Baku, Azerbaijan, Feb. 17
Potential regulatory changes pose a greater risk to the ratings on Russian oil companies than low oil prices, Standard & Poor's Ratings Services says Feb. 17.
"In our view, rating pressure could increase, depending on the extent to which the Russian government may make changes to current oil industry regulation, discussions about which are ongoing," said Standard & Poor's credit analyst Alexander Griaznov.
Proposals under discussion include the possibility of lowering mineral extraction tax exemptions that oil firms currently enjoy, or increasing excise duties on oil products.
"Our ratings on Russian oil majors Lukoil, Gazprom, Rosneft, Gazprom Neft, and Novatek, remain unchanged following our recent downward revision of oil price assumptions," says the report titled "Inside Credit: Regulatory Changes Pose A Bigger Risk To Russian Oil Companies Than Low Oil Prices."
Currently, regulation in Russia's oil industry is based on the principle that oil companies pay meaningfully lower taxes as prices go down, so it is the federal budget that suffers the most in a low oil price environment.
Russian oil companies are also benefiting greatly from the devaluation of the Russian ruble since about 90% of their operating costs and about 80% of capex is in rubles. They continue to hold solid credit metrics and have not materially cut capex volumes, as opposed to the 15%-25% capex cuts we are seeing by European and U.S. oil majors, the agency said.
"Our base-case scenario is that the Russian government will try to find a reasonable balance between its fiscal interests and the long-term success of the oil sector, which will remain key to the economy in the foreseeable future," said Griaznov.
"We do not exclude that the government might impose temporary measures to support the budget in the near term, but we think the overall framework will remain unchanged in terms of its key principles," the report says. "Besides, we expect prices will recover toward the second half of 2016, somewhat relieving the pressure on sovereign finances and the need to take a more aggressive and prolonged stance on taxation of the oil sector."
That said, we think the government might still take some more permanent decisions. For example, we think that it might reconsider the extent of mineral extraction tax benefits, which have been generously granted to many fields and projects in the past, the agency said.
"More material changes are currently not part of our base-case scenario," said Griaznov. "However, if more material increases in taxation were to be implemented, we think it very likely that they would have a negative near-term and long-term credit impact on the whole oil sector in the country."
"We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee," the agency said.