Government Support to Upstream Oil & Gas in Russia: How Subsidies Influence the Yamal LNG and Priraz

Reports and presentations on the European Gas Market
European Gas Hub Analysis
Published 07/04/2014 by GSI

This report identifies, quantifies and evaluates measures of government support to two upstream oil and gas developments in the Russian Arctic: Yamal LNG (gas) and Prirazlomnoe (oil). Using Sigra Group’s RusTax-model and information collected from publicly available sources, the analysis demonstrates how the measures of government support to the two projects have altered their economics.

In Russia, the existing benchmark taxation system makes development of many oil and gas fields uneconomic, and introduction of certain measures of government support seeks to rectify such distortions of investment decisions. However, “manual control” of tax breaks and other measures of government support to “cherry-picked” projects comes at the cost of unnecessarily large rent transfers from government (and taxpayers) to companies.

Continuing the cherry-picking of projects through ad hoc tax breaks and government infrastructure investments will most likely lead to rent transfers from the government to companies in the future. In the meantime, the lack of solid quantitative estimates precludes a straightforward answer to the question of whether or not the overall social benefits of such developments overweigh their overall social costs, including significant environmental risks.

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