This page has been archived and commenting is disabled.
Goldman Busts The Narrative: The New Oil Order Is "Blessing In Disguise" For Russia
With S&P facing billion-dollar fines for defying the narrative, Goldman Sachs just dared to go even further against the US government by suggesting that the new oil order may be a blessing in disguise for Russia's oil industry. Simply put, the impact of the lower oil price and sanctions on the Russian economy increase the importance of oil industry tax reform, which could provide stimulus for upstream investments and commercialisation of the country’s vast oil reserves. An acceleration of upstream/downstream tax rebalancing could incentivise the development of substantial new basins in Russia, leading to a production capacity increase and a reduction in refining volumes to levels necessary to supply the domestic market. As a result, in Goldman's view, Russian crude exports would increase, improving the country’s current account, government revenues would grow, and upstream would attract material incremental investments.
Via Goldman Sachs,
The new oil price environment, the impact of sanctions on upstream developments, and the emergence of the Eurasian Economic Union (Kazakhstan, Belarus and Russia) are likely to lead to a major tax reshuffle in the Russian oil industry, in our view. Russia’s dependence on the oil market makes the country’s economy highly vulnerable to the new oil price reality. Consequently, we believe Russia might need to create a stimulus for new upstream developments to go ahead, otherwise it could see falling oil revenues and further deterioration in the economy. In addition to this, the formation of the Eurasian Economic Union requires the gradual unification of export duties. All these suggest a tax overhaul in the Russian oil industry might not be far off.
In this note, we outline what shape we think potential tax reform might take and what would be the implications on the Russian oil industry, Russia in general and Russian oil equities.
Why we think change is needed?
The current tax regime indirectly subsidises both the Russian refining industry and Russian consumers, via low fuel prices, while the tax burden on Russian upstream is one of the highest in the world. Effectively, refining and consumers are subsidised by upstream. Removal of this subsidy and the simultaneous reduction of the upstream tax burden could boost upstream profitability, while keeping the government’s take from the industry unchanged; consumers and refining, not the government, would therefore fund the expected increase in upstream profitability. A lower upstream tax burden would make currently-stranded reserves commercially recoverable, which would boost production and export volumes, helping the country to sell more oil on international markets and offset the negative impact of price decline.
What we think needs to change?
The tax changes, introduced on January 1, 2015, and known as the “tax manoeuvre”, indicate some minor upstream/downstream re-balancing. However, we believe the pace of the tax adjustments introduced with the tax manoeuvre is too slow to incentivise material upstream developments. We think that, with the current macro/political realities, the pace could accelerate and could lead to faster and sharper improvement in upstream profitability. Based on the direction of tax reforms over the last 3-4 years (60/66 tax reform, the tax manoeuvre) and the formation of the Eurasian Economic Union, we infer that the end point of tax reform could be the full cancellation of export duties and excise taxes, and an increase in MET. However, we expect the magnitude of any MET increase would be lower than the reduction of export duties.
What would be the outcome of potential tax reform?
We estimate such reform could lead to the following: (a) upstream profitability would substantially increase, driving up the earnings of Russian oil companies; (b) Russia would produce more oil – its vast onshore and offshore oil resources would become commercial to develop, giving a boost to accelerated production growth; (c) export refining would become loss-making and hence refining volumes would decline. Total refining throughput could decline to as much as needed to supply products to the domestic market. Under the current regime, we estimate that potential oil products export could decline up to c.50% from 2014 to 2020 (from c.3 mnbpd to c.1.5); (d) domestic oil product prices could rise by 30%, on average, from current levels, as indirect subsidy through export duties would be eliminated; (e) unconventional and offshore exploration would pick up, as profitability would improve substantially, making those areas particularly interesting for investment.
What would be the stock impact?
We believe Russian oil companies could experience an increase in earnings, but the magnitude of impact would be differentiated. Higher upstream exposure, production growth and better access to unconventional and offshore deposits would be the key for success. Companies that adjusted their strategies to increase upstream exposure would be in a more beneficial position than those investing in downstream. For portfolio managers, stock picking in the Russian oil industry would be based on the following metrics, in our view: (a) upstream vs. refining, measured by refining cover, i.e. lower is better; (b) production growth becomes important, as profitability would improve; (c) exposure to unconventional and offshore. Within the Russian oils space, we see Novatek and Lukoil as winners on a 5-7 year view, under both the current, and a reformed, tax regime.
Tax reform machine turned on; upstream to benefit
We think that the tax manoeuvre sets the foundation for upstream/downstream tax rebalancing. In its current form, we believe it implies some upstream/downstream rebalancing, but not enough to create material incentives for upstream developments; it maintains the Russian refining sector tax incentives and indirect consumer subsidies, by effectively keeping the domestic oil products price at a discount to the international price, through the use of export duties. However, we think that the new oil order and current macro/political realities could drive a redesign of the tax system to make it more favourable to upstream. We think this could be achieved by an acceleration of the tax manoeuvre, which would imply a reduction in export duties and a MET increase. We think the end point of the tax reform would be full cancellation of export duties, a MET increase and cancellation of excise taxes.
2014 and onwards: The trend is set - volume vs. price, upstream vs. downstream
After years of tweaks to the tax regime, it looks like the trend has now been set; refining taxes are going up, upstream taxes are going down. Yet we are a long way from broad tax reform; it seems the trend could be followed, not via overall reform, but rather through a continuous chain of tweaks, such as the tax manoeuvre and special tax breaks for greenfields. The chain of recently announced tax breaks for new developments, implemented over the course of 2013/2014, has also set another interesting trend, i.e. going for volume growth in production and expanding capacity in order to maintain, or even increase, market share in the global oil market; we think Russia would have benefited from pursuing this trend a long time ago. For now, it seems the government prefers to support new developments in the industry. However, with time, we are likely to see broader support for upstream, especially as budget revenues from the refining sector increase.
Conclusion: Tax manoeuvre is the beginning of a wider reform
The Russian government’s tax manoeuvre reduces export duties for both crude oil and light products, while MET (which originates at the point of production) increases. However, the profitability of light products sales remains high and the tax differential between crude and products looks set to stay in place. In our opinion, these tax regime changes are not final, and we think there could be more adjustments to follow. We believe the government is trying to maintain its subsidy to the refining industry, but we see several factors that could lead to the gradual cancellation of the refining tax subsidy and the elimination of export duties as a fiscal tool: (a) integration of the Eurasian Economic Union of Belarus, Kazakhstan and Russia; (b) the need to increase budget revenues; and (c) the need to provide more economic incentives for new upstream developments. Yet, it does not appear that the government is ready to introduce radical changes, as it appears to be proactively trying to maintain the refining industry tax subsidy. However, we think the government might gradually approach the point where reform could be economically necessary. That could be years from now and, until that time, Russian oil industry taxation is set to remain a topic of continued debate within the government, the Kremlin and company managements. Hence, we expect the Russian oil industry tax regime to continue to be subject to regular adjustments to the tax law. This would not be positive for Russian oil equities, as it would introduce a high level of uncertainty into future projections.
»
- 19242 reads
- Printer-friendly version
- Send to friend
- advertisements -
with the biggest slice of course going to the new york bank mobsters
Actually, the whole attack on Russia and RUB was never realistic. Oil and Gas exports account for 65% of Russia's exports, but exports only account for about 30% of Russian GDP. So Oil and Gas exports account for only about 17% of Russian GDP. Even now, Russia still runs a trade surplus. And countries with a trade surplus don't have currency problems, unless orchestrated by "Someone".
The 70% of the GDP which is not exports is domestic consumption, within which Russia represents the largest consumer market in all of Europe, including Germany. Hence the hit to German exporters and thus Europe's economy overall as a result of blindly obeying US sanctions, sanctions whic have NO impact on the US itself.
Finally, Russia's external debt represents about 13% of GDP and it has adequate Fx reserves without even counting the world's fifth largest Gold reserves.
So for "Someone" to think that Russia could be broken in such a way was entirely unrealistic from the outset. IMHO.
I agree...for what it's worth to ya :)
It's about prodding, not breaking. The west is counting on Putin to 'overreact' to the economic war being waged by the US. Then they have the small grain of truth that they can blow up into a mountain of propaganda to justify whatever they desire.
Syria and/or Iran were expected to respond to any number of US/Israeli attacks.
But now it seems that Israel can simply bomb Syria, even Hezbollah members fighting ISIS, claim they were planning to invade Israel {which is absurd}, and count on a Jewish-dominated or influenced MSM to present any response to Israeli aggression as aggression which poor little Israel must 'respond' to.
It's a playbook with only a small handful of plays, of course, and while it fools most of the people most of the time, it doesn't fool everyone.
And as usual, regular, everyday people just trying to live and let live will pay the price.
thx, byingsterling, your observation is fundamental. The "this-is-a-conspiracy-theory" counter-argument is usually accompanied by the assertion that it is not plausible to assume all details to be pre-plannable. This assertion per se is correct but completely irrelevant. The point is to exert unrelented pressure until your foe starts dig his own grave.
Yep. It all made sense once I realized that it was revenue-neutral only because the guy filling up his tank will be paying Goldie's share, one way or another.
goldman only cares about enriching the coffers of Goldman -
and a few banksters working therein - not sure I'd take any adivce from goldman sachs comnsidering their involvement in various countries over the years....
hang the lowlife scum......
mebbe GS can educate all of us as to just exactly how letting them write Russian Tax Law will be so double-plus good for Russia?
Of course it doesn't help that Putin plays chess and Barry plays with Reggies hang-low.
Who from the hood was in the White House tonight?
Yeah, let's use all the earth's resources up as fast as possible to further enrich the psychopaths.
Humanity be fucked.
Of course lower oil was not hurting Russia, anyone that thought this was hurting anybody but the shale and other higher cost-base oil producers has not given it much thought. Since Ruble was falling oil was staying no change from Russian perspective. Another news flash for Americans higher Gold, Silver only strengthens Russia and China. The global economy is moving East and it is happening fast.
Now that is truth!
I wonder how much Goldman charged Russia for that rosy viewpoint? Won't pumping more oil into an oversupplied economy force the prices down further? Of course, China has to be "Loving it."™
Goldman is pimping for new fees !
Thw squid always knows which way the longer term winds are blowing!!!
I wonder how much is paid to ZH to publish this pro-Russian propaganda. Or, perhaps a Polonium pellet awaits the Tylers if they don’t toe the line.
Putin is going down, get over it.
probably a whole lot more than is paid to anti-Russian trolls. But to be sure, what are you paid?
How much was Goldman Sachs paid to write it?
Enough for GS to sell out the house of Saud.
To be sure they made a ton selling the Saudis on the plan to lower prices in the first place.
What's going down is the USD
unlike you mr. newbie, tyler has integrity and respect. say...how long have you been a member?...ah...just what I thought...another COINTEL agent trying to shape opinion online.....
Got any arguments other than ad hominem insinuations?
do you?
getting worried, eh?
You ought to.
tick-tock....
The question is: How much damage will he be able to cause in the meantime?
pollonium pellet?
ignorant inane post
"The Phoney Litvinenko Murder" William Dunkerley
media dumb you down much?
Sure thing. Pretty much everything AIPAC sells falls on it's face and ends up the opposite as intended. Sanctions on Iran for example -- made the Iranians stronger for the longterm of course. When will we ever stop listening to parasites who've inbred for generations? Creating a war in Ukraine then convincing Europe etc to end trade with Russia is beyond reckless.
The Isreali farmers are making out pretty well, on target to export 1 billion worth of ag products a year to Russia.
Farming is work beyond any clerk's or jew's comprehension.
Fracking the narrative .... Putin/Maduro fan club and apologists !
GS Narrative: Anal rape disguised as financial advise.
A sanctions regime is good for oil?
BWHAHAHAHAHAHAHA!
Even better! "And let's foist a Civil War on the joint!"
INSANE!
OIL IS GOING TO ONE DOLLAR!
I say again
ONE DOLLAR A BARREL!
DIVE! DIVE! DIVE!
just one question. How much Novatek and Lukoil stock does Goldy own?
Everything that does not kill me makes me stronger, yeah I heard that before.
That which does not kill you
make you strong
except for Bears
Bears will kill you
In the immortal words of Animal Mother, "All Goldman bankers must hang!"
http://youtu.be/qUQsozpZUSw
translated to plain english: a strong dollar incentivizes exxon to invest more into russia even as political risk explodes and the next president might institute capital controls.
what goldman isn't saying is; china will be given investment priority in russia , not the u.s. big oil companies.
the yuan of course is not going to stregthen along with the dollar, so the thesis is irrelevant.
Bingo!!
Upstream is Exxon and US drilling and exploration. The squid wants it to be more profitable.
Surprise, surprise!!
Goldman has MOAR to lose than ANY other Bankster as it's tentacles and testicles are lodged in the Central Western Banks and Oversight within the EU.
Suffice to say it is the Financing Arm and Political Wing of the Magic Circle who will sit down with the Dons and hand them the expected returns from a military engagement and anticipated fallout with early options to cover fluctuating scenarios.
Relinquishing this Power due to the Predominance of Eastern Delights and resultant transfer of wealth East it's a bitter pill to swallow for them.
The diminishing cake means that every one of these vultures are feeding off of each other with fresh blood/prey costing too much in less familiar pastures.
Yes the Saddam and The Colonel were the low level hanging fruit of days gone by.
Let's see Floyd's negotiating skills ( after being party to the rating agencies down-grading ) in the Kremlin after advising Barry on the Sanctions; now a complete reversal.
Don't forget Hollande's late fees on the War Flotilla deliveries to Mr Putin.. All Aboard
Well said, except I'm not quite sure about "All Aboard". I want OFF this unquestioable "Titanic" (Or "juggernaut" if you prefer that metaphor).
Whether or not measures I've taken stop me going down with all hands works, remains to be seen, but considering that I am 71 it is not as important to me as younger folks.
I lived through the best years - 1950s to early 1970s - when ordinary working people could graduate from a bicycle, to a mtorcycle and then a car ... with all of us blissfully unaware that this sort of stuff is completely unsustainable.
Thngs stated to look dubious around 1971 when the Empire ran out of easy cheap oil and the petro-dollar deal was stitched up with the Saudi bunch of thugs who are the model for ISIS.
OK stretch things back to WW1, Sykes-Picot and the Balfour Declaration.
An evil imperialst/bankster stew has been brewing for at least a century (250 years if know the Rothschild connection) but very few people knew any of this until about the last decade of the internet, though I and others knew some elements of concern 50 Years ago, such as my reading of J K Galbraith's "The Affluent Society".
Actually there were many warnings that things were going very badly wrong throughout the 19th Century even, but we all blissfully "boarded the Titanic" to some extent or other.
Stop posting this stuff! I am trying to corner the world. Give me a couple of days, please? My tentacles are tired. Plenty of thanks to Baal, Molach, and the other fake lesser gods.
Ex Goldman-Sachs Analyst Creates Hedge Fund Betting On Russian Asset Rise
Russia’s Energy Firms Withstand Low Oil Prices – Fitch
BP Profit Rise Due To It’s Ownership In Russia’s Rosneft
Russia Reducing Shipping Port Facilities To Make Room For More Yachts
IBM To Manage Accounting Services For Multinational Russian Businesses
Gazprom Success On Display in Iraq
Libya, Russia, Argentina, Venezuela.
See the pattern or common denominator?
Um, four shitholes ruled by power-mad autocrats?
Did I win anything by being first to get it right?
So what does this article actually say?
It says that Russia needs to scrap the subsidy for its own internal consumers and start charging them full price. That's what all this upstream-downstream tax rigamarole is about-- higher gas prices for the average Ivan in the street.
I think the Russian people have enough trouble already without someone jacking up the price of petrol as a way of swelling the tax coffers in the Kremlin.
The Russain tax man knows that attempting to tax Russian Oligarch Businesses is a losing idea. Contract rip offs and self dealing leaves the cash somewhere unknown.
However, counting bbls of oil from wells is much more simple. The idea of not taxing at the source won't go anywhere as otherwise there would be no tax collected.
I don't think that you quite get it.
Not saying that I completely do either, but there are many subtle moves going on in Russia as "The West" is slowly abandonned.
Putin and his team are very clever (I have read many of his and their analyses).
They are a quantum difference from ALL Western leaders and think-tanks.
Maybe they will get it all wrong in the long run, but meanwhile believe me that the the East is playing chess, whilst the West has zero clue, well unless you believe Obomber and Jen Psaki. who smiles her way through blatant lies, like all sociopaths do.
Meanwhile the RF is trying to dig itself out of the hole created by the sociopthaths, both domestic and foreign, of the 1990s.
Of course it is the best thing to ever happen to Russia. It gets them away from the 18th century carbon business and accelerates them toward exporting solar energy. New Jersey forces its residents to buy more solar power than Florida does to its residents, so therefore, solar in Siberia the the Royal Flush!
http://dearputin.com/
i wonder how much influence GS has in RU.
...nd GS's announcements as of late have not been all that correct. if memory serves...
Everything is a blessing in disguise. MOAR STAWKS!
Let's give all of our assets and 'money' to the rich people. Surely they will know the best things to do with it and with the government they will make good things happen. We will all benefit from that goodness trickling down the economic slope into the pits where we all reside.