“Non-OPEC’s largest source of supply growth”

The International Energy Agency (IEA) notes in its August 2016 report:

By contrast [to the US, China, Columbia and Mexico], Russia has shrugged off lower prices, international sanctions and financing difficulties to become non-OPEC’s largest source of supply growth. While the decline of the ruble and Russia’s tax system have sheltered producers from oil’s prolonged decline, companies have also skilfully accessed capital by pre-selling crude or divesting assets. This has allowed them to increase ruble spending and drilling and boost crude and condensate supply by 180 kb/d over the first seven months of the year.

A good summary, although I would re-order the list of reasons for Russia’s resilience. It is the tax system that has been the greatest benefit to the Russian oil sector: “Russian progressive taxation cushioning the effect of declining oil prices” on earnings, as Fitch put it. The ruble swiftly sliding from 35 to 65 to the US dollar doubtless helped all Russian exporters – it was a no-brainer it would – but its cushioning effect specifically on oil exporters took a second place to the progressive taxation.

Finally, there is one large company, the country’s largest crude producer, which – facing major debt repayments within two-three years – has both pre-sold crude and sold assets, mostly to Asian consumers and investors. Other sector companies, not burdened with so much short- to medium-term debt, have done well without pledging decades of future exports and without major divestments.

There is a flip side to the progressive taxation: when the oil price plunges, the government’s tax take plunges even faster. It is not an unexpected bug, rather a defining feature of the fiscal system for oil companies that Russia adopted in 2002-3. At that time, the government’s chief concern was to tax away as much as possible of potential oil price growth, and the oil industry’s objective was to minimize its tax burden in times of low prices – understood back then as less than $15-$20 per barrel. The government saved some of the windfall tax revenues from the oil rally that began in 2004 by keeping them in the stabilization fund that is currently being spent -as it should be, by design.

This is a highly simplified explanation, however, ignoring the string of adjustments to standard tax rates (including the ongoing “grand tax maneuver”) and the whole gamut of reduced tax rates for remote fields, heavy oil and tight reservoirs.

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