Taxes evaporate from ammonia – Kommersant

The government, at the request of NOVATEK, agreed to zero the mineral extraction tax (MET) for gas used in the production of ammonia and hydrogen in the Arctic. The relevant bill has been submitted to the State Duma. So far, only one project, the Obsky GCC of NOVATEK, is eligible for the exemption. But its status is also unclear: in September, the company put the project on pause due to sanctions. Initially, NOVATEK planned to sell ammonia to European and Japanese companies.

The government has submitted to the State Duma a draft law on the introduction of a zero MET on gas for projects for the production of ammonia and hydrogen in Yamal and Gydan, launched in 2025. The document has been placed in the database of the State Duma. As Kommersant wrote, the head of NOVATEK, Leonid Mikhelson, asked for preferential tax rates for the Ob GCC project (see Kommersant dated April 11, 2022).

The bill provides for the introduction of a zero severance tax rate for the extraction of gas and gas condensate in subsoil plots located in whole or in part on the Yamal or Gydan peninsulas and used exclusively for the production of ammonia and hydrogen. In addition, manufacturers have the opportunity to reduce the income tax rate by the share that is credited to the budget of a constituent entity of the Russian Federation (currently 17%). To do this, the company must be a resident of the Arctic zone, for which there is a zero rate of income tax credited to the federal budget.

Similar incentives are already in effect for NOVATEK’s LNG plants located north of the 65th parallel. Thus, the Utrenneye field of NOVATEK’s Arctic LNG-2 project under construction and the Yuzhno-Tambeyskoye field of Yamal LNG were exempted from MET for 12 years from the start of production.

The Ob GCC is a project for the production of 2.2 million tons of ammonia and 130 thousand tons of hydrogen per year, the launch of the first stage was planned for 2026, the second – for 2027. The Ob GCC was supposed to capture and inject into the reservoir up to 4 million tons of CO2 per year. The point was to produce premium products with a zero or minimal carbon footprint – primarily for buyers in Europe, as there regulation and the introduction of a cross-border carbon tax in the future force companies to minimize emissions. The resource base of the project is the Verkhnetiuteyskoye and Zapadno-Seyakhinskoye fields in Yamal, with them later it was planned to combine the Neytinskoye and Arkticheskoye fields into a single production complex.

To date, the status of the project is unclear. In September 2022, Leonid Mikhelson said that NOVATEK had suspended consideration of the Ob GCC. “We have practically passed the pre-FEED stage. We understand it, but in connection with the sanctions, we have weighed it for now, we are not making a decision,” Mr. Mikhelson said. At the same time, he added that “ammonia is needed”, the company is ready to implement the Obsky GCC and the entire pipeline infrastructure is being built immediately under the Obsky GCC and the adjacent Obsky LNG project.

Sergei Kondratiev from the Institute of Energy and Finance believes that Asia-Pacific countries can become promising markets for ammonia and hydrogen for Russian projects. Potential uses include power generation, bunker fuel, and others. So far, these markets are relatively small, he notes. The IEA estimates the global market for ammonia as a bunker fuel at 1-31 Mt depending on the scenario, but it will grow rapidly after 2030.

Prior to the start of the military conflict in Ukraine, NOVATEK had already begun to attract partners to the Obsky GCC project. So, at the end of 2021, an agreement was signed on the main conditions for the supply of 1.2 million tons of “blue” ammonia with the German Uniper, but later the German company announced that it was stopping all new investments in the Russian fuel and energy complex. A similar statement was made by the German RWE, with which a memorandum was signed in December 2021 on the supply of ammonia and hydrogen from this project. Also, according to Kommersant, the Japanese Mitsui was negotiating with NOVATEK on joining the Ob GCC and on buying part of the volumes. The current status of these negotiations is unknown.

Tatyana Dyatel