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Kommersant: Zero mineral resource tax for offshore fields to become bargaining chip in talks with Shell, Chevron

20 November 2006

The Russian government may again consider introducing a zero mineral resource tax rate for offshore oil and gas fields in 2007. This could become a bargaining chip in talks with Shell on the Sakhalin 2 project in Russia’s Far East, and with Chevron on the Shtokman gas field development in the Barents Sea, analysts told the paper.

The final decision has yet to be made, said Deputy Prime Minister Alexander Zhukov. “There are different opinions within the government.”

The Russian president spoke of encouraging the development of offshore fields in this way, in his budget address last May. In June, the government discussed mineral resource tax differentiation, but the bill submitted to parliament did not mention anything about tax relief for new offshore projects, although it had been endorsed even by the Finance Ministry, which is not usually inclined to reduce taxes for oil and gas producers. The abridged bill was adopted in September and will come into force on January 1, 2007.

Unofficial sources in the Economic Development Ministry said that the issue had been removed on the initiative of the Kremlin administration. Kirill Androsov, Deputy Economic Development Minister, said: “The issue should be linked to the general strategy of offshore field development that is being drafted by the Natural Resources Ministry.” Tax relief will not be enough to ensure shelf development, he said.

Analysts, however, doubt that the delay is caused by protracted coordination between government agencies. “It is no secret that the government wants to bring Sakhalin 2 out of the PSA regime and under national taxation rules,” said Dmitry Mangilev, an analyst with the Prospekt brokerage.

“Mineral resource tax relief was not included in the first set of documents because it can be a bargaining chip in talks with [the project’s] operator, Shell. An offer will be made to switch to the national tax regime, with a promise to lower the mineral resource tax.”

Artem Konchin of the Aton brokerage said that the prospect of relief was an argument even at talks with Gazprom’s former partners, primarily Chevron, on the Shtokman field.

The Economic Development Ministry denied any connection between the mineral resource tax and Sakhalin 2.

Valery Nesterov of Troika Dialog said it was very unlikely that tax relief for offshore fields would be used for bargaining with Shell. “If the bill were ready, bargaining would be possible,” he said. “But it is not, and the parties do not seem willing to give up the PSA regime.”

The situation around Sakhalin 2 will be settled by spring 2007, he added. Then the bill on a zero mineral resource tax rate for offshore fields can reach the Russian parliament.

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