Tax Change Favors Tight Oil, Russian Unconventionals

By Lada Ponomareva, June 21, 2013

WEB EXCLUSIVE, Moscow. Given today's oil prices, the production of unconventional oil and gas fields (specifically, shale oil and shale gas) is justified, Alexey Kondrashov, Partner, Global Oil & Gas Tax Leader at Ernst & Young, said.

"Developing these reserves is a political objective for many govenrments around the world which are continuing to perfect their tax regimes with the goal of stimulating the fruition of such projects", Kondrashov said.

In Russia, the issue ways to stimulate unconventional hydrocarbon production came to the fore last spring when Russian President Vladimir Putin issued instructions to draft a law on the subject.

By November 2012, a law was passed to lower the export customs duty (10% of the standard duty). On 18 June of this year, a new bill was introduced to the Russian Duma to stimulate the production of tight oil.

The bill, drafted by the Russian Energy and Finance ministries, proposes adopting a lower rate on the natural resources production tax for deposits of tight oil taking into account the efficiency of the oil-bearing layer, indicators of the permeability of the layer and also the level of depletion at the field.

"The fiscal environment is constantly changing around the globe. With the globalization of investment has come an increased emphasis on global tax policy and regime changes and the resulting impact these changes can have on investments. Globally, various countries have introduced or are contemplating introducing changes in the way oil and gas operations are taxed – from exploration and production to retail operations", Kondrashov said, commenting on the influence of changing tax regimes and the nature of investment in the oil and gas sector, "The impact of changes to the tax law may affect available cash to establish reserves or to service debt. This can negatively affect the balance sheet, with the result that credit agreements and covenants may need to be examined closely.”

In their annual Global oil and gas tax guide, Ernst&Young analysts said that in 2013, "The search for recoverable reserves continues to globalize. As long as recovery remains economically viable, both developed and emerging countries are expected to take measures to develop such reserves and countries are constantly competing for investor’s capital.  New emerging markets, in which hydrocarbon reserves have just been discovered – including the African nations, Cyprus, Lebanon, Israel and Myanmar – are working toward designing their national legal and tax legislation for the oil and gas industry.

Kondrashov concluded, “Now more than ever, it is vital for governments to make oil and gas tax regimes competitive and attractive to investors.”