''Unfortunately, oil refining processes are not very profitable today''

The Tatarstan president urged Moscow to clarify governmental regulation in the energy industry

''Unfortunately, oil refining processes are not very profitable today'' Photo: tatarstan.ru

Tatarstan President Rustam Minnikhanov isn't content about the absence of clarity in governmental regulation in the petrochemical sector. He claimed there was uncertainty about the completion of the tax manoeuvre at the federal level, and all changes the government promoted led to additional withdrawals in the end. Realnoe Vremya tells the details.

We are at the bottom

The problem of the effectiveness of governmental regulation of the petrochemical sector was raised at the meeting of the board of directors of Tatneftekhiminest-holding (TNKHI) on 22 March. Tatarstan President Rustam Minnikhanov and invited experts complained about the state of uncertainty, which, they said, accompanied the promotion of tax manoeuvre in the energy industry.

We need to remind that now the government is discussing several options, one of which suggests a refusal of export duties on oil and oil products. Instead, it's offered to increase the mineral production tax rate for oil and gas condensate.

Managing Director of VYGON.Consulting Grigory Vygon expressed his opinion in this respect. He started his report in a very roundabout way – with a discussion of the place of Russia in the world market.

''If we look at Russian petrochemistry on the world scale, of course, despite the resource potential, the volume of hydrocarbon raw material, we are at the bottom. Nowadays we lost to consumer countries that don't have their own feedstock and producers such as Saudi Arabia and the USA. Unfortunately, we don't have chances to catch up with them,'' said Vygon.

According to Vygon, some of the currently discussed tax reform options in the energy industry really threaten to reduce profitability. Photo: tatarstan.ru

At the same time, Russia has one significant competitive advantage – big volumes of cheap raw material. However, other countries also have their advantages: European companies, Japan and South Korea take advantage of technological breakthrough, while India and China grow thanks to a high domestic demand.

Then Vygon switched to a talk about tools to stimulate the sector, including tax subsidies. According to him, subsidies in petrochemistry in 2014, before a twofold fall in oil prices, reached 70bn rubles. After that, they were cut twice.

Finally, the tax manoeuvre: ''There is an opinion that the manoeuvre extremely negatively affected oil refining process and petrochemistry. It's a myth,'' said the representative of VYGON.Consulting. However, he continued saying that the country needed to formulate its position on the manoeuvre better and clarify what would happen to customs duties and stimulating tools for producers.

More withdrawals

Tatarstan President Rustam Minnikhanov who complained about lopsided governmental regulation joined this topic.

''We have uncertainty at the federal level. In general, we think we fall behind a lot, and the potential we have in our country hasn't been realised yet. And, of course, tax changes need to be understandable. We always talk about changes. Unfortunately, all changes lead to more withdrawals. It means companies won't have investment opportunities to create and fulfil new projects. And, unfortunately, oil refining process, petrochemistry, especially oil refining process, is not very profitable today.''

According to Vygon, some of the currently discussed tax reform options in the energy industry really threaten to reduce profitability. But the tools that will compensate the rise in load are likely to appear at the same time.

Director of the Tax Department of the Russian Ministry of Finance Aleksey Sazanov claimed his ministry saw a necessity to carry out the tax manoeuvre in the energy industry. Photo: roscongress.org

''What are possible scenarios of the tax manoeuvre? Active debates are taking place now, you know. The Ministry of Finance offers to completely slash [customs] duties to zero from 2019, while the Ministry of Energy and companies, naturally, don't agree with it. Nevertheless, there is such an offer. It's clear today's situation is unlikely to maintain because there are certain and quite big budget losses. This is why something will happen,'' Vygon said.

He thinks the realisation of the Ministry of Finance's option, that's to say, complete cancellation of duties with a higher mineral extraction tax is unlikely because almost everybody understands its risks. Risks will remain even if there are compensating mechanisms: ''Here these risks frighten everybody, of course.''

The most probable scenario nowadays is a gradual refusal of customs duties and simultaneous compensating measures. Some measures can almost completely level future losses for petrochemists. ''But as the Ministry of Finance is an unpredictable department, it can change rules of the game, certain risks remain here,'' Vygon concluded.

We need to notice that on 21 March, Director of the Tax Department of the Russian Ministry of Finance Aleksey Sazanov claimed his ministry saw a necessity to carry out the tax manoeuvre in the energy industry: ''To create an effective competitive environment in the oil sector, we need to carry out the tax manoeuvre – to refuse export duties on oil and oil products, reduction of export duties is equal to an increase of mineral extraction tax.''

A memorandum of understanding between Tatarstan and Codest International was signed at the meeting of the board of directors of TNKHI. Photo: tatarstan.ru

There is good news too

A memorandum of understanding between Tatarstan and Codest International, which is part of de Eccher group from Italy and constructs administrative, industrial buildings, big commercial facilities and hotel, was signed at the meeting of the board of directors of Tatneftekhiminest-holding. The memo presupposes closer cooperation.

According to Business Development Director of Codest International Elshad Mamedzade, cooperation in construction of a complex of olefins (Nizhnekamskneftekhim), melamine factory and modernisation of a carbamide factory (Ammonia JSC) is discussed. In addition, negotiations on the reconstruction of the Zainsk Hydro-Electric Power Plant are held.

By Artyom Malyutin
Analytics