SUBSOIL WEALTH IS THE STRENGTH OF THE COUNTRY


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Private companies are not profitable to increase the volume of gas

March 12, 2015

 

Increased royalties on gas production and 70% non-gas extracting companies put on the brink of extinction. The rate of 70% would result in an outflow of investment and reduce domestic gas to a critical minimum. Experts believe that taking the decision to raise the rent, the state took care of short-term profits rather than the long-term prospects.
 
Supreme Council of increased royalties for use of mineral resources extraction of natural gas from depths of up to 5 thousand. M for households from 20% to 70%. Appropriate changes were made to the Tax Code. Market participants rated this innovation pessimistic. Chairman of the largest gas production company JSC "Ukrgasdobycha" Sergey Kostyuk said that it is the result of loss of production and a large debt pit. "Rectify the situation will not improve and for 1 cubic meter of gas to the level of cost - 1590 UAH", - he said.
 
For smaller companies that carry gas under cooperation agreements with "Ukrgasdobycha" rate of 70% means a loss of economic efficiency and, consequently, the outflow of foreign investment. But the saddest thing in this situation - a loss of incentive to carry out technical modernization of gas fields. The fact that these companies - are very mobile, they are interested in introducing modern technologies of production, especially in the case of old, worn-out fields. Still using the potential of "wasted" in terms of state deposits advantage was small gas producing companies. By the way, today in Ukraine there are over 100 gas fields, whose potential has not yet been fully exhausted.
 
First of all a serious problem after increasing the profitability of gas royalties were "Poltava oil and gas company", "Karpatyhaz" "Geo-Alliance", "KUB-Gas", "Burisma holding" and several other companies. Most likely, they will reduce the already small investment aimed at developing exploration and production of hydrocarbons. Annual investment in exploration of oil and gas in Ukraine is not more than $ 1 billion.
 
So what is the reason for the increasing financial pressure on the industry and consumers of natural gas? Assuming that the economy is so critical, and taxes - the only source of state budget stabilization, then tomorrow there is a risk of non-payment.
 
The adoption of a number of unpopular laws associated with IMF requirements. However, another program agreed in February of $ 17.5 billion primarily provides structural reforms that should allow to improve public finances and banking sector, and promote the development of industrial production. Is there a structural reform raising the rent for produced gas to 70%? It is doubtful.
 
Ukraine gas production could really use their resources more efficiently and increase revenues to the state budget. In 2013, payments for use of mineral resources totaled 5.3% of total tax revenue. This, apparently, was the "trump card" in the hands of the initiators of response rates. But do not forget about the investment component industry. In terms of the budget deficit can not push the market private capital ready to invest in its development.
 
His vision of a solution of the problem presented late last year it was the IMF. They suggested Ukraine to raise rates for the use of mineral resources to international standards, consider a tax on additional income and establish short-term tax incentives to attract investment. The experts strongly emphasized the essential condition - stable tax regime and expanding its base in all phases of the respective project - the stage of exploration, development and production. In their view, only in such circumstances, investors actively go down in Ukraine.
 
In the short term was even offered from January 2015 to reduce rates on subsoil use in the petroleum industry to levels that are operated from April to August 2014, namely 28-55% of gas produced at depths up to 5 thousand. M. This because a major gas producing countries score for subsoil use often does not exceed 20% and sometimes it does and below 10%.
 
Experts also warned that the sharp increase in royalties for use of mineral resources can significantly distort the level of investment and production volumes, due to their characteristic insensitivity to profitability. However, perhaps the high speed compensation benefits from the extraction of non-renewable natural resources for the government was more convincing argument.
 
IMF experts recommendations formed the basis of several conditions. First, to prevent the reorientation of investment tax regime in Ukraine should not differ significantly from existing in countries with similar resources. Second, the uniqueness of the situation in Ukraine is that we have a large number of old fields, there is considerable amplitude gas price prevailing values ​​of public companies. Third, reduce tax risks for investors from the government will promote their involvement in the long run. And finally, fourth: the presence of royalties for use of mineral resources and the government's ability to influence its size justifies the use of a special regime for resource sectors.
 
However, the objectives can facilitate the introduction of so-called tax package, providing income tax and tax on additional income. This, in turn, would remove the need to reduce the fee for use of mineral resources, depending on the depth of their occurrence and reduce royalties for their use.
 
Thus, filling the budget will not interfere with balancing rates of rent for the use of mineral resources and lead to an outflow of foreign investment from industry. Accordingly, gas production in the future will not be reduced.
 
However, the negative trend has emerged, and the middle of last year, mining companies have begun to reduce the volume of their investment. Primarily this is due to a decrease in cash flows caused by the increase in rental rates. We also see that at present additional risks are a company focused on long-term investments with significant because their projects do not involve getting significant profits in the initial stages.
 
However, we note the stabilizing factor for the industry - tends to increase the cost of gas and its approach to cost recovery. But amid serious decline in yield production, falling wages of the population of active growth of unemployment and rampant inflation positive effects will not be significant. It is unlikely that it will lead to the stabilization of the situation in the sector and improve investor confidence.
 
Therefore, at a time when Ukraine desperately needs investment capital, and the issue of energy independence is crucial, the government needs to focus on long-term development priorities and gas production industry make better use of international experience.
 
 
March 12, 2015
apostrophe.com.ua