WASHINGTON, D.C. -- Investors have complained vociferously that the nation’s goal to become energy independent is doomed by excessively high royalty tax rates of 55 percent enacted last year as a crisis measure.
The nation’s leaders listened and changed course, with a
well-timed proposal to slash those rates to spur existing and potentially new
investors.
Finance Minister Natalie Jaresko unveiled the proposal,
which is subject to parliament’s approval, at the July 13 U.S.-Ukraine Business
Focus taking place across the street from the White House. The forum attracted
several hundred participants, including many familiar faces from Ukraine.
The video link to the conference is here
At a later press briefing, Jaresko delved into the details
for journalists along with Naftogaz chairman of the board, Andriy Kobelyov.
Also in attendance were Yuriy Vitrenko of Naftogaz, former U.S. Ambassador to
Ukraine Carlos Pasqual and energy executive Robert Bensh.
“We have met business more than halfway…We are listening to
the business and investing community,” Jaresko said. “Because of the importance
of the energy sector to Ukraine and reducing reliance on imports and reducing
our need for hard currency to purchase imports, we have decided to propose a
fairly radical change from our existing policy.”
If parliament agrees, Ukraine will drop its two-tier royalty taxes
from 55 and 29 percent to 29 and 14 percent. Ukraine also wants to drop the
rates further to 20 percent and 10 percent next year, while enacting a windfall
30 percent surcharge tax that is triggered by what Jaresko described as
extraordinarily high profits. The cheaper royalty rates apply to gas extracted
at a depth of more than 5,000 meters because such production is more expensive.
The initial reaction from investors in the energy sector was
effusive.
“Ukraine has gone form being the worst to one of the best
fiscal environments in the world,” Bensh, managing shareholder of Leadville Resources Inc, and the
managing partner of Pelicourt LLC., a private equity firm focused on the energy
sector in Ukraine and eastern Europe
“What
that does is…increase tax revenues, increase energy security,” Bensh said. They
changed the market dynamic immediately. We could not ask for a better
resolution.”
Bensh said investors in oil and gas are not dissuaded by
Russia’s war against Ukraine.
“We don’t care about the war at all. The coal industry has
been affected by the war, but there are no oil and gas fields where the war
is,” Bensh said.
The tax cut is especially significant given that Ukraine is
dropping its policy of subsidizing gas prices for users, meaning those prices
will rise to market or cost-recovery levels.
The combination of policies – reducing taxes and raising
prices to market levels – makes the potential for higher production and profits
so much greater, a powerful incentive to investment, Bensh said.
Former Ambassador to Ukraine Carlos Pasqual, senior vice
president for energy and international affairs for IHS global consultancy, said
that besides potentially encouraging new energy investment, the new policies
will help spur production from existing producers.
Pasqual said that smaller producers have shown large
increase in production from 2009-2014 with investment conservatively estimated
$700 million.
Kobolev said that private production accounts for five
billion cubic meters of gas per year, out of domestic production of 20 billion
cubic meters, with most investment coming from inside Ukraine. He hopes the
policy changes will encourage major international players to enter the market or re-enter
– citing Shell and Chevron, which did not have “much success” in their
investments.
The goal, Kobolev said, is to reduce Ukraine’s natural gas
import requirements from 20 billion cubic meters in 2015 to 3 billion to 7
billion cubic meters by 2020.
This can be achieved by increasing production by 9 billion
cubic meters, requiring investment of $6 billion, while Ukraine reducing
consumption by up to 8 billion cubic meters, requiring $6 billion in
investment.
Already, Ukraine has reduced its share of imported natural
gas from Russia. It stood at 92 percent in 2013 but dropped to 39 percent in
the first quarter of 2015, according to a Naftogaz handout at the press
briefing.
Ukraine consumed roughly 42 billion cubic meters of natural
gas in 2014 while producing only 20 billion cubic meters and is expected to
consume less this year.
