Oil industry of the Russian Federation
Operational results of the sector
The Russian Federation joined the agreement to limit oil production due to weak production dynamics on the domestic market. Oil and condensate production amounted to 546.8 million tonnes in 2017, a slight decrease compared with 2016. At the same time, there was an increase in the percentage of oil produced offshore and at hard-to-recover reserve categories. An extension in the decision to limit oil production suggests that production will remain at a stable level in 2018.
The volume of oil exports from the Russian Federation did not change significantly in 2017. According to the Russian Ministry of Energy, exports totalled roughly 258 million tonnes. However, there was a change in the structure of exports: shipments to China continued to grow as exports to Europe declined slightly. By the end of the year, the Russian Federation had become the primary supplier of oil to China, well ahead of Saudi Arabia in this regard.
Primary oil refining, which amounted to 279.5 million tonnes in 2017, remained virtually unchanged. At the same time, the output structure of petroleum products continued to change due to the influence of modernization and changes in tax and customs legislation: fuel oil production declined significantly, while the production of jet fuel increased. As projects are implemented to modernize Russian oil refineries, the average depth of refining continues to increase.
Moderate growth was seen in the economy of the Russian Federation throughout the year. For the year, GDP expanded by 1.5% and industrial production edged up 1%. Retail turnover grew by 1.2%. At the same time, negative trends in the real incomes of the population continued last year.
The pace of consumer inflation declined to an all-time low in the history of the Russian Federation with only a 2.5% change in consumer prices as of the end of the year. The low level of inflation allowed the Central Bank of the Russian Federation (the Bank of Russia) to significantly loosen its monetary policy. The Bank of Russia reduced its key interest rate from 10 to 7.75% over the course of the year, and rate cuts continued in early 2018.
The stabilization in the macroeconomic situation and improvements in budget indicators enabled leading rating agencies to upgrade the credit rating of the Russian Federation. Higher oil and gas revenue and lower lending rates have created conditions for the positive trends in the Russian economy to continue.
Recovery of the domestic market
The situation with domestic demand for petroleum products was consistent with the varying dynamics in economic indicators. Fuel consumption by motor vehicles demonstrated moderate growth of roughly 1-2% amidst weak dynamics in household incomes and retail trade.
The air transportation market has recovered much faster. Air carriers increased passenger transportation by 18.6% and freight transportation by 15.7% in 2017. As a result, domestic jet fuel consumption expanded by approximately 10% for the year.
Tax policy and regulation
Decisions on tax legislation concerning the oil industry in 2017 followed the logic of the changes that have been made over the past few years. The mark-up factor on the mineral extraction tax rate for oil in the amount of RUB 428 per tonne was extended until 2020. The schedule of changes to excise taxes on petroleum products was approved, including an increase in excise taxes on motor petrol and diesel fuel until 2020 inclusive. In addition, in an effort to counter surrogate fuels, clarity was brought to the market regarding the concept of ‘medium distillates’ for the purpose of excise taxation. At the end of the year, the Government of the Russian Federation approved the bills required to transition to the taxation of financial results in the form of an additional income tax (AIT) for the oil industry and submitted them to the Federal Assembly. The purpose of the new policy, in particular, is to increase oil production at fields that will be included in a number of pilot projects for the AIT.