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Year marked by struggle. What happened in Ukraine over gas producing field in 2015

January 6, 2016

Literally on the eve of publication of this article extractive industry received good news: The Verkhovna Rada of Ukraine voted for the bill №3688, causing changes were made to the Tax Code of Ukraine, including in terms of rent. This was the most anticipated event for the gas industry.

According to the State Statistics Service of Ukraine, natural gas production in the country in January-November 2015, excluding Russia annexed Crimea fell compared with January-November 2014 2% - to 17.8 billion cubic meters. m. Forecasts for the year were less optimistic, and falling on results expected in 2015 at 4%. To keep production figures was due to investments in previous years, but further implementation of tight fiscal policy in the future could lead to a rapid decline in the coming years.
But thanks to the active position during the year representatives of mining companies and pre initiative of parliamentarians, particularly members of the Committee on fuel and energy complex, since January 2016 to private companies will apply the rates of rent payments for subsoil use in the amount of 14% for gas with deposits of more than 5 thousand. m, 29% - for gas from deposits up to 5 thousand. m. The history of the struggle for moderate taxes for the industry began a year ago - at the end of December 2014 MPs supported the Cabinet and turned his ballot temporarily increased rates of rent in constant rate of current tax code.
Higher tax rates applied mining companies since mid 2014, but then that was served as a temporary measure, a vital state for filling the budget fairly empty, and did not cause critical assessments. Businesses went to meet the needs of the public treasury. But as a permanent rate of 55% and 29% for private companies, 70% for state JSC "Ukrgasdobycha" and companies working on contracts of joint activities - such financial burden was too high to be able to invest in drilling, geological work and even to repair wells. It is not even discussed the development of new deposits at a time when our own country every cubic meter of gas is important. Parliament also reduced the rent at gas PJSC "Ukrgasdobycha" from 70% to 50% for the period from 1 April to 31 December 2016.
The high tax rate will continue to apply only to companies working under contracts of joint activities. Return to the previously existing rates could encourage companies to actively invest in production and increase the volume of recoverable reserves. Recall that increase gas production by private companies in 2014 was about 33% - 34%, but overall production in the country in 2014 decreased compared to 2013 by 3.4% - to 19.7 billion. Cube. m. In 2013 gas production increased compared to 2012 by 1.7% - to 20.4 billion. cube. m.
High taxes were introduced for the industry heading in the general fund budget and then allocated to finance subsidies. The budget lacked funding for exploration. For example, the first 11 months of 2015 the volume of exploration and development drilling on the enterprises naftohazpromu declined by 5% and 15% respectively compared with those of 2014 Today the financial situation of public exploration companies difficult. Why these trends will result in deterrent development of natural gas in Ukraine?
The fact is that increasing the volume of production required a positive growth of proven reserves. But for several years the increase of gas reserves in Ukraine negative and this trend must change soon - the country has a task to do everything possible for the development of domestic gas production to replace imported resource. Confirmed the seriousness of the Government Resolution №375-r of March 25, 2015, which affirmed the road map of reforms in the energy sector. During 2015 - 2016 rr. Provided for the development and submission for consideration of the Government for further submission to the Parliament the relevant documents in the subsoil. It:
- Amendments to the Tax Code regarding taxation of mining companies considering international best practice. From the beginning of February registered more than ten bills failed to find compromise amendments to the Tax Code in late December 2015. I must say sharing rental tax. In Parliament introduced two bills on redistribution between the different levels of funds received from payment of rent for oil, natural gas and gas condensate. The goal - the development of administrative units and communities in the territory which is the extraction of hydrocarbons by entering the corresponding share of royalties to local budgets. This is a good initiative, but it will not affect the development of gas production. According to the Budget Code of rent for use of subsoil for the extraction of oil, natural gas and gas condensate credited to the general fund budget in full. Association "subsoil Ukraine" considers it necessary to increase revenues to the special fund of the state budget on rent and thus enable the exploration work to increase funding from the state budget;
- The draft law on mineral resources in the new edition. Unfortunately, neither the new Code nor the draft document subsoil not seen, but actively participated in working out its provisions. Perhaps some instability of relations with Russia as one of the suppliers of imported resources and consistently high demand for natural gas in the domestic market will give impetus to finalize the document codified the mining industry, and the 2016 draft, appeared in court the public;
- A comprehensive audit of private and public users of oil and gas mineral resources, analysis of the work programs in areas of mineral resources and revocation of special permits, for which work is not carried out in full. Such work has started, but no tangible results;
- Development of the phasing out of 5% special permits issued by state-owned enterprises, which are not expected to implement the program fully. As work on the Code on mineral resources, the work is in the format of the working group.
In addition to the initiatives set out government regulation, develop gas production by using a tool such as production sharing agreements. While Ukraine has successful examples of such projects, but the experience is positive in many countries. In the Supreme Rada September 4, 2015 №3042 registered bill on amendments to the Law on PSA. The changes are aimed at including the specification and deregulation PSA procedure based on previously issued special permits. This model should ensure special tax incentives, while at the same time, CRP translates into major investor risks for exploration and production. The main difference: the fiscal results through reallocation mechanism section is output, ie gas or oil, but not because of 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» under the terms of the PSA. The rest of extracted hydrocarbons are divided between the state and the investor. This progressive model and improving the legal regulation of CRP Ukraine will attract more investors.
Also developed and supported by the parliamentary committee bill №3096, which is designed to simplify land issues mining industry. Despite the fact that the legal framework for 2015 can note many initiatives aimed at developing the sector to implement them in practice not an issue. As a result, during the year in Ukraine completed participation in projects such major mining companies as Shell, Chevron, and Ukrainian subsoil took a pause until better times. During the year there was virtually no active steps to develop a new version of the Code on mineral resources and other actions under the road map. But in the new version, which should appear in 2016, a legal act must be a single codified document that governs all relations in the sphere of subsoil use, issue registration permits on land allocation; ownership of the subsoil; the issuance of special permits for subsoil use; extraction of raw materials and control the process; regulating the access to geological information, a digital fields; allotment of land for mining projects, etc. As part of this work should be taken into account the position of mining companies, professional associations, NGOs, Ukrainian and international experts.
The issues are many, but a comprehensive reform of the legislative field today is very important for Ukraine, and the change in the law should be fast enough - starting from the first decade of 2016, that in the next three to five years could see the first results of this work.
Author: President of the Association "Subsoil users of Ukraine" Roman Storozhev
Issue: "Terminal» №1 (795) on January 4, 2016