№3 March 2012Table of contents Issue Archive
№ 2 (February 2012)
Russia’s Ministry of natural resources drafted a new program for offshore fields’ development. It is designed for the next 18 years and assumes transferring to subsoil users some 40 licenses.
By Galina Starinskaya
Well, the user register hasn’t changed much – the state is not ready to expand the list of participants and unprepared to throw open the gates to foreigners, regardless of the need for huge investments in the industry. But it does promise to reduce the fiscal burden.
The Long-term 2012–2030 Program for Russian continental shelf exploration and mineral resources development (hereinafter, the Program) recently developed by the Ministry of natural resources had already been sent for governmental approval. Work on different versions of offshore programs has been going on since 2006, though none has been adopted.
The current version of the document proposes four implementation phases. The first phase (2012 to 2015) is used to set up the necessary legal and regulatory framework, to install the servicing infrastructure, and to do some groundwork for prospect evaluation surveys. During the second phase (2016–2020) experts will identify the largest and most promising fields. The third phase (2021–2025) will be used to switch to exploration and development of offshore fields. During the fourth phase (2026–2030) all earlier discovered commercial deposits will be put online, as well as new, largest oil and gas fields.
Program developers expect that by 2030 offshore oil and condensate production would reach 40-80 million tons per year (8-16 percent from current levels), atural gas production – 190-210 billion cubic meters (32-35 percent).
Production levels will depend on “the development of domestic and external markets and must be determined by the long-term market balance.” By that time the accumulated production volume will reach 435-1,250 million tons of crude and condensate and 1-2.6 trillion cubic meters of natural gas.
However, about 70 percent of all recoverable offshore resources, which is about 100 billion TOE, including over 13.5 billion tons of crude, concentrated on western Arctic shelf: Kara, Barents and Pechora Seas. Distribution of hydrocarbon reserves on Russia’s sea shelf is shown of Fig. 1.
Currently, the share of Russian oil in global trade is 12 percent. Europe, Asia-Pacific Region (APR), North America, and CIS countries are the main export markets for oil and oil products. Under the Program, the oil produced on the shelf of the Baltic, Kara and Pechora Seas will be exported to North West Europe; on the shelf of the Black and Caspian seas – to the Mediterranean countries; on the shelf of the Sea of Okhotsk and the Chukchi Sea – to APR and North America markets. The APR capacity for Russian oil may reach 80-100 million tons by 2030. Europe will remain the largest importer of Russia’s natural gas. The ultimate need for natural gas by 2030 by regions and markets is projected at 166-190 billion cubic meters for Europe, 0 for the U.S. and 270-400 billion cubic meters for APR markets. That is, market for Russian oil and gas will shift from Europe and North America to Asia-Pacific Region.
Now Russia is one of the leading global producers and exporters of hydrocarbons, sharing the top place in oil segment with Saudi Arabia and second place in natural gas segment with Norway and the USA.
One of the Program’s objectives is to “stay afloat”, maintaining the market position by ensuring sustainable recovery of hydrocarbon reserves. Russia’s current oil production level is 500 million tons ± 4-6 million tons. At this production level, current reserves will keep the industry comfortable for next 13-15 years, that is, up to 2022–2025. Today, domestic oil-producing regions hold at most 30 percent of light “fluid” oil; the remaining 70 percent is heavy oil and scavenger oil. At the same time, commercial reserves of natural gas are sufficient for 25-30 years.
The developers of the Program recognize that for the past 18 years the licensing process has been sluggish and highly irregular. As of the end of July 2011, there are only 65 offshore production licenses issued to 26 subsoil users. Currently the state records (as of Jan. 1, 2010) show 25 offshore fields (C2 [inferred] reserves – 595 million tons) containing oil, including nine oil fields, 16 oil and gas fields and 44 natural gas fields (reserves 3.5 trillion cubic meters) containing combustible gases (free and dissolved gas), including 11 – gas fields, nine – gas condensate fields, 16 – oil and gas deposits and eight oil deposits.
Only Gazprom and Rosneft have the right to own offshore production licenses. Between 2008–2011, the companies forked out some 100 billion rubles for their shelf projects. Officials for a long time have been mulling liberalization of the legislation and expansion of the license-holders table. Two state-owned companies – Zarubezhneft and Gazprom Neft – may soon be lucky enough to join the list. The State Program includes a list of fields which all these companies want to develop (see Table). For some sites, interests of the companies clash.
Hoping for Incentives
The Program includes two forecast scenarios: the “no change” scenario, when offshore development is carried out using the current regulatory framework, which authorizes offshore production access only for state-owned companies. And the second, innovative scenario, which supposes expansion of the subsoil users list. Otherwise, this will require more than 150 years under the current subsoil usage regulations.
Thus, “to intensify work on the continental shelf” the Program proposes to provide exploration opportunities to any interested Russia-registered legal entity, guaranteeing participation in the development of a discovered field under control of a state company. The Ministry also proposes to divide the water zones into clusters: the lower subsoil exploration levels, the more opportunities for private sector research. The state could introduce geologic exploration as a separate type of subsoil usage. But there is nothing on access of the foreign companies to the Russian shelf.
Another problem to be solved is the offshore projects financing. Here the state still hopes to attract investment from private companies, providing in return tax and customs privileges. For example, VAT refund to investors in proportion to investment in the project rather than after its completion; fast-track integration of capital expenditure into expenses row for income tax purposes; reset (reduction) of property tax; zero export duty on LNG; zero rate of natural resources production tax.
Innovation scenario suggests establishing a special offshore fiscal regime: natural resources production tax is charged at the rate of 10 percent of the produced volumes; income tax – 20 percent of taxable profit; oil production profit tax, charged at 15 percent of taxable income, but “increase of the tax rate if the project exceeds the set level profitability level.”
A number of projects run by Russian companies already enjoy the benefits. Rosneft and Gazprom projects offshore Black Sea and Sea of Okhotsk already operate under zero-rate natural resources production tax. At the end of 2010 LUKOIL secured a preferential duty on oil exports for its Caspian fields (Korchagin and Filanovsky).
In December 2011 the government subcommittee on customs tariff and non-tariff regulation recognized the feasibility of a preferential export duty for Gazprom’s Prirazlomnoye field. A preference for Rosneft and Gazprom Arctic fields in the Kara and Barents Seas may be introduced in the first half of 2012. Russian Ministry of Finance pledged that the large Shtokman gas condensate field (Gazprom, Total, France, and Statoil, Norway) could rely on tax breaks after the investment decision on the project.
The state needs the offshore development program, says Vitaly Kryukov, an analyst at IFD Kapital. Currently the companies aggressively enter the shelf, some (Rosneft, ExxonMobil) have already moved on to implementing field infrastructure. This solution also settles some of Russia’s geopolitical problems linked to shelf competition from other states, he notes. But for successful offshore development, tax regulation must be changed. “In this direction there are already positive signals. In particular, there is a proposal to set the minimum rates of return for offshore sites at over 20 percent. For onshore fields it is now 16-17 percent,” adds Kryukov. It is also necessary to involve the Russian private business also should be engaged as its experience in offshore projects is extensive, too. “The shelf is large and requires considerable financing for its development,” the analyst concludes.
Volumes and Sources of Program Funding, billion rubles
“No Change” Scenario:
Extra-budgetary financing – 3,796.52;
State investment – 2,332.33 (including 1,235.9 of state tax and customs regulation measures);
Total investment – 6,128.86.
Extra-budgetary financing – 5,710.11;
State investment – 1,337.98;
Total investment – 7,048.09.
Program’s Fiscal Impact, billion rubles
“No Change” Scenario – 17,941.22;
Innovation Scenario – 25,221.19.
SOURCE: DRAFT LONG-TERM PROGRAMME FOR RUSSIAN CONTINENTAL SHELF EXPLORATION AND MINERAL RESOURCES DEVELOPMENT