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What is choking gas production in Ukraine?

Declaration of the government to reform domestic production capacity in the name of independence of the energy sector are not backed by real legislative reform of sphere of subsoil.
The theme of energy independence has become a top issue discussed in government circles and in the Ukrainian society. However, analyzing the results of the government effort in this context, the question arises about the "underperformance" of the plans Ukrainian politicians.
For the actual confirmation of such serious accusations give a little sad statistics. For example, gas production in Ukraine in January-August 2015 amounted to 13.17 billion m3, which is 2.2% lower than a year earlier. "Naftogaz Ukraine" for eight months reduced production by 4.9%. Gas production in August 2015 compared to the same month last year, declined by 1% - up to 1.68 billion m3. NAC mining companies in August fell by 6.5%. The reason for the lower production volumes in 2015 were high tax rates on natural gas and as a result - the mining companies have reduced or even stopped any investment.
But the challenge facing Ukraine is quite different: to do everything possible for the development of domestic gas production to replace imported resources.
Special permits both exploration and extraction in recent years given less. And this is not due to the loss of interest by investors in the development of Ukrainian oil and gas mineral resources, as explained by the unstable conditions of regulation of the industry and of the companies in our country.
Ukrainian gas resources every year are becoming increasingly important for the economy and the need to reform the legislative framework in order to create a comfortable business environment for investors. For this process of interaction with state institutions must be stable and clear, and the legislation - to ensure investment protection.
What changes in legislation proposed today?
In March, the Cabinet of Ministers of Ukraine adopted a resolution number 375-P, which was assigned a roadmap of reforms in the energy sector. And during the 2015 - 2016 biennium. provides for the development and submission to the Government for further submission for consideration by Parliament of certain documents in the sphere of subsoil use:
changes to the Tax Code regarding the taxation of mining companies, taking into account best international practices;
Draft Code on mineral resources in the new edition;
well planned comprehensive audit of private and public users of oil and gas mineral resources, analysis of the program of work in the areas of mineral resources and the cancellation of a special permit, which by law is not satisfied the work program in full;
also plans to develop a program phasing out of at least 5% special permits issued by state-owned enterprises, which is not expected to fulfill the program of work in full.
It is worth noting that it is the unpredictability of the fiscal regime causes a lot of complaints from mining companies. Previously mining companies say more about the instability of the rules of hydrocarbon production during 2015 all mining companies say the high rates of rent payments. Since February 2015 the legislators put forward the initiative to lower interest rates, there are more than 10 bills, but only members of parliament on October 6 was able to start from the corresponding bill. About real-reducing rents too early to say: to make proposals and amendments to the bill, which is taken as a basis, parliamentarians allotted 14-day period, and then the document should just 2 reading in the Verkhovna Rada of Ukraine.
The decrease in rates - this is not the full scope of the reforms that are necessary to carry out. The legislation is necessary to establish not only the rate but also the methodology by which the rate could be calculated for each particular field, taking into account the geological conditions and other factors. This will give the opportunity to make long-term forecasts for the fiscal load in each individual project. Without stable and predictable tax regime, investors will prefer less risky projects, for example in neighboring countries.
We can not say about the new law "On the gas market," which came into effect on 1 October. The necessary legal framework is not adopted in full. The result is a legal conflict. For example, as regards production: according to the Tax Code of Ukraine, the rent is calculated by limiting the price, but the new legislation there is no such thing. Accordingly - there is no base for calculating the amount of tax for mining companies. The bill number 3072, which was submitted to the parliament, included a clause allowing to settle, including this issue. But the project was rejected by the deputies. And now, how to calculate the amount of rent payments mining companies in November is unclear. Also, it is unclear what to pay rent during the formation of the insurance reserve, the amount of which is increased to 100% of the contract monthly delivery. Although mining companies this innovation postponed until January 1, but such a load with a high rent is detrimental to companies and negatively affect the financial position in general of all natural gas suppliers.
Then, speaking of taxes, it is important to say also on the distribution of the rent tax. The Verkhovna Rada handed 2 bill on redistribution between budgets of different levels of funds received from the payment of rent for oil, natural gas and gas condensate. The goal - the development of administrative and territorial units and communities in the territory of which the hydrocarbons are extracted by transfer of the corresponding share of the rental fee in local budgets.
This is a good initiative, but it will not affect the development of the gas industry. In accordance with the Budget Code, the rental fee for use of mineral resources for the production of oil, natural gas and gas condensate is included in the general fund of the state budget in its entirety. Association "Ukrainian Subsoil Users" considers it necessary to increase revenues in a special fund of the state budget on rent and thus provide an opportunity to increase funding for geological prospecting works at the expense of the State Budget.
The fact that the costs of exploration from year to year decline. According to the results of 7 months of 2015, the volume of exploration drilling declined by 10% compared to the same period last year, while production drilling - by 17%. For 8 months of 2015 the volume of exploration and development drilling of oil and gas industry enterprises decreased by 11% compared to the same period in 2014 is critically low funding for geological prospecting work led to the fact that we have a negative trend of substitution of harvests. Decline - is the main trend of 2015 and to eliminate the need of more than one year of active investment funds in exploratory drilling and so on.
But to attract investors need not only low tax rates, but also offer more efficient organizational and legal forms of public-private partnership. And here we are talking about the wider application of such tools as the Production Sharing Agreement. So far, Ukraine has no successful examples of such projects, but there is a positive experience for many countries. The Verkhovna Rada registered a draft law №3042 amending the law on PSAs. The changes are aimed, inter alia, to clarify and deregulation process of concluding the PSAs previously issued on the basis of special permits.
Furthermore, such a model production of hydrocarbons must guarantee the special tax incentives and at the same time the PSA on the investor shifts the main risks of exploration and production. The main difference: fiscal redistribution of the results is carried out through the mechanism section is output, ie, gas or oil, but not through taxes, which is typical of other mechanisms. At the same time the company-investor receives a refund of investments in the form of «cost gas» in accordance with the terms of the PSA. And the rest of produced hydrocarbons are distributed between the state and the investor. This progressive model and improvement of legislative regulation of PSA may help Ukraine to attract more investors.
But within the framework of how these and other projects, mining companies are faced with the problem of land acquisition. If we adhere to the statutory terms, in order to enterprises that carry out intelligence work could begin immediately to implement them, it is necessary to spend at least four months. In practice, the procedure of land allocation can last 2-5 years. Or, for example, in the production of commercial flows of oil and gas exploration wells made them translated into the category of production and in this case it is necessary to develop the project of land allocation in the long-term use, in accordance with industry standards and the Land Code of Ukraine to other uses of the land. Pending receipt of documents of title to land is necessary to stop the improvement of productive wells, canned it for the period of registration rights to the land. This leads to missed deadlines construction of pipelines to wells, loops and putting them into operation, reduces revenue. In order to resolve this very difficult issue it is developed and supported by the profile parliamentary committee bill №3096, designed to simplify land issues the mining industry.
As you can see, work is underway to reduce the rates of rent payments, the settlement of the land question, but throughout the year there was virtually no active steps to develop a new version of the Code on mineral resources and other activities in accordance with the road map. Therefore, in the near future should be developed a new version of the Code of Ukraine on mineral resources.
And the new version of the legal instrument should be a single codified document regulating all the relations in the sphere of subsoil use: questions of registration of allowing documents on land allocation; ownership of the subsoil; issuance of special permits for subsoil use; extraction of raw materials and control the process; to regulate the access to geological information, a digital database fields; land allocation for the implementation of mining projects, etc.
And in this work should be taken into account the position of mining companies, professional associations, NGOs, international experts.
Despite the fact that a lot of questions, but a comprehensive reform of the legislative field today is very important for Ukraine and the change in the law should pass quickly enough in the next 3 - 5 years, you could see the first results of this work.
Details of the reform of the subsoil, see the presentation >>>
October 20th, 2015