Fitch: Tax Hike May Force Russian Oil Firms to Reduce Drilling
The adopted proposal is less radical than the original plan and will have no rating implications since most Russian players remain low-leveraged and Fitch's ratings of Russian oil and gas names are driven primarily by the sovereign rating.
On 8 October, the government announced an increase in the Mineral Extraction Tax (MET) on Gazprom (BBB-/Negative) by around RUB100bn (USD1.7bn) in 2016. It also said export duty on crude oil and oil products will be unchanged in 2016, rather than gradually falling to offset a hike in oil MET in 2015-2017. This will deprive Russian oil companies of around RUB200bn (USD3.3bn) next year. We understand that the government intends to reduce the export duty in 2017.
The decision seems to be a compromise between the Russian Ministry of Finance, which originally proposed to increase taxes by around RUB600bn (USD10bn), and Russian oil and gas majors, which strongly opposed the plan stating it would result in falling investments and sharply lower oil production.
Higher MET on Gazprom should have no immediate credit implications, as its 2016 EBITDA would fall by only around 5% compared to our original expectations. Its leverage remains low among global peers. However, Gazprom may be forced to cut its 2016 capex programme and possibly slow down its new pipeline projects due to this and other commercial and funding challenges (see "Nord Stream II Raises Gazprom's Commercial, Funding Risks", dated 21 September 2015).
There will be no MET increase for independent gas producers, such as Novatek (BBB-/Negative); though they may be marginally affected as exporters of natural gas liquids.
The impact on Russian oil producers will be more significant though not enough to trigger rating actions. We estimate that most integrated oil companies will see their EBITDA fall by between 7% and 10% in the USD55/bbl (Brent) environment as a result of the measure. Companies with a lower share of exports and higher share of downstream, such as Bashneft (BB/Stable), Gazprom Neft (BBB-/Negative) and Lukoil (BBB-/Negative) will be less affected than Rosneft and Tatneft (BBB-/Negative), whose profits are more sensitive to changes in export duty.
We believe that the tax hike will most likely force Russian oil producers to make additional cuts to their capex budgets in 2016. In particular, they may further reduce production drilling at brownfields, mainly in Western Siberia. Some Russian majors already reported lower drilling volumes in 2015 (data from CDU TEK show a 15 drop % in 1H15 yoy for Lukoil and a 7% drop for Gazprom Neft). Thus, the move may accelerate brownfield production declines (see "Russia's Brownfield Oil Output Faces Further Declines", dated 4 September 2014). Oil majors may also phase out greenfield developments that do not qualify for export duty breaks. Together, these factors could reverse Russia's oil production growth as early as in 2016.
Further tax increases remain a risk, especially if oil prices stay at the current level for a long period of time, or fall. This is one reason we cap the ratings of Russian oil and gas producers at the sovereign level. However, higher overall taxation is less likely in a gradual oil recovery scenario, which is our base case.