10 Oct.2019

The New Tax Realities and Their Impact on Russian Oil Refining / Ivan Khomutov’s Speech at the Argus Media Conference in Moscow

In his address to the conference, Ivan Khomutov, General Director of the Petromarket Research Group, spoke about the investment multiplier on reverse excise tax on oil as a tool for stimulating the development of oil refineries.

The Argus Russia and CIS Oil Products 2019 conference took place on October 10–11 at the Ritz-Carlton Hotel in Moscow. For 12 years in a row, the event has become a platform for discussing the most pressing topics of the country’s oil industry. This year, the conference was given over to the events that had had the greatest impact on the development of Russia’s domestic and export petroleum product markets in 2019. Topics for discussion included the current state and future prospects of the Russian oil refining industry, the new tax realities and their impact on refineries and the introduction of digital technologies.

Ivan Khomutov got a discussion about investment in the modernisation of Russian oil refineries underway by providing the conference with information on the introduction in 2020 of the investment multiplier on reverse excise tax on oil. The decision on the need to introduce a multiplier was taken on August 28, 2019, at a meeting attended by Russia’s First Deputy Prime Minister Anton Siluanov and Deputy Prime Minister Dmitry Kozak. Work in this area, which will see the government co-financing a domestic refinery modernisation programme, has been carried out by specialists of Russia’s Ministry of Finance with the support in a consultancy role of the Petromarket Research Group.

In his presentation, Ivan Khomutov pointed out that, at the present time, Russian oil refining is relatively backward by comparison with global standards. This lack of development is one of the major obstacles to any transformation of Russian oil refining from its current standing as an unprofitable, state-subsidized industry into a profitable sector of the economy. The refinery modernisation programmes already planned will not solve the problems, since they will not be sufficient to bring Russian refineries up to the required standard.

Introduction of the investment multiplier would, on the other hand, increase business interest in refinery modernisation and be a major impetus to refinery development.

According to Petromarket RG estimates, introduction of the multiplier will stimulate the construction of a number of deeper conversion processing units at a range of plants with capacities of 40 million tons/annum. This is a very significant figure – equivalent to a 2.8-fold increase in investment in Russian oil refining by comparison to the investment levels planned prior to the introduction of the multiplier. In terms of technical development, the investments will give Russian petroleum refineries the opportunity to finally catch up with their European counterparts.

According to the calculations given by Ivan Khomutov, the refinery modernisation stimulated by the multiplier will cost the budget an average of 140 billion roubles/annum over the 10 years from 2021 to 2030. The greatest amount of state support will go to oil refineries independent from vertically integrated oil companies, as well as to the Rosneft and Surgutneftegaz enterprises.

Ivan Khomutov went on to say, that despite the expected positive effects of the introduction of the multiplier, a number of problems still remain. These must be solved by the regulator when refining the mechanism prior to its launch. In particular, the issue of whether it is advisable to co-finance the modernisation of all oil refineries without exception must be addressed, since there is a significant risk that some enterprises will remain unprofitable even after modernisation.

Further presentations were made at the conference by representatives of the Ministry of Energy of Russia and the Federal Antimonopoly Service of the Russian Federation, as well as by the heads of corporate entities such as Gazprom Neft, Rosneft, SIBUR, LUKOIL, EY, Accenture, JBC Energy and others.

In total, the conference brought together more than 150 participants from 20 countries.