Russia’s largest private oil producer, Lukoil, has asked the government for tax breaks after the price of Russian Ural crude oil, which is trading at a discount of almost 50% to the global benchmark, the pro-Kremlin Russian publication Izvestia announced on Monday, as quoted by the Moscow Times.
Citing a letter from Lukoil, affected by US sanctions, to the cabinet and the Energy Ministry, Izvestia said the company had proposed changing the price stabilization mechanism to reduce its tax burden and potentially secure payments from the federal budget, according to Agerpres.
The price stabilization mechanism, introduced in 2018 to stabilize domestic fuel prices, compensates oil companies when fuel prices remain below the international benchmark.
Companies are required to make additional payments to the state when fuel prices exceed the international benchmark.
According to Izvestia, Lukoil has requested a revision of the formula so that the discount applied to Russian crude for tax purposes is capped at $10-15 per barrel. Without such changes, oil companies would be forced to make payments rather than receive compensation.
With the discount on Russian crude exceeding $20 per barrel, oil producers would have to pay the budget about 13 billion rubles ($170 million) for December under the price stabilization mechanism, the Russian publication reported.
And the Central Bank of Russia recently announced that the discount applied to Russian Urals oil compared to Brent (the global benchmark) expanded by six percentage points in November, to 23%.
The discount, while less severe than that seen after the first wave of Western sanctions in 2022, reflects increasing pressure on Russia’s oil and gas export revenues. These revenues are the Kremlin’s most important source of cash, accounting for about a third of total federal budget revenues over the past decade.
The Central Bank of Russia said the discount was close to 15% in the second and third quarters, reaching 17% in October.
“We believe that the widening discount on Russian oil prices is a temporary phenomenon, as it was in 2023,” said Alexei Zabotkin, deputy governor of the Bank of Russia.
He added that Russian oil exporters had managed to diversify their supply routes and adjust to “new realities” in 2023, when the discount eased by mid-year.