You're reading: Rada pushes gas production tax up to 70 percent for some companies

Hard times are coming for Ukraine's domestic gas extraction. The Verkhovna Rada, Ukraine's parliament, raised the production tax for gas companies up to 70 percent during its March 2 session. The previous rate was 20 percent.

This covers all the gas extraction up to 5 kilometers from the surface. The decision only affects two state-owned companies, Ukrgazvydobuvannya and Ukrnafta that sell their gas to the population. Royalties on new wells have actually been reduced because the government has introduced a 0.55 coefficient on royalties for such business.

“That should be positively received by the industry,” wrote Timothy Ash, an analyst at Standard Bank in London.

Private companies were a source of 3.3 billion cubic meters of blue fuel last year. Overall, energy-inefficient Ukraine consumed as much as 42 billion cubic meters of gas in 2014. Naftogaz, the state-owned giant, extracted 17.2 billion cubic meters. The rest – 21.5 billion – came from abroad. with Russia supplying some 14 billion cubic meters.

Naftogaz runs a constant deficit approaching up to $1 billion monthly, much of it blamed on corruption and unjustifiable subsidies. The International Monetary Fund, Ukraine’s key foreign lender, has taken aim at the company’s poor business practices, especially its low gas prices on the domestic market.

Yuriy Vitrenko, Naftogaz’s head of business development, told the Kyiv Post during a March 1 interview that the energy giant plans to privatize Ukrgazvydobuvannya, its gas extraction unit. However, analysts doubt anybody would want to invest in such an asset under the current tax rate.

“The 70 percent tax is absurd,” says economic analyst Evgen Dubogryz. “Just think for a minute, what kind of investor would want to buy Ukrgazvydobuvannya – a company, whose production is taxed at such a high rate?”

Dragon Capital’s energy analyst Denys Sakva agrees that the move isn’t a good one. “With one hand, they’re raising the gas prices for Ukrgazvydobuvannya, but with the other – they’re taking away a major part of this increase through the tax,” he says.

Meanwhile, Yuriy Korolchuk, an expert on energy, says the tax hike is quite a logical step, given the necessity to cover the cost of the Donbas war. Moreover, the Cabinet on Feb. 28 increased the social spending by half, up to $1.3 billion this year, as inflation reaches 30 percent. The government obviously needs more money to serve its liabilities.

“I understand Energy Minister Volodymyr Demchyshyn, I understand the members of parliament,” Korolchuk told the Kyiv Post.

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].