Severance tax to consume all revenues from domestic gas prices indexation


The Gazprom Board of Directors addressed the measures to increase the profitability of natural gas sales under a significant growth in the Company's debt burden since 2012.

The Management Committee was tasked to proceed with:

  • synchronizing the dates of regulated gas price adjustment and those of changes in the tax burden;
  • balancing the debt burden of Gazprom and independent gas producers;
  • differentiating the severance tax rates on natural gas and condensate in order to create a fair taxation regime for developing new and mature fields;
  • resuming the sales of specified amounts of Gazprom's gas using exchange technologies;
  • optimizing the costs in operating and investment activities of Gazprom;
  • cutting the consumer indebtedness for the supplied gas;
  • gradually raising the Russian gas exports within and beyond the FSU.

In November 2011 amendments were made in the Russian Tax Code. They stipulate a gradual increase in the severance tax rate on natural gas from RUB 237 per 1,000 cubic meters in 2011 to RUB 509, 582 and 622 per 1,000 cubic meters in 2012, 2013 and 2014 accordingly. These rates apply only to Gazprom as the owner of the Unified Gas Supply System facilities. For other companies these rates are adjusted through discounts and reach RUB 251, 265 and 278 in 2012, 2013 and 2014 accordingly.

The meeting highlighted that the increased severance tax for Gazprom would result in RUB 440 billion of extra tax payments over the said three-year period of time as compared to 2011.

Gazprom sells some 60 per cent of its commercial gas in the domestic market. At the same time, its gas prices for Russian consumers are regulated by the Government. As these prices are below the economically viable level, domestic gas supplies were unprofitable for Gazprom between 2000 and 2008. Only in 2009 the Company managed to recover its costs and attain minimum sales profitability. Later on, the profit increased, but it is still low and does not allow establishing the sources for reliable development of the Russian gas industry.

According to the Outlook for Socioeconomic Development of Russia for 2012 and the target period of 2013–2014, the increase in wholesale gas prices for Russian consumers from July 1, 2012 will boost Gazprom's revenues by RUB 50 billion, while the rise of the severance tax from January 1, 2012 will result in RUB 114 billion of extra tax payments on gas sales in the domestic market. Therefore, in 2012 the Company will pay to the budget both the entire extra profit gained due to a higher wholesale price in the domestic market and RUB 64 billion from its revenues.

With a view to fulfill the federal objectives on comprehensive development of gas supply to Eastern Siberia and the Far East, Gazprom obtained subsurface use licenses for a number of fields, namely the Chayandinskoye oil, gas and condensate field (Republic of Sakha (Yakutia)), the Kovyktinskoye gas and condensate field (Irkutsk Oblast), the Kirinskoye oil, gas and condensate field (Sakhalin Oblast), and others.

The gas production and transmission infrastructure is created from a scratch on the Far Eastern shelf and in Yakutia, the remoteness of the region leads to high procurement costs and the geological structure is more complex here than in Western Siberia.

Meanwhile, Gazprom has the same operating conditions in the East as oil companies that were entitled by the Government to benefits during the initial period of field development.

Thus, to have a success in Eastern gas projects, it is expedient to provide the Company with benefits comparable with those enjoyed by oil companies. First of all, over the project payback period it is necessary to abolish the severance tax on gas production on the Far Eastern shelf and in Yakutia, to introduce income and property tax benefits, to reduce export customs duties for pipeline gas produced on the shelf and in Yakutia. Besides, reducing or abolishing import customs duties is essential for the equipment and goods having no analogs manufactured in Russia for oil and gas projects in Eastern Russia.

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