Mechanism for Switching Oil Producers to New EPT Fiscal Regime: Providing Rationale and Estimating Efficiency

Abstract

AbstractThe paper considers the current oil and gas industry taxation system in the Russian Federation, highlights its key problems and changes. The main focus is on considering a new fiscal regime (NFR)—the Excess-Profit Tax (EPT) regime, the basic principle of which is deducting tax from the financial result and not from gross production indicators, as is the case with the MET (Mineral Extraction Tax). The Udmurtneft OJSC oil-producing company’s procedure for calculating this tax has been analyzed. The strengths and weaknesses of the new EPT tax regime have been identified. The efficiency of the Arkhangelsk field operation has been estimated for two fiscal regimes, which allows concluding that switching to EPT will reduce the tax burden for the company. A model is proposed for the efficient exploitation of fields under the conditions of switching to the EPT regime, which allows managing economic efficiency through the levers of impact on indicators (taxable profit, net profit, capital investments, net cash flow, NPV). Based on the calculation results, a stress analysis has been performed for various factors affecting the tax amount: the NPV dependencies on the production rate for a set of scenario conditions under two fiscal regimes, a set of scenario conditions and unit costs per well and a ton of oil, and the production rate and unit costs per well and a ton of oil have been determined. The efficiency calculation and stress test results have shown that the proposed model allows controlling the various indicators to achieve optimal NPV values. Based on the calculation results, the expediency of switching to the NFR has been revealed in terms of economic indicators: increasing the NPV, reducing the tax burden, and retaining profitable operation while increasing costs.KeywordsOil and gas companiesSwitching companies to the excess-profit tax from hydrocarbon production (EPT)Fiscal regimeEfficient exploitation of fieldsTaxation systemsTax burdenStress analysis