State Regulation and Support of the Oil and Gas Industry

One of the key documents in state regulation of the industry is the Federal Law "On Subsoil" dated February 21, 1992, No. 2395-1, which governs the use and protection of subsoil and establishes licensing procedures. Additionally, specialized laws are being developed, such as the draft Federal Law "On State Regulation of Activities in the Oil Industry of the Russian Federation," aimed at improving the legal framework for the industry, including taxation and control. This draft was submitted to the State Duma in January 2020 and is still undergoing approval procedures.

To stimulate industry development, preferential tax regimes allow companies engaged in innovative activities to reduce costs, thereby freeing up additional funding for innovative projects. In 2017, Article 286.1 was introduced into the Russian Tax Code (Federal Law No. 335-FZ), granting taxpayers the right to "reduce the current tax period's tax amount by the investment tax deduction of the current tax period." As part of the tax maneuver in the oil and gas sector, compensation of up to 90% of certain expenses, including costs for implementing innovative technologies, is provided to attract investments and modernize oil refineries.

To encourage the entire oil and associated gas production sector, a tax deduction has been available since January 1, 2018, for oil extracted from subsoil plots entirely located within the Nizhnevartovsk District of Khanty-Mansi Autonomous Okrug—Yugra. The tax deduction amounts to 2,917 million rubles per tax period, subject to the following conditions:

• The subsoil use license was issued before January 1, 2016.
• Initial recoverable oil reserves were 450 million tons or more as of January 1, 2016.

This tax deduction is valid until December 31, 2027.

Federal Law No. 340-FZ dated October 15, 2020, "On Amendments to Article 343-2 of Part Two of the Tax Code of the Russian Federation," introduced a tax deduction for dehydrated, desalted, and stabilized oil extracted from subsoil plots located simultaneously within the boundaries of the Surgut and Khanty-Mansiysk Districts of Khanty-Mansi Autonomous Okrug—Yugra, under the following conditions:

• Subsoil use licenses were issued before January 1, 2018.
• Initial recoverable oil reserves for each plot were 1,000 million tons or more as of January 1, 2018.

The tax deduction amount is determined collectively for all such subsoil plots as follows:

• 3,830 million rubles—if the average price of Urals crude oil per barrel (in USD) during the tax period exceeds the baseline oil price.
• 0 rubles—if the average price of Urals crude oil per barrel (in USD) during the tax period is below or equal to the baseline oil price.

The tax deduction applies provided the taxpayer, holding licenses for the specified subsoil plots, concludes an investment agreement to stimulate oil production on these plots. The timeframe is from December 31, 2020, for a period of 3, 6, 9, or 12 consecutive calendar years.

The tax deduction ceases to apply starting from the tax period in which the total deductions (including those for excess amounts) first exceed 459,600 million rubles (the deduction threshold). However, if after 12 consecutive calendar years starting from December 31, 2020, the total deductions (including excess amounts) for all tax periods within this timeframe are less than the conditional additional budget revenues calculated for this period, and the taxpayer has previously paid excess amounts to the budget, the deduction threshold is increased by the paid excess amounts.

In addition to tax deductions, direct support in the form of grants or subsidies is also important. For example, under the national program "Digital Economy of the Russian Federation," domestic companies developing and implementing innovative digital solutions can receive grant support after a competitive selection process, as per Russian Government Resolution No. 550 dated May 3, 2019, "On Approval of the Rules for Granting Subsidies from the Federal Budget to the Russian Information Technology Development Fund for Supporting Projects for the Development and Implementation of Russian IT Solutions."

Furthermore, there are tax incentives for newly commissioned facilities with high energy efficiency or high energy efficiency ratings (for three years from the date of registration), as well as for property located in the Russian sector of the Caspian Sea floor. These incentives may apply if adopted by regional legislation. For example, the legislation of Khanty-Mansi Autonomous Okrug provides a three-year tax exemption for newly commissioned high-efficiency facilities.

Additionally, customs duty exemptions are used to stimulate the industry. Export duties are waived for oil (including oil-gas condensate mixtures resulting from the technological specifics of transporting crude oil and stable gas condensate via pipelines) produced from subsoil plots meeting the following conditions throughout the month of export:

1. The tax on additional income from hydrocarbon extraction (AIT) is calculated for the plot, and the plot is included in Group 1 or 2 for AIT purposes.
2. The mineral extraction tax (MET) coefficient Kg (reflecting the time elapsed since the start of commercial oil production on the plot) is less than 1 for oil extracted from the plot.

The Russian Government establishes the procedure for confirming compliance with these conditions.

The most important aspect of such state support is the ability to apply to executive authorities, particularly the Russian Ministry of Finance (the Department for Analyzing the Effectiveness of Preferential Tax Regimes or the Department of Budgetary Policy in Economic Sectors), to obtain individual subsidies for enterprises or apply preferential tax regimes tailored to specific companies.