Rent for gas producers will be hiked by 70% of the production cost

Photo: Yevgeniy Musiyenko

At today’s session the Verkhovna Rada plans to introduce changes to the Tax Code (TC) according to which the rent for oil and gas companies operating under joint venture agreements will be increased to 70% of the value of the extracted product. Oil and gas companies say that even in response to the current rent of 55% they were forced to postpone the implementation of certain projects, while its further increase could make gas production unprofitable.

Step on it!

MP Viktoria Voitsytska (Samopomich faction) said that the tax rates for companies engaged in the production of hydrocarbons under joint venture agreements (JVA) will be clearly defined in the new edition of the Tax Code. In addition, the rent will be raised by 15 p.p. and the amount of payment will be calculated based on the volume of production and the price of hydrocarbons, which will be set by the National Commission for State Energy and Public Utilities Regulation (NCSEPUR). The increased rate of rent will apply to both the JVA concluded by the largest state-owned company Ukrgazvydobuvannya and other similar agreements concluded by subsidiaries of the state-owned Nadra Ukrainy.

Voitsytska believes that unlike other forms of participation of private capital in oil and gas production, operation within a JVA is less risky and costly for private investors, while the profit margin from such activities is much higher than that from extraction oil and gas carried out on other terms (e.g., under licenses).

Voitsytska said that under the terms of a JVA its partners do not divide the non-produced physical resources, rather the profits from their sale. At the same time, she noted that often hydrocarbons produced under JVA are sold on commodity exchanges at below market prices and the difference is transferred to trading companies controlled by private investors. «We mean that agreements on joint venture activities are controlled by oligarchs, who own the assets accumulated back in the Soviet times and they receive exorbitant profits. The marginality of their business is higher compared to other companies operating on the market,» the expert assured.

Pinned to the ground

Ukrgazvydobuvannya is the largest gas producer in Ukraine. According to the gas balance for 2014, this year the state-owned company plans to produce 15.10 bn cu m of gas, including 1.12 bn cu m expected to be produced under the JVA with private investors. In this case, Ukrgazvydobuvannya extracts 80–85% of gas within the frameworks of the JVA together with Karpatygaz, which certain media associate with Dmytro Firtash, though the company denies this fact.

Chief Financial Officer of Karpatygaz Artur Somov said that introduction of a 70% rent will have a negative impact on gas production in Ukraine. He explained that after the increase of the rent payments to the level of 55% the company was forced to suspend projects on the major reconstruction of its wells. This also affected the commissioning of booster compressor stations (BCS), which allow for increasing gas production in the fields and maintaining the required operating pressure. Somov noted that Karpatygaz is not the only company feeling the effect of the JVA. Ukrgazvydobuvannya and other private investors operating in the same fields are also taking the brunt. Due to financial problems Karpatygaz delayed commissioning of its two main BCS. «If the rent is raised to 70% we will have no resources to complete the commissioning of the BCS. This means the Ukrgazvydobuvannya’s output will be sharply reduced and Ukraine will be forced to buy imported gas to cover the losses,» he said.

Commenting on statements according to which the companies operating within the JVA have higher margins, Somov said: «Do we pay less for drilling or capital construction? It is like building a house on your own or rented land — the cost of construction works does not change».

At the same time, he agreed that many JVA were corrupt and in terms of a market price of UAH 4,000 per 1,000 cu m of gas, they sold produced gas for example, at a price of UAH 1,500 and the difference was laundered. «There was such a practice on the market, so there is no point in hiding this fact and their activities cast a shadow on us,» he said. Somov added that Karpatygaz pays UAH 200–250 mn in various taxes every month.

On other rails

In early December, Premier Arseniy Yatsenyuk said that the government wanted to change its approach and work with private investors on terms of production sharing agreements (PSA). The Ukrainian government signed such contracts in due time with such international companies as Shell and Chevron.

Somov believes that such an initiative plays into the hands of private gas production as this new form of cooperation will be clearer for foreign creditors and at the same time the state will know the exact amount of resources it will receive. However, he also mentioned the negative side of the PSA — its implementation would require a number of changes to the current bylaws.