Russian taxes are unfair to oil companies, says Rosneft CEO

The CEO of state-backed Rosneft Oil Co. PJSC has again denounced the level of taxes Russia imposes on the oil industry, saying the burden is so heavy that it tramples on investors’ rights.

Igor Sechin has previously acknowledged that Rosneft has faced sanctions from foreign governments, production restrictions under the Organization of the Petroleum Exporting Countries Plus (OPEC+) alliance, limited liquidity in the Russian financial market and high taxes.

Rosneft had negative working capital at the end of the first half of 2024 with current liabilities of 5 trillion rubles ($54.7 billion) exceeding current assets of 3.8 trillion rubles ($41.6 billion), according to the company’s recently released results.

“Despite external pressure and challenges, including production restrictions under the OPEC+ agreement, higher growth in natural monopoly tariffs, increasing tax burden and interest rates, the company continues to deliver strong financial results thanks to its high level of operational efficiency,” Sechin said in a statement on the company’s results for the first six months of 2024.

Rosneft reported half-year net profit of 773 billion rubles ($8.5 billion), up 26.9% after adjusting for the company’s first-half 2023 earnings. EBITDA rose 17.8% year-on-year to 1.7 trillion rubles ($18.6 billion). Revenue climbed 33.4% year-on-year to 5.2 trillion rubles ($56.9 billion), after adjusting for royalty income in the corresponding 2023 figure. Capital expenditures rose 16.2% to 696 billion rubles ($7.6 billion) while adjusted free cash flow increased 61.3% to 700 billion rubles ($7.7 billion).

Rosneft, which claims to be Russia’s largest taxpayer, paid 2.8 trillion rubles ($30.6 billion) in taxes in the first half of 2024.

“The continued growth of tax pressure has a negative impact on the oil industry,” Sechin said. “Its high level is confirmed by calculations based on data from the Federal Tax Service of Russia and the Ministry of Finance: for 2019-2023, the tax pressure in the oil industry amounted to 75%. In comparison, the pressure in other sectors for the same period is much lower: in the banking sector – 27%, in mining and metallurgy – 35%, in the extraction of diamonds and precious metals – 31%, in the gas industry – 62%.”

“Such a level of tax burden undermines the very business model of the industry and violates the rights of investors, including individual shareholders, of whom Rosneft has more than 1.3 million.”

Despite this, Rosneft completed in August the payment of 2023 dividends totaling 634 billion rubles ($6.9 billion), according to the company.

Sechin had previously said that Rosneft had held discussions with the government over the tax regime.

“The company, as the country’s largest taxpayer and industry leader, is interacting with the government of the Russian Federation regarding the stabilization of the tax regime with a view to securing shareholders’ returns, including returns received by the state,” Sechin said in the company’s first-quarter report published on May 30. “Rosneft has prepared its proposals on effective improvement of the industry’s tax burden.”

At the time, Sechin also lamented that “high interest rates and limited liquidity available in the country’s financial market are putting pressure on financial performance, forcing the company to resort to loans in alternative currencies.”

“Current market conditions in Russia have already led to a significant increase in the cost of debt,” Sechin added. “In the first quarter of 2024, for example, the Company’s average quarterly debt servicing cost reached its peak in the 21st century.

“Higher financing costs lead to longer project delivery times and repayment periods and negatively affect net income, which is the basis for determining the amount of dividends.”

Externally, Rosneft also faced pressure from “new sanctions from hostile countries,” Sechin said at the time.

According to recent reports, Germany is moving closer to selling Rosneft assets seized in 2022 following Russia’s invasion of Ukraine. On September 16 of that year, Berlin said it had placed Rosneft Deutschland GmbH and RN Refining & Marketing GmbH, including Rosneft’s stakes in three refineries, under the trusteeship of the German utilities regulator, effectively seizing the assets. While Germany said the move was aimed at securing fuel supplies as lenders and buyers cut ties with Rosneft, the Russian company said at the time that the move was a result of European Union sanctions and pressure from the United States.

Bloomberg reported Wednesday that negotiations between Germany and potential buyers over the sale of Rosneft assets have been limited to Qatar, the last remaining bidder. “The German government would agree to the purchase, meaning it is now up to Rosneft and the buyer to close the deal,” Bloomberg said, citing people who asked not to be identified because they were disclosing private information.

To contact the author, send an email to [email protected]

Reader-generated comments included here do not reflect the views or opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or offensive comments will be deleted.