Gas Tariffs and Taxes on Agenda

While we expect a major recovery in gas sector fundamentals in the second half of 2009, there are two regulatory issues on the risk side of the story to be settled in the coming months. First, the government might increase the gas extraction tax next year. Second, we have yet to face the decision on gas tariff hikes in 2010, which might differ from that which was previously approved (increases of 13% in January and 12% in July 2010), capping gas tariff growth amid a weaker economy.

Both issues are subject to negotiations between the government and Gazprom. However, before the final decision is made, we highlight the sensitivity of Gazprom and Novatek to higher taxes and lower tariff growth in 2010. That said, the two initiatives contradict each other in terms of fiscal implications, and we believe the more inclined the government would be to raise gas taxation, the less willing it would be to cap tariff growth.

We estimate each 10% increase in the gas extraction tax (from the RUB 147/mcm now), would result in Gazprom’s 2010 EBITDA and net income being 0.7% and 0.8%, respectively, lower. Novatek is more sensitive, with EBITDA and net income down 0.9% and 1.1%, respectively, in 2010. We currently factor in growth in gas taxation starting from 2011, therefore the major risk to our estimates relates to the year 2010.

Each 10% reduction in the 2010 gas tariff would result in Gazprom’s EBITDA and net income dropping 4.8% and 5.9%, respectively. Novatek is again more sensitive, with risks to EBITDA of 6.2% and net profit of 7.2%. Should the year-end 2010 gas price be materially less than initially planned (because of the potential tariff growth revisions), this would pose a threat to the long-term levels of domestic tariffs, implying liberalisation later rather than sooner. That said, we currently factor in netback parity in 2015, which is already conservative.