Dark oil: Loophole lets Russian refiners dodge duties
(Reuters) — Two Russian refiners are avoiding export duty on fuel oil and vacuum gas oil by renaming them as an oil product that is exempt from the charge, according to a Reuters analysis of customs and refining data, and four industry sources.
The practice takes advantage of a loophole in customs rules and has this year saved the refiners tens of millions of dollars which would otherwise have gone into the state budget, according to the government data and sources.
Novoshakhtinsky and Mariysky refineries shipped a total of 2 MMt of reclassified fuel in the first nine months of this year, saving about $170 MM in tax, according to the data and sources.
Novoshakhtinsky said in a statement that in producing and selling its products it acted in complete compliance with customs legislation.
Mariysky’s owner, New Stream Group, denied the refinery was avoiding customs duties on its oil products and said it was in compliance with customs legislation.
The Federal Customs Service (FCS) did not respond to repeated requests for comment. Russia’s Association of Oil Refiners and Petrochemists said it had no comment.
Fuel oil and vacuum gas oil are low-value refined oil products known among refiners and exporters as “dark oil” products, and are mostly used either for shipping fuel or as ingredients to make more complex products.
The duty for dark oil products has been $86.7/t this year on average, and stood at $96.1 in November, according to publicly available customs data. However there is zero duty on exports of fuel defined as products “containing more than 50% aromatic hydrocarbons.”
The loophole lies in the fact that fuel oil and vacuum gas oil can be included in that latter definition, and therefore exported without duty under that customs code, according to the sources.
The four people—a customs broker, two commercial executives at refiners and a refining engineer—asked not to be named due to the sensitivity of matter.
A fifth source, an FCS manager, also told Reuters that dark oil products were being exported under the zero-duty customs code, but did not identify the refineries involved.
ZERO DUTY
Novoshakhtinsky refinery, in southern Russia, is the biggest exporter of products that fall under the duty-exempt code, according to customs statistics.
The plant is however only capable of producing fuel oil or vacuum gas oil, according to energy ministry data. It does not have the technology to produce any other products that have more than half aromatic hydrocarbons, or to produce more deeply refined “light oil” products like gasoline and diesel.
Despite this, according to ministry data based on the refinery’s output declarations, the plant produced no fuel oil or vacuum gas oil in the first nine months of this year. Instead it exported about 1.5 MMt of fuel classified under the duty-exempt code, according to customs statistics.
Mariysky refinery, in central Russia, was the second-biggest exporter of products that fall under the duty-exempt code in the first nine months of this year.
It has the same production capabilities as Novoshakhtinsky. However, it produced no fuel oil or vacuum gas oil but instead exported 0.5 MMt of fuel classified under the duty-exempt code, according to the energy ministry and customs data.
Russia exported about 30 MMt of fuel officially classed as fuel oil in the same period.
HARD TIMES
Times are tough for many refiners in Russia, a country which derives much of its wealth from commodities and where the customs tariff level is a key factor in determining whether exporters make a profit.
The government has gradually increased the duty on dark oil products over the past 2 yr to encourage refiners to sell less of them, and instead invest in modernizing their plants so they can make more deeply refined “light oil” products, which command higher prices.
But the duty rise has coincided with a slump in world oil prices. With their income falling, many refiners say they have been forced to postpone planned modernizations of plants. As a result, they say they have found themselves still producing large volumes of dark oil products, but with a tax set-up that penalizes them for it.
Fuel oil, known in Russia as mazut, and vacuum gas oil are classified under a customs code which begins with the digits 2710, making them automatically subject to duty. For reasons that Reuters wasn’t able to determine, fuel defined as products containing more than half aromatic hydrocarbons has a code beginning 2707, exempting it from duty.
Fuel oil, known in Russia as mazut, and vacuum gas oil are classified under a customs code which begins with the digits 2710, making them automatically subject to duty. Fuel defined as products containing more than half aromatic hydrocarbons has a code beginning 2707, exempting it from duty.
Editing by Christian Lowe and Pravin Char
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