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Important Changes in Russian Gas
Business Environment
Gazprom: How to Pay More/Less Taxes
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Our analysis of natural gas
trade transactions in
Russia and the former Soviet Union shows that Gazprom may need to use
similar approaches in its practice at eastern and western borders of Russia.
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For Gazprom, it means a
choice between increasing and decreasing its tax payment.
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In both cases, it is a
matter of over $1 billion a year.
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On the eastern side,
Gazprom uses RosUkrEnergo (RUE), a Switzerland-based joint venture between
Raiffeisenbank of Austria and Gazprombank.
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RUE buys gas outside of
Russia and takes it across the Russian territory to Ukraine.
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This gas is not subject to
Russian import and export duties because it is owned by foreign company.
Table 1:
Opportunity for Higher Taxation of Central Asian Gas
|
|
Unit
|
Importer now:
RosUkrEnergo
|
New importer:
Gazprom
|
|
Import price at Kazakhstan-Russian border
|
$/mcm
|
(62.00) |
(62.00) |
|
Import duty - 5% |
$/mcm
|
-
|
(3.10) |
|
Russian transit fee |
$/mcm
|
(9.11) |
-
|
|
Export price at Russian-Ukrainian border
|
$/mcm
|
80.00
|
93.00
|
|
Export duty - 30% |
$/mcm
|
-
|
(27.90) |
|
Seller's profit |
$/mcm
|
8.89
|
0.00
|
|
Imported volume |
bcm
|
40.0
|
40.0
|
|
Total duties |
$ mill
|
-
|
(1,240.0) |
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Assume Gazprom replaces
RUE and buys and exports Central Asian gas on its own (Table 1).
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Then the whole transit
volume becomes subject to import and export duties, and the tax payment
legally increases by $1.24 billion a year.
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Note that to break even,
Gazprom would need to raise export price for Ukraine to $93/mcm.
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Table 1 shows anticipated
volumes and prices for 2005.
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The state of Russian
Federation, main shareholder of Gazprom, seems to approve the practice of
using foreign party that reduces tax collection by over $1 billion a year.
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Itera of USA and Cyprus started the transit
deliveries of Central Asian gas to Ukraine in 1999.
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In 2003, Itera was
replaced by Eural Trans Gas of Hungary, which in turn was replaced by Swiss RUE in 2004.
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Note that a foreign 100%
daughter company of Gazprom (like Gazprom UK Limited) would have been more
beneficial for Gazprom shareholders than RUE. RUE makes profit out of
Russia, while Gazprom UK Limited would have made no profit on transit of
Central Asian gas.
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On the western side,
Gazprom does run all transaction by itself without using any foreign party.
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Gazprom sells gas at
importers' borders and pays transit costs from Russian border to the point
of sale.
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From January 2004, Gazprom
pays export duty, which is defined as 30% of contract price.
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In most cases, Gazprom
pays transit costs out of Russian territory by dedicated volumes of gas.
Ukraine receives about 26 bcmy (billion cubic meters a year) of payment gas.
Slovakia, Czech Republic, Bulgaria, Moldova and other countries receive
smaller volumes. We estimate the total volume of payment gas delivered for
transit services in Ukraine, Moldova, Romania, Bulgaria, Slovakia, Czech
Republic and Austria in 2004 at 33.1 bcm.
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Transit costs are not
deductible from the taxation base of export duty (see
details here).
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Assume Gazprom applies the same approach
to its exports to Europe via Ukraine as it does to transit gas from
Central Asia (Table 2).
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Assume Gazprom UK, a
foreign 100% daughter company of Gazprom, buys all export and payment gas at
the Russian-Ukrainian border. The volume includes 26.9 bcm of payment gas
delivered to Ukraine and Moldova.
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Gazprom UK would pay the
price equal to total export revenue reduced by the cost of transit out of
the Russian Federation. It would leave Gazprom UK with no profit from these
operations.
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Gazprom UK would deliver
the same volumes to all importers, including volumes of payment gas to
Ukraine and Moldova.
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In its transactions,
Gazprom UK would use the same contractual terms as Gazprom (price, volume, delivery point and
time, etc).
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Table 2 shows the volumes
and prices of 2004. The introduction of this scheme would have saved Gazprom
about $0.8 billion.
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This scheme is basically
different from that of RusUkrEnergo. RUE makes profit out of Russia, while
the use of Gazprom UK for elimination of tax on transit cost would have
increased Gazprom's profit in Russia.
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In 2005, both prices and volumes are higher, which
results in higher overpayment of export duties.
Table 2:
Opportunity for Lower Taxation of Gazprom Exports via Ukraine
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|
Unit
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Actual seller:
Gazprom |
New seller:
Gazprom UK
|
|
Exports to Europe via Ukraine |
bcm |
109.1 |
109.1 |
|
Average price at European borders |
$/mcm
|
137.0 |
137.0 |
|
Revenue |
$ mill |
14,946.7 |
14,946.7 |
|
Actual tax
overpayment case: |
|
|
|
|
Export duty (30%) |
$
mill |
(4,484.0) |
|
|
Payment in kind for transit
services |
bcm |
33.1 |
|
|
- including to Ukraine and
Moldova |
bcm |
26.9 |
|
|
Value of payment gas |
$ mill |
(2,643.4) |
|
|
Gazprom's netback at the Russian
border |
$ mill |
7,819.3 |
|
|
Export optimization case: |
|
|
|
|
Gazprom UK buys at the Russian border |
bcm |
|
136.0 |
|
- export volumes to Europe |
bcm |
|
109.1 |
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- gas paid for Ukrainian transit
services |
bcm |
|
26.9 |
|
Gazprom UK procurement expense |
$ mill |
|
(12,303.3) |
|
Gazprom (Moscow) revenue |
$ mill |
12,303.3 |
|
|
Export duty (30%)
paid by Gazprom |
$ mill |
(3,691.0) |
|
|
Gazprom UK payment for transit
services |
$ mill |
|
(2,643.4) |
|
Gazprom UK profit |
$ mill |
|
0.0 |
|
Gazprom's netback at the Russian
border |
$ mill |
8,612.3 |
|
|
Export duty
overpayment in 2004 |
$ mill |
(793.0) |
|
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Having a working example
of tax optimization of Central Asian gas transit, minority shareholders
of Gazprom are surprisingly comfortable with the management's
inaction to the change of taxation rules in January 2004, that has already
caused a loss of over $1.6 billion.
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Gazprom continues to lose
$3 million a day overpaying the export duties.
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