Home Business Gazprom Rejects Russian Tax Increases, Faces EU Anti-Trust Probe

Gazprom Rejects Russian Tax Increases, Faces EU Anti-Trust Probe

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Gazprom OAO (ETR:GAZ) (FRA:GAZ) (PINK:OGZPY), the world’s largest natural gas producer rejected the Russian government’s plan to increase taxes, and threatened that it would delay new projects particularly in remote areas. The Russian Government  owns over 50% of the company and has a majority on the Board of Directors.

Gazprom Rejects Russian Tax Increases, Faces EU Anti-Trust Probe

According to the report from Reuters, the Russian government proposed to raise the mineral extraction tax (MET) in order to deliver its spending promises during the campaign period for this year’s election. Under its proposal, the government wants to increase the rate of MET paid by Gazprom OAO (ETR:GAZ) (FRA:GAZ) (PINK:OGZPY) four times from its existing level, to 1,000 roubles or $31 per 1,000 cubic meters in 2015. Independent and smaller companies, such as Novatek (NVTK.ME), will pay the same rate as Gazprom, but the increase will implemented for them at a slower rate.

Capital Economics, a London-based consultancy firm, projected that the Russian government’s total election-related spending bill, by 2018, will reach approximately 4.8 trillion roubles or $163 billion per year. It represents 4 percent to 5 percent of Russia’s gross domestic product (GDP).

The state and investor owned natural gas producer recently delayed its development project for the Shtokman offshore field, located in the Arctic, in partnership with Total SA (NYSE:TOT) and Statoil ASA (NYSE:STO), due to high costs and the lack of tax relief. Gazprom said it would delay its new projects, if the proposed tax increases will negatively affect its profitability.

In addition the company also stalled the development of the Bovanenkovo field, in the Yamal peninsula in the Arctic. The Bovanenkovo project serves as the next major source of natural gas for the company.

The company pointed out that it is losing profits in some of its gas production fields due to high tax expenditures. In a statement, Gazprom said, “The situation will hinder resources development both at large deposits, which are currently being developed, and at new producing provinces.”

According to Troika Dialog brokerage, Gazprom’s gas production for the whole year is 494 billion cubic metres (bcm), a 3 percent decline, compared with its total gas production in 2011. The firm said Gazprom OAO (ETR:GAZ) (FRA:GAZ) (PINK:OGZPY)’s gas production continues to go downward below 490 bcm.

Last August, the company gas production dropped by 2.4 percent compared with its gas production during the same period a year ago. Gazprom’s export also declined this year due to lower demand in Europe, caused by the on-going financial crisis.

The company suggested a zero MET rate for offshore gas production intended to be liquefied, and different tax rates on fields, based on location, quality, and state of depletion.


Meanwhile, the Wall Street Journal reported that the European Union intensified its antitrust investigation against Gazprom.

According to the report, the European Union is checking the company’s long-term contracts with gas buyers in eight countries, including Bulgaria, Estonia, Lithuania, Slovakia, Poland, Hungary, and Czech Republic.

The European Commission suspected that Gazprom is restraining competition by hampering the free flow of gas across EU member states, preventing countries from diversifying their gas supplies and implementing unfair prices to its customers, by forcing contracts wherein gas prices are linked to oil prices.

In a statement, the European Commission said, “Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply. Ultimately, such behavior would harm EU consumers.”

Denis Ignatiev, spokesperson, did not provide any immediate comment regarding the EU probe, but according to him the company will issue a statement in the future.

The WSJ cited that the European Union conducted surprise raids in several natural gas companies in the region, aside from Gazprom in September. Other companies include E.ON AG (XE:EOAN) and RWE AG (XE:RWE), both German companies, and Polskie Gornictwo Naftowe I Gazownictwo S.A. (WA:PGNiG) in Poland.

Gazprom is due to release Q1-12 results on 6th September 2012.

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