An additional trillion to the budget. Why should the authorities limit the discount to Brent and reduce oil production?

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The record budget deficit since 1998 in January forced the authorities to look for ways to get more oil and gas revenues. First, Russia will reduce production from March, thereby increasing the shortage of oil in the world market, the demand for which is growing due to the opening of China. Secondly, the authorities will change the formula for calculating the price of oil, on the basis of which oil companies pay taxes. The second measure can bring about 1 trillion rubles of additional oil and gas revenues to the budget per year.

Reduction in production

Russia will voluntarily cut oil production by 0.5 million barrels per day in March, but will not sell it below the ceiling, Deputy Prime Minister Alexander Novak said today. “This will contribute to the restoration of market relations,” he believes. The Russian authorities have repeatedly allowed production cuts as a response to sanctions.

Is it a lot or a little

The reduction will be about 5% of January production. In January, Russia maintained the level of oil production at the level of November-December (9.8-9.9 million b/d). In the first week of February, production rose to 10.9 million bpd. The budget includes oil production at 9.8 million barrels per day, so Novak's announced "production cut will leave it above budget estimates," said Alexander Isakov, an analyst at Bloomberg Economics.

What does it threaten

Even a slight reduction in Russian oil production "will stir up the oil market, which has generally calmly accepted both the EU oil embargo and the recent ban on imports of Russian oil products," expects Bloomberg . Shortly after Novak's announcement, Brent jumped from $84.2 to $86.6 per barrel.

Given the recovery in demand in China, where anti-COVID restrictions are being lifted, the reduction in production in March could increase its deficit on the world market and lead to higher prices, believe analysts at Sinara Bank . “At the same time, the positive effect of even a 10% increase in prices fully compensates for the negative impact of a 5% decrease in production, if we talk about the financial performance of Russian oil companies,” they say.

It is still difficult to say how the reduction in production will affect Russian companies, because it is not known who will cut it and how much. If we take 2020 as an example, when production was reduced as part of the OPEC + deal, then the largest volumes of falling production fell on Bashneft and Slavneft, while Gazprom Neft and Novatek suffered the least, recalls BCS Express .

Limitation of Urals discount to Brent

In addition to the fact that the authorities decided to increase oil prices by cutting production, they also want to receive more taxes from oil companies. To do this, the government, according to Bloomberg and Interfax , is going to directively limit the Urals discount to Brent by $20-25 per barrel. According to Bloomberg, the main discussions on this issue have been completed, now the only question is whether the discount will be $20 or $25. The decision is expected by March 1, and it can come into force from April. According to Argus Media, in January Urals' discount to Brent was close to $35 per barrel.

What does it mean

We are talking about limiting the discount in order to calculate taxes for the oil industry - MET and export duty, explains Marcel Salikhov, director of the economic department of the Institute of Energy and Finance at the Higher School of Economics. Compared to current quotes, this means that the actual price for tax purposes will be about $10/bbl higher. The same assessment is given by Isakov from Bloomberg Economics.

Now, to calculate taxes received by the budget, the average price of Urals for the tax period on world markets, which is calculated by Argus Media, is used. But after the entry into force of the oil embargo, this assessment ceased to be relevant, the Russian authorities decided: the Argus formula includes the cost of delivery to the ports of Italy and the Netherlands, where Russian oil is no longer supplied. On this basis, the Russian government, on behalf of the President, must submit proposals by March 1 to clarify the methodology for determining prices for oil and oil products used to tax companies.

According to Interfax, the Ministry of Finance, which is interested in increasing oil and gas revenues, proposes to immediately limit the Urals discount to Brent by $20 per barrel. According to the Ministry of Energy, the discount should be gradually reduced from $35 to $25. The authorities are also discussing another option, the agency says: to tie taxation not to the price of Brent, but to the price of Dubai Crude, one of the benchmark grades of world-class oil along with WTI and Brent. But in this case, there is a risk of a discrepancy between the tax base and the revenue base, since the bulk of oil is traded with reference to Brent, Interfax notes.

Why is it needed

The average price of Urals in January, calculated according to the old formula, was $49.48 per barrel. And if the discount to Brent had been limited to $20-25 already last month, then the price of Urals used to calculate taxes would have been about $59-64 per barrel, which would have brought additional income to the budget, RBC . calculated

“According to our estimates, for the Ministry of Finance this will mean about 1 trillion rubles of additional oil and gas revenues at the annual level compared to the current system. For oilmen, respectively, additional tax payments,” says Salikhov. in January (which was based on a price of $70 per barrel). The intention of the authorities to change the oil price formula is due to the shortfall in oil and gas revenues, which, among other factors, led to a record budget deficit since 1998

What will happen to the ruble

If the government starts calculating taxes based on the price of Brent minus $20, the budget's oil and gas revenues will increase, and the Ministry of Finance will stop selling yuan on the foreign exchange market, say SberInvestment analysts . This may lead to some weakening of the ruble. But not immediately: according to Raiffeisenbank analysts, the redirection of supplies and the normalization of discounts on oil will take time, so we can expect that at least in the coming months the Ministry of Finance will continue selling foreign currency, which will support the ruble.