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A new study of Russian state fossil fuel subsidies

20 february 2012
WWF and International Institute for Sustainable Development assess volume and efficiency of state subsidies in the oil and gas sector of the Russian economy.

The study describes 30 schemes of government support for oil and gas producers in 2009-2010. They include forms of direct support such as special disbursements targeted at the sector or government loans, and indirect support, for example assumption of accident liabilities or use of government-provided infrastructure. Of these 30, the study has been able to quantify the value of 17 subsidy schemes totalling US$8.1 billion in 2009 and US$14.4 billion in 2010. This amounts to 4.2 per cent and 6.0 per cent of the total value of oil and gas production in Russia in 2009 and 2010 respectively.

Two most sizeable federal subsidies supporting upstream oil and gas activities in Russia in 2010 were export duty exemption for new oil fields in East Siberia (approx. US$4 billion) and tax holidays with respect to the mineral extraction tax for new deposits in East Siberia (approx. US$2 billion).

State subsidies mostly stimulate development of new fields, including the Arctic instead of intensive development of energy sector”, says Mikhail Babenko, Oil & Gas Officer at WWF Global Arctic Programme. “Russia has a great potential in energy saving. For instance, according to the estimates of the International Energy Agency, if in 2008 Russia used energy as efficiently as Canada, Sweden, or Norway, it could have saved more than 200 million tons of oil equivalent from its primary energy demand, equal to 30 per cent of its consumption that year and an amount similar to the total primary energy used by the United Kingdom”.

For instance, according to WWF estimates, wasteful practices of burning natural gas at domestic thermal power stations results in losses of 40–50 bcm of gas per year, which is more than the annual gas needs of the Moscow megacity (30 bcm). Furthermore, increasing the projected oil recovery factor in Russia by 5 per cent (from 37 per cent to 42 per cent) would result in additional recoverable reserves exceeding 4 billion tons.

This significantly exceeds the reserves of many individual new fields in the Russian frontier areas. For instance, the recoverable oil reserves of Prirazlomnoe in the Pechora Sea in the Arctic amount to just 72 million tons.

Furthermore, subsidization of oil, gas or coal production on a global scale lowers their prices on the world
market and leads to increased consumption of fossil fuels and emissions of greenhouse gases, driving climate change, believes WWF.

Our goal goes far beyond simple arithmetic and assessment of subsidy amounts. The purpose of this report is to provide an inventory of government subsidies to upstream oil and gas activities in Russia as a launching pad for a broad debate among the Russian government, academia, business, civil society and international stakeholders on the economic, social and environmental expediency and efficiency of such policies. So far there are more questions than answers, but it’s high time we asked these questions and tried to find the answers”, says Ivetta Gerasimchuk, author of the study, and expert at WWF and International Institute for Sustainable Development. In particular, the inventory aims to assist Russia in meeting its international commitments “to rationalize and phase-out over the medium term inefficient fossil-fuel subsidies that encourage wasteful consumption” under the agreements of Group of Twenty (G-20) and the Asia-Pacific Economic Cooperation (APEC).

Several of the identified subsidy schemes have been scheduled to be phased out. For example, in 2011 Russia adopted a new law amending the Tax Code with the aim of eliminating the loopholes that enable transfer pricing conferring multibillion dollars in benefits to oil and gas producers and companies from other sectors. The new legislation is effective from January 1, 2012 and is expected to phase-out this form of price support to the industry.

However, WWF predicts that the cumulative value of federal government support to upstream oil and gas activities in Russia is likely to increase in the forthcoming years, as several large-scale schemes subsidizing oil and gas production at new fields will become active in the near future (for example, tax holidays with respect to the extraction tax levied on newly developed offshore oilfields in several regions: north of the Arctic Circle, in the Sea of Azov and the Caspian Sea, in the Black and Okhotsk Seas).

For detailed information (methology, data sources, comparison to other countries, top 10 state fossil fuel subsidy programs in 2010, 8 large-scale government subsidy plans for the nearest years, etc), please see the report at http://www.wwf.ru/resources/publ/book/eng/570

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