TrIZ Sector: oil companies ask for new tax benefits
The oil companies have asked the authorities to provide tax incentives for projects with hard-to-recover oil (TrIZ), which currently accounts for 52% of Russia's total reserves. Business representatives propose to legislate the concept of TrIZ and the criteria of deposits that relate to them. And also to introduce a separate type of taxation for them, using the example of a tax on additional income or reducing coefficients for the tax on the extraction of these minerals. Without significant investments and maintaining trends, production may decrease from 516 million to 360 million tons by 2050, experts believe.
Tax benefits for oil and gas companies
The ASSONEFT Association has sent its proposals on measures to support independent oil and gas companies (NOC), which include 16 points, to the interdepartmental working group under the Ministry of Energy (the document is available to Izvestia). In particular, businessmen propose to legislate the concept of "TrIZ" and the criteria of deposits that relate to them.
— It is known that in the coming years, the share of TrIZ in relation to all oil production will increase significantly. There are no tax benefits for the development of deposits with TrIZ for a wide range of taxpayers. The exemptions are introduced on an individual basis, which makes it impossible to discover and develop new fields on a large scale, as well as to conduct scientific research on new methods of oil production. The Tax Code of the Russian Federation and the law "On Subsoil" do not contain definitions and criteria for recognizing reserves as difficult to recover, the oilmen note in the appendix to the letter addressed to Pavel Sorokin, First Deputy Minister of Energy.
They propose to introduce a separate type of taxation for TrIZ, using the example of the additional income tax or reducing coefficients for the tax on the extraction of these minerals (mineral extraction tax) and mineral extraction tax. In addition, the association considers it necessary to amend Article 425 of the Tax Code by setting reduced insurance premium rates for companies engaged in the development and production of hydrocarbons in fields with hard-to-recover reserves.
— If we consider that the share of TrIZ in newly discovered reserves is increasing, it becomes obvious that the extraction of "difficult" oil is our near future. At the same time, the legislation and the tax system are adapting slowly to these new circumstances. Certain steps in this direction have been taken with the adoption of government Decree No. 1499 dated 09/19/2020, which defined certain types of TrIZ for testing technologies for geological exploration, exploration and production," Elena Korzun, General Director of the Association of Independent Oil and Gas Producing Organizations Assoneft, told Izvestia.
But, according to her, this is not enough.
"It is necessary to adjust legislation so that it flexibly reacts to the aforementioned changes in the mineral resource base, allowing the Russian oil industry to maintain profitability, reliably supply the economy with hydrocarbon raw materials in the long term, maintain competitiveness and maintain a share in the global market," she added.
According to Igor Shpurov, General Director of the Federal State Budgetary Institution State Commission on Mineral Reserves, hard—to-recover reserves account for 52% (16.1 billion tons of oil) of the total Russian reserves, while TrIZ accounts for 32% of the production structure.
Categories of hard-to-recover oil and field development
The press service of the Ministry of Natural Resources and Environment reminded Izvestia that the concept of hard-to-recover mineral reserves was fixed in the law "On Subsoil" in 2019.
"Today, the TrIZ includes both the Abalak, Bazhenov, Khadum, Domanik, Kumsko—Kerestinsky, Achimov oil deposits, extra-viscous oil, and Paleozoic deposits of oil and gas condensate in Western Siberia," the environmental protection agency noted.
Nevertheless, in 2023, the Ministry of Natural Resources and Environment proposed to include the oil deposits of the Kumsko-Kerestinskaya formation in the North Caucasus in the list of hard-to-recover reserves.
The ministry told Izvestia that the Ministry of Natural Resources and Environment "together with companies engaged in the extraction of hydrocarbons is developing a more detailed classification of TrIZ, which can become the basis for developing incentive measures for the development of technologies for the extraction of hard-to-recover reserves."
"All proposals are being considered, including the initiatives of Assoneft," the ministry noted.
The Ministry of Energy told Izvestia that the concept of "hard-to-recover oil reserves" (TrIZ) is not legally fixed, since TrIZ categories are unstable — they change with the development of technology. The ministry noted that from an economic point of view, TrIZ is reserves that have higher operating and/or capital costs and, accordingly, require a more lenient tax regime.
— In practical work, the Ministry of Energy relies on the criteria contained in the Tax Code, which provides for the application of reducing coefficients to the MET rate, characterizing the degree of complexity of oil production. The Ministry of Energy is also guided by government Decree No. 1499 "On the establishment of types of hard—to-recover minerals, in respect of which the right to use a subsurface area may be granted for the development of technologies for geological exploration, exploration and extraction of hard-to-recover minerals," the press service of the department explained.
They noted that "hydrocarbon raw materials will remain the basis of the global energy balance in the foreseeable future, therefore, with a natural change in the resource base, conditions are needed for the economically efficient and reasonable development of TrIZ, the share of which in the structure of Russian production is gradually increasing."
— At the same time, there are three main areas of support for the development of TrIZ: economic incentives for exploration (search technologies), the introduction of new more efficient technologies for the development of "difficult" deposits and tax preferences for the development of such reserves. Success will depend on comprehensive work in all these areas, but special attention should be paid to fine-tuning the fiscal system, which will make it possible to maintain the attractiveness of investments in the development of Russian mineral resources and maintain oil production volumes in accordance with the Energy Strategy 2050, the press service of the Ministry of Energy said.
The Ministry of Finance did not provide Izvestia with a comment on this issue. Rosneft, Gazprom Neft, Lukoil, Surgutneftegaz, and Russneft did not respond to Izvestia's request.
Production cost of TrIZ
The position of independent oil and gas companies is quite understandable, says Ekaterina Kosareva, Managing Partner of WMT Consult.
— The list of hard-to-recover reserves is constantly expanding. And often large companies are involved in their development. But the "kids" have enough "difficult" oil. That's why they're calling for the rules to be the same for everyone. And in general, this is a very urgent problem for the industry," she told Izvestia.
According to Valery Andrianov, associate professor at the Financial University under the Government of the Russian Federation, the resource base in the country continues to deteriorate — mainly small deposits are being discovered in remote regions, the task is to develop new gas horizons and "unconventional" types of oil (for example, the Bazhenov formation), production is moving further into the Arctic regions.
— Therefore, it is necessary to further improve the mechanisms of support for oil companies working with TrIZ. In other words, we are not talking about creating some kind of fundamentally new support system, but rather about upgrading an existing one. At the same time, fiscal measures should be combined with the use of other mechanisms. For example, further development of technological landfills is required to improve methods of increasing oil recovery," the expert said, noting that the TrIZ support strategy should be long—term.
— If we do not develop new types of reserves, then in a few years — when, perhaps, the OPEC+ mechanism ceases to operate — we may face a shortage of reserves. They are on paper (we have oil resources for several decades), but extracting them may be unprofitable, and there will be no necessary technologies," he added.
As for a separate law for TrIZ, in his opinion, it is necessary to generalize the existing regulatory framework. It makes sense to include measures of non—tax support for the development of TrIZ in the system of state programs - this is a more effective method than the adoption of a framework law, the expert believes.
CEO of the Independent Analytical Agency of the Oil and Gas Sector (NAANS-Media) Tamara Safonova recalled that, according to the inertial scenario of Russia's Energy Strategy, oil production without significant investments and while maintaining current trends and trends may decrease from 516 million to 360 million tons by 2050.
— Every year, the depletion of exploited deposits is growing, and at the same time, the share of hard-to-recover reserves is growing. In order to ensure the competitiveness of the Russian oil and gas industry in the future, investments are needed in the development of new fields, the commissioning of which is impossible without government support measures," she said.
According to her, the cost of TrIZ production has a significant range of deviations, depends on the productivity of the reservoir and the conditions of occurrence and increases against the background of high interest rates, rising inflation, capital and operating costs, and the cost of extraction technologies.
In Russia, the average cost of production is $20 per barrel, and the cost of TrIZ production is from $40 per barrel, said Dmitry Kasatkin, managing partner of Kasatkin Consulting. At the same time, taxes average $35 per barrel.
He considers the initiative of the oil industry relevant, since every year the share of TrIZ in Russia increases. This can be seen in the growth of both average cost indicators and production—related operations, with an increase in the share of horizontal drilling.
— Speaking of analogues, we can refer to the experience of the United States, where the government actively supports mining projects through tax deductions equivalent to drilling and depreciation costs. And also in the UK, where the deductions relate to projects for the extraction of extra—viscous oil," the expert added.
In early April, Deputy Finance Minister Alexei Sazanov noted that the agency excludes the possibility of reducing the tax burden on the country's oil industry, referring to the legislatively approved three-year budget of the country.
"This does not mean that you have to sit and wait for three years. The work on the classification of TrIZ and the calculation of economic models for making decisions on fiscal issues require a huge amount of time. Therefore, the industry needs to make the most of this time," concludes Ekaterina Kosareva.
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