State support measures proposed by Gazprom for gas industry to boost its effective development

The Gazprom Board of Directors reviewed preparation of the Company's proposals on measures of state support for gas companies. These included proposals on creating new approaches to taxation and price formation in order to secure the cost effectiveness of gas supplies to Russian consumers.

The Board of Directors generally approved Gazprom's attitude towards creating the mentioned approaches. The Company's Management Committee was tasked to continue cooperation with federal authorities on providing state support measures.

The meeting underlined that Gazprom was an effective and highly profitable company that recovered considerable resources to implement its strategic projects. A focus was placed on Gazprom's constant efforts on cost optimization in every key area of the Company's activity. In 2011 Gazprom saved RUB 83.2 billion. Nowadays, an increase in Gazprom's operating expenses (excluding the growing severance tax rate and fixed assets revaluation) is lower than the price index, fixed by the Ministry of Economic Development and Trade for producers of industrial products.

Meanwhile, considerable investments are needed for cost-effective development of new and remote gas production areas, maintaining production level at traditional fields, expanding the Company's presence on the global hydrocarbons (including liquefied natural gas) markets as well as for Russian regions gasification. In this respect, elaboration and provision of state support measures are of special importance.

The Government has already adopted a number of supporting measures for the companies engaged into the gas sector. In particular, the Directive on Basic Measures Aimed at Reinforcing Russia's Stance in the Global Energy Industry until January 1, 2016 issued by the Russian Federation Government on April 12, 2012 gives an impetus to large-scale exploration and development of the continental shelf resources. The measures contained in the document include differentiated severance tax rates for hydrocarbons, zero export duties, and a property tax discount. However, these conditions do not apply to large gas fields awaiting production in the nearest future – Prirazlomnoye and Kirinskoye. Besides, a 12 per cent return rate set in Gazprom for production projects, is not attainable even taking into account all mentioned actions.

Another state decision aimed at advancing the Russian gas industry is setting the domestic gas prices higher than the inflation rate. But nowadays, this decision is almost eliminated by intentions on additional indexation of severance tax for gas. As a result, an increase in Gazprom's proceeds becomes primarily a tax collection for the budget as Gazprom doesn't make and hasn't made any excessive profits from selling gas to Russian consumers. For the time being, gas prices are not able to cover all operating and investment expenses when selling gas to the domestic market.

As a result of a rapid increase in severance tax, gas production at some fields may become low-efficient or even loss-making. This situation will hinder resources development at existing major fields and in new production areas. Low efficiency of gas projects focused on the domestic market only, will make it impossible to adopt a decision on their implementation.

Among measures of state support, Gazprom offers to provide some extra tax incentives for the offshore projects – for instance, setting discounts for severance tax rates. Besides, it is possible to set a zero severance tax for natural gas produced in an offshore area for subsequent liquefaction as well as for natural gas delivered to the domestic market at regulated prices. Adjusting the diversification of offshore projects by difficulty categories may also become an effective measure.

It is necessary to abstain from lifting the severance tax above the rate fixed by the Tax Code. As part of state support measures, Gazprom offers introducing from 2014 a severance tax rate formula including:

• economic, geographical and geological features of fields;
• field maturity degree;
• complexity of gas composition;
• other parameters reflecting economics of gas production and sales including attainment of an economically expedient level of regulated gas prices.

Moreover, the formula shouldn't provide for withdrawal of revenues from indexation of domestic gas prices in case of lacking the excessive profit from gas sales.

Besides, it is necessary to adopt differentiated severance tax rates for natural gas with due account for the economic and geographic factors of field development – up to a zero rate for the Russian East.

Besides the said measures in taxation, Gazprom elaborated a number of proposals on state support in other areas of activity. Above all, it means boosting the resources development in Eastern Siberia and the Far East. In this respect, the following actions may become effective, such as: creating conditions for wider use of helium, to the extent of state sponsorship of some helium projects; state promotion of industries relying on gas and its final products; setting price formation mechanisms taking into account the gas market value for Russian eastern regions.

The measures of state support proposed by Gazprom for the gas industry will help successfully achieve the state-level goals on developing new production areas, expanding Russia' presence on global hydrocarbons markets and gasification of Russian regions.