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GSI Seminar - Oil and Gas Subsidies in Russia

February 20, 2012
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Man speaking at a podium. MOSCOW - 20 February 2012 - GSI and WWF-Russia co-organized the ‘first-of-its-kind’ seminar Comparative Analysis of Oil and Gas Producer Subsidies as the a launching pad for a broad debate on the scale and efficiency of various programs of government support for oil and gas producers in Russia. The event, which was held as part of the ‘Oil & Gas Dialogue’ series of workshops hosted by the Institute of World Economy and International Relations of the Russian Academy of Sciences, as well as the report itself, received substantial press coverage and attention from the community of Russian oil and gas experts.

The seminar was attended by around 80 delegates including representatives of the Ministry of Finance of Russia; State Duma of the Russian Federation; oil and gas industry (BP,  Gasunie, Gazpromexport, Mitsubishi, NOVATEK, Repsol, Russian Gas Society, Servis-VMF, Society of Petroleum Engineers); consulting and academic institutes (Economic Expert Group, Gubkin University, Institute for Energy and Finance, Institute for Energy Strategy, Higher School of Economics, MGIMO University, Russian Academy of Sciences, Troika-Dialogue, RusEnergy); international organisations (European Commission’s Delegation in Moscow, UNDP, UK Embassy in Moscow); NGOs (Ecoaccord, Greenpeace-Russia, WWF-Russia); and the media.

Structured in order to provoke an engaging debate on the subject, the seminar started with the presentation of the key findings of the study Fossil Fuels – At What Cost? Government Support for Upstream Oil & Gas Activities in Russia, which was co-published by WWF-Russia and GSI. Ivetta Gerasimchuk, GSI Research Office and author of the report, linked the study to the unceasing debate over Russia’s ‘resource curse’ and the difficulties the Russian government is facing in estimating and capturing the natural resource rent in the oil and gas sector. Referring to the WTO definition of subsidies only as a second-best approach to quantifying the resource rent not captured by the state, she revealed the GSI’s estimates of oil and gas producer subsidies in Russia: US$ 8.1 billion in 2009 and US$ 14.4 billion in 2010. The study did not attempt to determine whether subsidies were good or bad though it observed that the identified subsidies are largely focused on developing new fields, including in the Arctic, and not improving recovery and efficiency in existing fields.

The Audience at the event. Kerryn Lang, GSI’s Project Manager, put these estimates for Russia in a broader context, specifically referring to the GSI’s two studies on two other Arctic countries, namely Canada and Norway, from the same Fossil Fuels – At What Cost? series. She also briefed the audience on the existing global efforts aimed at fossil-fuel subsidy reform noting that Russia needs to establish a mechanism for monitoring and evaluating the impacts of these subsidies as part of fulfilling its G-20 and APEC agreement to phase out inefficient fossil-fuel subsidies.

Mikhail Babenko, Oil and Gas Officer, WWF Global Arctic Programme, and Aleksey Knizhnikov, Coordinator of Energy Sector Policy Programme, WWF Russia, both stressed the need for the governments of Arctic states to consider environmental risks when taking decisions on granting tax breaks, royalty relief and other forms of government support to offshore projects in the High North. They also pointed out that economic analysis of such risks may prove highly valuable in cases where ‘classical’ arguments for nature conservation do not work.

Konstantin Simonov, President of the National Energy Security Fund, challenged the applicability of the WTO subsidy definition to the oil and gas sector in general and the case of Russia in particular. He stressed that when the system of taxing the oil and gas sector in Russia was set up, it did not take into account the different degrees of productivity and accessibility of individual fields. As a result, to encourage development of higher-cost fields, the government now has to make project-based exceptions from the general taxation regime. While all of these exceptions can qualify as subsidies, in reality they are just ‘virtual money’, or ‘a hide of the bear that has not been killed’ according to the Russian saying. Meanwhile, without such subsidies, development of the Russian oil and gas sector, and, generally, the Russian economy would be impossible. Simonov referred to production sharing agreements in Sakhalin as an example of a special provision without which economic development of Russian regions would have never happened.

Against this background, the ensuing discussion largely welcomed the joint report by WWF-Russia and GSI as a ‘first-of-its-kind’ piece of analysis showing the need for the Russian government to develop a more comprehensive and transparent approach to taxing and subsidizing the Russian oil and gas industry. The debate focused on the following issues:  

  • there are ‘no winners’ as a result of applying the WTO subsidy definition to the oil and gas sector, given the absence of internationally unified taxation principles and benchmarks;
  • the need to develop sound methodologies forc lassifying energy subsidies as ‘efficient’ and ‘inefficient’, with respect to not only the oil and gas sector but also the renewable energy sector;
  • the need to put the issue of government support to oil and gas producers in Russia into the broader context of Russia’s economic diversification and modernization agenda;
  • the importance of equal fiscal treatment of all oil and gas companies in Russia;
  • the need for further analysis of possible channels of subsidizing Russian oil and gas companies, in particular through improper taxation of refined products;
  • and the need to increase transparency and public awareness of the value and cost of the existing producer subsidies to the oil and gas sector.

In their concluding remarks, Natalia Ivanova, First Deputy Director of the Institute of World Economy and International Relations of the Russian Academy of Sciences, and Evgeny Shvarts, Director for Conservation Policy of WWF-Russia, both stressed the need to view government support for oil and gas industry in Russia in a broader international context. Ivanova referred to Russia’s recent accession to the WTO and the WTO’s positive experience of using a ‘traffic lights' system to classify subsidies that the government may or may not apply to ensure fair trade. Evgeny Shvarts stressed the need for Russia to efficiently manage its energy subsidies as the country will be increasingly in the spotlight not only as one of the world’s top energy suppliers, but also as APEC Chair in 2012, G-20 Chair in 2013 and G-8 Chair in 2014. 

Speakers

Session moderator:

  • Dr. Natalia Ivanova, First Deputy Director, Institute of World Economy and International Relations of the Russian Academy of Sciences

Welcome note:

  • Dr. Evgeny Shvarts, Director for Conservation Policy, WWF-Russia

Panelists: