By John Helmer in Moscow
Tax-free exports of crude oil from Kozmino, on the Sea of Japan — Russia’s newest oil tanker loading terminal — may be eliminated by April, after a showdown last Friday between the oil industry tsar, Deputy Prime Minister Igor Sechin, and the budget tsar, Finance Minister Alexei Kudrin. For the moment, Kudrin’s pocket derringer is given no chance of prevailing against Sechin’s six-shooter.
Kudrin told Sechin the revenue loss to the federal budget is too great; and the profitability of fareastern oil sales large enough at the current oil price to justify ending the export tax holiday, which had been expected to last for three years. Finance Ministry officials say they are projecting that the crude oil marker used in federal budget revenue calculations will average this year between $70 and $80 per barrel. In some official statements, the Finance Ministry claims that the tax break this year for oil exported eastwards is worth Rb80 billion ($2.7 billion) to the treasury. By anticipating a higher crude oil price for this year and next, the director of the Ministry’s Tax and Customs Department, Ilya Trunin, said the East Siberian tax break could cost the treasury as much as Rb 120 billion ($4 billion) per annum.
The current scheme, approved by Moscow last year, authorizes a zero export duty rate for crude oil with certain specified physical and chemical properties; these correspond to crude oil produced at 13 Eastern Siberian oilfields.
When the tax break was first proposed a year ago, crude was at a benchmark of $44 per barrel; it is currently above $70 per barrel. The broader justification for the tax break was that it raised the profitability for Russia’s oil companies to bring on line their eastern Siberian wells, and export the crude eastwards through the Eastern Siberia Pacific Ocean (ESPO) pipeline, now being built by Transneft. For the time being, however, this pipeline stops at Skovorodino, where the crude is then to be piped southward to Daqing, China, according to the terms of Rosneft’s agreements of last February with the China National Petroleum Corporation (CNPC).
Until the pipeline is completed to the Pacific coast, the surplus crude is delivered by rail to the new Kozmino port terminal, which opened last month.
Russia’s leading oil exporter, state-owned Rosneft, appears to be the largest beneficiary of the tax break to date, shipping oil from its new Vankor field to Kozmino. Sechin is the chairman of the Rosneft board.
Rosneft’s oil trader, Gennady Timchenko (image in centre), would also be a beneficiary if he continues to receive substantial Rosneft cargoes for loading at Kozmino. Last month at Kozmino, Timchenko loaded the first Rosneft shipment through his Finnish company, International Petroleum Products (IPP). In western Russia, Timchenko usually loads Rosneft oil through his Geneva-based Gunvor company.
According to an analysis by one Moscow investment bank analyst, the relief from the crude oil export tax is worth an estimated 25% of Rosneft’s projected profit this year. The source also calculates that the tax break is worth 18% of this year’s profit line for Surgutneftegas, and 8% for TNK-BP (8%). UBS analyst Maxim Moshkov puts the value of the tax break to Rosneft at $9.6 billion for the next two years, 2010-2011; $1.96 billion for SNG, and $1.6 billion for TNK-BP.
There are also westward options for Rosneft’s Vankor field, should the eastward direction lose its payoff. But the company doesn’t want to discuss them, or the policy clash between Sechin and Kudrin. Rosneft spokesman Nikolai Manvelov said: “We would like to refrain from commenting on Mr. Kudrin’s claims, because he is an official. I cannot tell you how much we save when transporting from Vankorskoye oil field to Kozmino, because, in fact, Vankorskoye is a group of oil fields, and for each of the oilfields we have different [cost and price] quotations, and I would like not to tell you the middle exponent. We don’t know for how long the zero rate will remain. When the government makes its decision, we will tell you. Let’s refrain from guessing anything.”
In an announcement on October 21, Rosneft called itself “the most Transparent Company of Russia”, which it reported as due to “the publication of the Code of Business Ethics, announcement of recommended dividends before the record date, publication of the auditor’s report on interim financial statements, disclosure of non-audit services rendered by the auditor and more detailed information on the remuneration of the Management Board.”