The tax structure is designed in a manner that the Russian government retains most of the revenues generated for crude prices above $30 resulting in low revenue for Imperial Energy, which is ONGC Videsh Ltd’s wholly-owned UK-based subsidiary.
ONGC has sought the intervention of the Prime Minister in resolving the Russian tax puzzle and improving the returns of Imperial Energy, which is ONGC Videsh Ltd’s wholly-owned UK-based subsidiary focusing on the Russian oil and gas sector.
According to sources, a high tax regime in Russia limits the net realisation of Imperial’s Siberian assets at around $30 a barrel at the current crude prices, nearly 25 per cent lower than ONGC’s realisation at home during the last fiscal even after sharing high subsidy burden to downstream sector. In 2008, ONGC struck one of its most expensive deals to acquire the company at $2.1 billion. The acquisition was completed in early 2009.
Capex plans hit
When contacted, the ONGC chairman, Mr R.S. Sharma, admitted that the high tax regime has come in the way of increasing capital expenditure and stepping up output of Imperial. “We are currently going slow on our capex plan in Imperial and are seeking the intervention of the higher authorities,” he told Business Line.
Imperial is currently producing approximately 16,000 barrels a day (bpd) – up from 8,000 bpd a year ago – from its onshore assets. The acquisition was made apparently on the assumption that the company would produce oil at a peak rate of 80,000 bpd. As per its original plan, the company was slated to invest heavily in drilling a total of 92 wells to push up the production to 32,000 bpd by 2011-12.
Mr Sharma, however, did not respond on the realisation issues. “I do not keep track of the day-to-day management of Imperial,” he said.
While the exact tax burden is not known, sources told Business Line that Russia charges two broad categories of taxes on the exploration and production (E&P) sector. These include extraction taxes (which are comparable to cess and royalty in India) and export taxes. “The tax structure is designed in a manner that the Russian government retains most of the revenues generated for crude prices above $30.”
Responding to queries on a much lower is the rate of return from Imperial than envisaged vi-s-vis the high cost of acquisition, Mr Sharma said that while the company was right in estimating Imperial’s reserves, the price estimate made at a crude price level of $122 “has gone wrong”. “When we estimated the value of Imperial, crude was $122 and was rising steadily. Did anyone know that the world was heading for such a crisis?”