Gazprom pipelines and export capacity

Газопроводы Газпрома и экспортные мощности

Gas pipelines of West Siberia

Газопроводы Западной Сибири

Export flows of Gazprom

Экспортные потоки

Spot, Gazprom, Brent

Цены на нефть и газ

End-use price of gas

Russia and USA

Daily gas production

Суточная добыча


Important Changes in Russian Gas Business Environment


Gazprom Has Overpaid at Least $1.3bn of Export Duties

 Comments in Russian (Комментарии на русском)

  • Quarterly financial reports of Gazprom show significant overpayment of export duties

    • For the period from January 2004 to May 2005, we estimate the total overpayment at $1.3 billion

    • Currently Gazprom is losing about $3 million a day of export duties

  • Before January 2004, Gazprom exports to Europe and the former Soviet Union (except Belarus and Kazakhstan) were subject to the following principal taxes:

    • Export duty = 5% x [Export revenue]

    • Excise tax = 30% x [(Export revenue) - (Export duty) - (Cost of transit out of Russia)]

  • On January 1, 2004, excise tax was annulled and the export duty rate was raised to 30%:

    • Export duty = 30% x [Export revenue]

  • Gazprom started to pay export duty on the cost of transit out of Russia

    • Note that Gazprom pays foreign transit fees in kind (by gas) and by cash

  • According to Q3-2004 financial report of Gazprom, this change has caused tax growth of $550 million

    • We estimate the full-year tax increase for 2004 at $0.8bn

  • Gazprom could have avoided the additional taxation

    • We do understand that it is an extremely hard time for tax optimization in Russia now

    • However, paying tax on transit cost is absolutely wrong

Sample Net Revenue from Gas Exports to Waidhaus, USD/mcm

Map of the Area

 

Before

After 01.01.2004

 

 01.01.2004

Actual

Optimal

Price at Waidhaus, German border

150.00

150.00

150.00

Export (customs) duty

7.50

45.00

-

Transit cost from Kursk to Waidhaus

30.00

30.00

30.00

Excise tax base

112.50

-

-

Excise tax

33.75

-

-

Export duty tax base

-

-

120.00

Export duty at point of sale Kursk, Russian border

-

36.00

Net revenue at Kursk

78.75

75.00

84.00

Loss

-

9.00

Optimal case assumes the move of point of sale from Waidhaus to Kursk or change of definition of taxation base.

  • The table above illustrates the effect of taxation change on exports from Kursk (Russian border) to Waidhaus (German border)

  • There are at least four simple practical ways to reduce the export duty:

(A) Filing application for a change of definition of taxation base

  • Customs Code of the Russian Federation allows the use of alternative ways for calculation of taxation base of export duty

  • Gazprom should have filed the application on the first business day of January 2004 (it would have made the overpayment refundable)

  • The regulation is very likely to be changed because options (B) and (C) show that Gazprom is not to pay tax on transit cost anyway (though Gazprom's application with documented alternative options is required first)

(B) Changing contract terms with all importers

  • Moving the point of sale to the Russian border and cutting the price by the cost of transit

  • Dividing the payment gas volumes between the relevant importers

  • Importers would pay transit costs either by gas or cash

  • Benefits of this option are smaller than in (A) because importers would need a price discount

(C) Creating a 100% daughter company out of Russia and Belarus (for instance, Gazexport-Ukraine)

  • Selling all export gas at the Russian border to Gazexport-Ukraine at the price reduced by the cost of transit

  • Selling gas to all importers at the existing terms

  • Showing no profit in Ukraine

  • This option is economically better than (B), though benefits are smaller than in (A) because Gazexport-Ukraine would have some expenses and taxes in Ukraine

(D) Setting up a private foreign company that would buy all export gas at the Russian border and sell it to importers

  • Gazprom and the new company would split the saved export duty (about $3 million per day in 2005)

  • In recent history of Gazprom, companies like Itera and Eural Trans Gas have benefited from helping Gazprom to reduce tax payment

    • Note that Gazprom benefited as well, though some analysts do not recognize this fact

  • It is a nice way of making new legal multi-millionaires or a billionaire

  • It would be a bigger and a way more transparent business than Baikal Finance Group, that bought Yuganskneftegaz

  • This business would end with the change of tax regulation, so Kremlinís cooperation is a must

  • There are no legal obstacles to stopping the overpayment

    • Managersí will or shareholdersí pressure are required

  • Gazprom is using third parties for tax reduction for years

    • RosUkrEnergo buys Central Asian gas in Kazakhstan and exports it out of Russia

    • It saves Gazprom about $0.8bn a year of export duty

    • If RosUkrEnergo scheme is legal, then Gazexport-Ukraine (option C above) is absolutely safe

      • Gazexport-Ukraine is better, because it is 100% owned by Gazprom, while Gazprom's share in RosUkrEnergo is 50%

  • Itís hard to believe the management of Gazprom does not see the overpayment problem

    • From January 2004 through May 2005, management inaction has caused a loss of about $1.3bn

    • Every day Gazprom loses another $3 million

    • Gazpromís Charter still says the Companyís goal is to make profit

    • For the state, $13 billion tax collection from Gazprom is a way more important than $0.3 billion dividends it received as shareholder in 2004

    • Is Gazprom changing back into ministry?

  • The missed opportunity to increase Gazpromís cash flow by $1.3bn has negative side effects

    • Gazprom had to take additional loans, which resulted in additional financial costs

    • Market capitalization of Gazprom could have been much higher

      • The price of shares sold in 2004-2005 was not quite right

    • The 2004 profit could have been higher and shareholders got lower dividends

  • It is not all positive for the state neither

    • To fill the financial gap, Gazprom lobbies increase of the domestic price of gas

    • It results in higher inflation in Russia, as well as in lower competitiveness of all Russian businesses, including Gazprom

  • Gazprom has turned into a classic textbook monopoly that has no reason for cost control

  • The chart compares the growth of Gazprom costs with industrial price and wage indices of Russia in 1999-2004

    • We use the reported cost of fuel gas (gas burned at compressor stations of transmission pipelines) as an accurate indicator of the overall cost performance of Gazprom

    • In the accounting books of Gazprom, fuel gas is reported at delivery cost and it is not affected by sales taxes (VAT, excise, customs duty etc)

  • On the positive side of the tax overpayment issue, it indicates that Gazprom can easily increase its cash flow by $1bn a year

    • From the standpoint of criminal law, overpayment is definitely better than underpayment


Last modified: 12/07/14                    © East European Gas Analysis 2006-2014                                           Email: info@eegas.com
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