Minnikhanov on shock absorber: ‘Oil companies have been taken away everything, then it is discussed how to balance the price’
Russian Vice Minister of Energy Pavel Sorokin explained why petroleum price was rising, while his colleague from the Russian Ministry of Finance Alexey Sazanov promised to return concessions to oil companies in 2023-2024
At an annual petroleum summit in Almetyevsk, the Tatarstan president criticised the Russian Finance Ministry’s tax regulatory mechanisms of oil companies that operate with an OPEC+ oil production cut. In his opinion, the mechanism of fuel shock absorber “took away what could be taken away” from oil companies, but direct consumers anyway didn’t get cheap fuel. Rustam Minnikhanov put the Agro-Industrial Complex as an example of the action of the “distorting mirror” of public regulation that is sold expensive diesel, but then the state looks for ways of subsidisation.
Student Goryachyov’s hot-button question: for how long petrol price will be rising
The polemics about the efficacy of tax regulation of oil companies began at a panel session of the summit absolutely unexpectedly and turned out to be out of the agenda. This year the oil summer was completely dedicated to the problem of the Russian Fuel and Energy Complex’s sustainable development in the light of new environmental requirements of the EU, while the Russian Ministry of Energy and Tatneft organised it.
Russian Vice Minister of Energy Pavel Sorokin who as it is known chaired this post after a victory in Russia’s Leaders national competition in 2018 arrived in Almetyevsk to participate in the strategic session for the third time. 38-year-old Russian Vice Minister of Finance Alexey Sazanov who graduated from Oxford University besides his Russian education was there for the first time. Generally speaking, they can be considered the most advanced figures in the creation of regulatory approaches of the Russian Fuel and Energy Complex.
Carbon footprint, decarbonisation, carbon farms: the discussion during the strategic session of the oil summit was about these key topics. Because exports can lose hundreds of billions of rubles because of an EU carbon border tax.
Kazan senior student Andrey Goryachyov who was given a microphone during the session honestly warned another issue that concerned him, it wasn’t on the global agenda.
“For how long will fuel prices keep rising?” he asked Russian Vice Minister of Energy Pavel Sorokin. “Why isn’t the shock absorber mechanism effective and is it planned to amend it in the short term?” he added.
Student Goryachyov’s question was backed up by the audience’s applause.
“If not the state regulation, the price might be 10-12 rubles higher”
Pavel Sorokin took the brunt bravely and claimed that petrol is now 10-12 rubles cheaper than it might be without state regulation thanks to the shock absorber.
“If not the shock absorber, you should add 10-12 rubles to the price. This is the price based on purely market relations,” he said. According to him, now the price at petrol stations is rising following inflation pace.
He explained how this measure protected the domestic market from price fluctuations. He says he was tasked with making prices at petrol stations predictable as early as 2018, this is why there was created a mechanism regulating oil producers and refiners’ profit.
“All the surplus profit that operates in the production is taken away and transferred into oil refining precisely to make sure the wholesale price in the factory doesn’t increase. It is some adjustment. Otherwise, it is impossible to achieve such an effect,” he said and stressed that “in fact, the mechanism works, and very effectively.”
At the same time, he reminded the audience that at the beginning of 2021 all oil refiners of the country were at a loss because oil prices had grown, while the price at petrol stations wasn’t growing. Consequently, there was a shortage of profitability to cover these losses. But now retail fuel prices grow under the influence of world prices where, as we see, a shock absorber can be applied. “We cannot refuse it ourselves because oil is a commodity that is created in the free world market. Here the market really works,” he explained the current situation.
He assured people that a fuel crisis wasn’t looming in the country because oil companies started to produce additional volumes after a recent correction.
“The market is supplied, there is no problem. Fuel became profitable inside the market,” Sorokin concluded.
Take away first, balance then?
Tatarstan President Rustam Minnikhanov expressed his opinion about the action of public regulation in oil.
“Oil companies were taken away what could be taken away,” he claimed in reply to the Russian Energy Ministry’s view. “Then we start to discuss how to balance the fuel price.”
The president considers that public regulation's “distorting mirror” affects the Agro-Industrial Complex (AIC). The AIC is a big fuel consumer. On the one hand, we sell expensive fuel to it, on the other hand, we look for ways of subsidisation. Take this moment into consideration too,” he urged the federal guests to have a holistic approach to the sector’s regulation.
“We ask oil companies to give us fuel at a discount,” the Tatarstan leader continued talking. “How they can give it below the prime cost because they work in tax legislation!”
Tatarstan President saying to Russian Ministry of Energy: “Don’t bother us for at least five years”
In turn, Vice Minister of Finance Alexey Sazanov noted that the ministry is ready to help the companies that are ready to “give the countryside fuel below the prime cost.” “If they need help here, we will help...” he willingly started to speak. According to him, after the OPEC+ deal is over, preferences on tight oil production will return, while at the moment he sees a threat of preferences in the optimisation of oil companies’ tax basis.
“No, no, no,” the president disagreed. “If you didn’t bother us, we would be happy. Give us a guarantee for five years to put things in order and work calmly!” Minnikhanov exclaimed with annoyance
He continued explaining that the federal authorities’ conceptual approaches of “taking away” are basically wrong. “We try to sometimes find money as magicians. We took it in one place but lost it in another place. There are no miracles! We should work effectively... Yes, that’s true. And if we take away...” Minnikhanov went on.
Here he explained why he considers approaches to oil production taxation unfair. According to him, because of this, Tatneft suspended bitumen oil production it had been putting effort into for several years. Changes in legislation regarding the cancellation of benefits on tight oil production will influence not only the oil industry but also related sectors that are linked with its production. “It is unfair when classic wells with 40-50 tonnes of output and bitumen wells operate in the same conditions,” the president claimed.
“As for bitumen oil. How much effort and time has been spent! And they turned out to be unnecessary at some point,” Rustam Minnikhanov continued. “The OPEC+ deal will be over. But then you won’t launch the production again. That’s it. Brigades have been disbanded. Those who manufacture steam and gas equipment told them: ‘We don’t need you.’ We lost... Yes, you found money for the budget but you lost a big number of related companies that worked on bitumen oil.”
The Tatarstan president thinks that such decisions should be taken gradually, step by step, not at a stroke.
“I understand you do a state task, but we also work for the state,” he concluded