Natural Gas is the Least Taxed Hydrocarbon in Russia

By Mikhail Korchemkin

Natural gas industry is one of the least taxable sectors of the Russian economy. In terms of energy content, Russia produces more natural gas than oil, but the collection of gas production tax (severance tax) represents just a fraction (7%) of that of oil. In 2011, the total taxes and duties paid by Gazprom (RUR 1683 Bn, including the profit tax) were lower than the total oil & condensate severance tax - just one of the taxes paid by oil producers in Russia. Even at the maximum new rate of gas severance tax its total collection would represent just about one-sixth of the total oil production tax.

Russia's gas export monopoly Gazprom pays less taxes and duties than the state-controlled oil company Rosneft. For example, the share of customs duties in the export revenue of Gazprom has dropped from 26% in 2005 to 16% in 2011. Note that in 2005-2011, the average price of gas exported to the former Soviet Union and Europe has increased from $149 to $351/mcm.

Despite the low taxation of the Russian gas sector in general and Gazprom specifically, I do not anticipate any dramatic change in the financial position of Gazprom. Even at the gas severance tax of RUR 622/mcm (instead of the actual rate of RUR 237/mcm), the share of taxes and duties in the total revenue of Gazprom would have been about 46%, compared with 51% of Rosneft. Moreover, the gradual increase of the gas severance tax rate will be more than compensated by the planned growth of the price of gas for Russian consumers. It may also be compensated by new reductions of customs duties.

Gazprom plans to invest tens of billions of dollars into the construction of new pipelines, and the government will do its best to keep up the company's profitability rate. As Vladimir Putin says, "we need to act so as not to undermine the investment plans of our producers".

 Mikhail Korchemkin is managing director of East Europe Gas Analysis (EEGAS)