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The Russian government enacts tax break plan for oil and gas development on continental shelf

Russia
18 Sep 2012
ST. PETERSBURG, Russia—Under a government decree signed April 16, complex, expensive oil and gas development projects on Russia‘s continental shelf will receive a highly favorable tax regime aimed at ensuring technology transfer and attracting foreign investment.

Prime Minister Vladimir Putin signed the decree that directs tax breaks to companies developing oil and gas projects on the continental shelves in the Arctic and Black Sea. The government has identified the parameters of the tax breaks, and has instructed its agencies to develop the regulatory framework to enact the measures by Oct. 1, according to the report. 

Major oil companies have long called for a new tax regime for the costly offshore projects, particularly in the Arctic, where extreme conditions of cold, ice, and light greatly increase the risk of drilling and transport. The companies said the existing tax structure would make such projects unprofitable.

Generous Tax Plan

Export taxes will be abolished for offshore projects in the Arctic and Black Sea, meaning total tax on oil should not exceed 5 percent of the product sold under the new regime, Putin said in an April 12 address. Putin will begin a third term as president May 7 (see related story in this issue).

Property tax and value-added tax on equipment purchases will be eliminated. These plans will be left in place for 15 years to allow for long-term business planning, he said. 

All industry involved in offshore oil and gas development—including ship building, metallurgy, and machine building—will receive incentives under the new tax regime, as Putin sees the development of the shelf as central to the country‘s economy, with the possible creation of up to 400,000 new jobs across related industries.

Focus on Arctic Development

Russia‘s hydrocarbon reserves are estimated to be one quarter of the world‘s total, with 70 percent of the reserves located offshore on the continental shelf. Putin said the oil and gas, particularly in the Arctic, are the country‘s strategic reserves for the 21st century. 

The tax plan ―is about creating qualitatively new conditions for work on the Russian continental shelf—conditions that will make our offshore projects in the most comprehensive way globally competitive and allow for an influx of foreign investment and technology inflows, which is of great importance,‖ Putin said.

Putin stressed in the speech that projects on the shelf will employ the most advanced technology, and be held to global environmental standards.

A project in the Barents Sea will perhaps be the most immediately affected by the announcement, as the companies involved have repeatedly delayed investment decisions while awaiting the government‘s tax plan.

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