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Russia

Energy: Integrated Oil & Gas

Lukoil

Appendix – Korchagina field regulatory regime

We estimate that the Korchagina field, which was launched in 2010, started commercial production in 2011, which means that it will have a Kg coefficient of 1 already in 2019 (for more details about how the EPT system works, see our Russian Oils Upstream – The Metamorphoses. Rise of Titans, of 5 October 2018). As a result, the costs base of the field (sum of opex, capex and SG&A), which might be deducted from the EPT tax base, could be limited to RUB 7,140/t (USD 15/bbl) in 2019-20, and RUB 9,520/t (USD 20/bbl) in 2021 (indexed at CPI after that). Therefore, the field might not be able to deduct all historical accumulated losses indexed by 1.1163 (which we estimate at USD 1.7bn as of 1 January 2019) to zero out the tax base and, so, would have to pay the full EPT (unlike other Russian greenfields launched more recently). Moreover, the field currently also receives regional MET relief until the end of 2021, which it would lose, if it opted to change the tax system, missing USD 560mn of tax-savings in 2019-22F. Furthermore, the tax payments under EPT in the longer term are going to be just USD 19mn lower than under the current tax regime, which is not enough to offset the shortfall from the lost MET relief.

Figure 24: Tax payments of Korchagina field under current and EPT regime

250

Export duty (current regime)

Source: Company data, VTB Capital Research

We therefore think, that Korchagina is likely to stay under the current tax regime.