a “virtual quotation”. Rosneft fears an even greater discrepancy between the actual prices and supply bases of Urals, which is sold mainly to Asia, and the quotations used to calculate taxes. According to the company, this threatens to unjustifiably increase the tax burden. Experts believe that, given the need to fill the budget, a revision of the formula for calculating oil taxes is unlikely.

Rosneft is not satisfied with tying the calculation of oil taxes to the price of Urals oil in European ports, since in fact Russian oil is not supplied there. The head of the oil company, Igor Sechin, sent a corresponding letter (Kommersant has a copy) on March 22 to Russian President Vladimir Putin.

Mr. Sechin wants to eliminate “an unjustified increase in the tax burden on the oil industry” and “accelerate work on the formation of objective price indicators” that will be based on the real bases and directions of Russian oil supplies. Now the bulk of Urals arrives at the ports of India and China. Vladimir Putin instructed Prime Minister Mikhail Mishustin to consider the proposals.

Currently, key oil taxes—MET and AIT—are calculated based on the higher of two quotes: Brent minus a discount of $20 per barrel or Urals on a FOB basis in a Russian port plus $2 per barrel of transportation costs to the European market. The level of transportation costs in the future must be calculated by the FAS, but cannot be less than $2 per barrel.

The reason for Rosneft’s appeal to the president was precisely the draft order prepared by the FAS on the procedure for calculating the cost of transporting oil from the Russian Federation by sea in the direction of European ports. Igor Sechin asks to stop the preparation of this document, since in practice there are no deliveries to European ports. The head of Rosneft proposes to abandon “artificial indicators tied to the ‘virtual’ price of oil for sea deliveries to non-existent ‘European markets’.” In his opinion, the adoption of the order will only exacerbate the risks of discrepancies between the cost of raw materials for actual oil supplies and the price used for taxation.

The FAS, the Ministry of Finance, and the government press service declined to comment. Rosneft and other oil companies did not respond to Kommersant’s request. A Kommersant source in the White House told Kommersant that the company’s proposal is being considered.

The draft order was signed by the FAS and is being registered with the Ministry of Justice, Yuri Stankevich, deputy chairman of the State Duma Committee on Energy, told Kommersant. But, according to him, a number of industry participants insist that not all proposals in the draft order have been taken into account, including those regarding the reflection of real supply bases. According to his estimates, the adoption of the FAS methodology would not entail a significant increase in the mineral extraction tax and the additional tax – the price of oil calculated for taxes would probably change by less than $1 per barrel, although the final amount of transportation costs depends on changes in the cost of freight and insurance of tankers.

In March 2023, as Kommersant reported, Rosneft proposed replacing Brent when calculating taxes on the Dubai grade, since the latter is the main benchmark in the Asian oil market. However, the Ministry of Finance did not agree with this.

FAS fulfills the requirements of the Tax Code, which instructs the service to determine the cost of transportation by sea for taxation, notes independent expert Boris Lutset.

According to Mr. Lutset, any proposals to change quotes when calculating the mineral extraction tax are unlikely to lead to a reduction in the tax burden on the industry, since fiscal priorities are decisive: “Any decision on new price markers will be made only subject to the implementation of budget projections, and it is from them will depend on what the formula for the mineral extraction tax on oil will be.”

Dmitry Kozlov