Private gas companies are rolling back their investment programs over a hike in subsoil fees that was introduced by the government in August as an emergency tax-collecting measure. The government also is mulling whether to extend the tax beyond 2014, despite complaints from business that it has rendered much of the gas extraction unprofitable.
Since August, gas companies are paying a 55 percent subsoil fee on gas extraction, up from 28 percent previously for tapping gas deposits lying up to five kilometers below the ground. For deeper wells the tax was hiked from 15 to 28 percent.
This was the fifth tax hike for gas producers in the past four years.
“All companies, one after another, announced in August that they will be rolling back capital investments. Next year we might not see any growth in gas production,” said Oleksandr Parashchiy, chief analyst at Concorde Capital investment house during the Oct. 9 roundtable. Meanwhile, private companies are the key driver of gas extraction growth, he added, as for the last decade they’ve increased production by 2.5 times and by 32 percent during eight months of this year.
The share of private producers in Ukraine’s gas extraction remains tiny. It does not exceed 2.5 billion cubic meters a year. Ukraine produced 21 billion cubic meters of gas in 2013 altogether.
Producers are saying that money that was set off for capital investments is now used to pay additional taxes. Poltava Oil and Gas Company’s Yevgen Pavlenko says as a result, investment into old wells will be down by 7 percent this year.
The nation’s biggest gas producer, state-owned Naftogaz, has no money to invest into underdeveloped wells, according to Sergiy Makogon, the company’s top executive. It means that Ukraine will not be able to increase gas extraction to replace imports from Russia in the short-term.
The new government tax has affected gas traders in other ways too. Publicly traded companies with assets in Ukraine lost 25 to 35 percent of their value since Aug. 1, according to Concorde Capital research.
In the meantime, the government has not received much financial benefit from hiking the tax. The Cabinet,which pushed through the initiative, predicted it would receive Hr 3.5-4 billion of additional revenue, but that’s just not happening, explains Parashchiy of Concorde.
The increase in budget revenue is only Hr 23 million, while Naftogaz alone failed to pay Hr 500 million of subsoil fee.
“We’re seeing that producers will be going into the shadow,” said Oleg Kanivets, member of parliament with Batkivshchyna party, led by former prime minister Yulia Tymoshenko.
“The decision taken by the government and reflected in the law was guided by this minute’s needs,” said Oleksandr Danylyuk who’s in charge of energy issues at the Presidential Administration. “Changes in the east of the country will push us to change the approach. We have to find an equilibrium, a compromise.”
IHS, a Colorado-based consultancy, in its recent report slammed the government for the new tax: “Any tax regime for the hydrocarbons extraction should effectively combine two key aspects: stimulate investments into the development of more expense-demanding production… and cover the fiscal needs of the state. Tax mechanism that is currently being applied in Ukraine does not respond to any of this criteria.”
Matthew Sagers, managing director at IHS, said higher taxes hit an independent group of new producers that country’s future production depends on. He says the government fails to understand that new types of gas extraction are a lot more expensive for companies and need higher capital investments. Investors will simply avoid them if they are not sure they can make a profit.
“New gas is much more expensive than the old gas,” Sagers said. “While Ukraine has the lowest production margins regionally.”
Sergiy Panchuk, executive director of Kub-Gaz, laments that more than 70 percent of the company’s revenue is taken away through taxes.
Meanwhile, Robert Bensh, managing director at Pelicourt that owns a stake in Kub-Gaz, says if the government wants to increase the revenue – it should allow gas companies to increase their production instead of putting heavier levies on them.
“From attractiveness point of view, you’re better off doing business in North Korea than in Ukraine,” he said.
Sagers of IHS consultancy says Ukraine scores poorly on all components that matter for starting a gas extraction business in Ukraine, from regulation to taxes to overall business environment. The nation, however, has 2.9 trillion cubic meters of estimated conventional gas deposits, according to IHS. British energy giant BP gives a substantially smaller figure – 0.6 trillion cubic meters.
The nation’s gas reserves are located primarily in Poltava and Kharkiv oblasts in the eastern part of the country.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
