IMPORT GAS PRODUCTION OR: HOW TO UKRAINE WILL TAKE ENERGY

In anticipation of the new heating season in Ukraine again actualized talk about the purchase of natural gas for injection into storage and the need to increase its own production. As for money, in fact, to download the Ukraine is not. Speaking about the prospects of production, the Ukrainian authorities could not ignore the fact that over the past six months, production volumes have decreased, the rate of new wells are close to zero, and one after the other investors are reviewing plans for projects for the production of hydrocarbons.

 

For a long time the cause of the crisis in the energy sector did not have to look for: for 6 months mining companies in one voice say about the high rates of rent payments that are detrimental impact on the industry. And if in the first half they had not heard, the risk to enter the heating season with a deficit of natural gas has forced officials to revise the fiscal policy in the industry. And in mid-July, Finance Minister Natalia Yaresko reported that led her department has developed a new model for calculating the rates of taxation of mining companies. The corresponding bill is registered in the Verkhovna Rada of Ukraine under the number №2352a. Its predecessor - the bill number 2120, designed profile Verkhovna Rada Committee on Fuel and Energy Complex, and even seems to be a consistent CMU, it has not been included in the agenda of Parliament. About the catastrophic situation in the energy sector he has publicly told the Prime Minister of Ukraine and called for crisis management headquarters at August 03 this year

 

According to the Ministry of Finance submitted a new document on the revision of tax rates for mining companies, rental rates for subsoil use are going to reduce the companies which produce natural gas at a depth of up to 5 km, up to 29% from 55%. For companies that produce gas at a depth of more than 5 km - rate dropped to 14% from 28%. Recall that the type of interest rates for the use of subsoil for mining set on July 01, 2012. According to amendments made to the Law №4834 in st.263 Tax Code, for the extraction of natural gas from reservoirs located at a depth of 5000 m, board for subsoil use was 17% of the cost of gas, but not less than 594.64 USD. for 1 thousand cubic meters; for the extraction of gas from the reservoir at a depth of 5,000 meters - 9% of the cost of gas, but not less than 318.34 USD. for 1 thousand cubic meters The law provided for the abolition of rent for gas 01.01.2013 and merge it with the payment for use of mineral resources. From 2013 to mid-2014 rental fee amounted to 29% for gas from a depth of 5,000 m, 15% of gas production from reservoirs at a depth of 5000 m. The model of taxation, previously operating until mid-2014, will be applied only to the fields, entered into operation before the end of 2015

 

New projects for the extraction of hydrocarbons - the new conditions. So companies engaged in the extraction of natural gas as a result of implementation of investment projects which, after January 1, 2016 prepared and approved in the manner determined by the Law of Ukraine "On Oil and Gas", and are payers of rent for the use of subsoil for mining of natural gas, under the new bill will have to pay the rent at the rate of 20% in the extraction of gas at a depth of 5 km, while mining at a depth of more than 5 km - 10%. In addition, the subsoil, which will start work on the new investment projects will be obliged to pay an extra premium to income taxes.

 

Expect premium legislator provides for a specific algorithm: the object of taxation surcharge to the income tax computed in accordance with sub-paragraph 134.1.1 NKU and increases in the amount of depreciation of fixed assets, financial expenses and expenses from exchange differences on borrowings directly related to investment projects that after January 1, 2016 prepared and approved in the manner determined by the Law of Ukraine "On Oil and Gas", accounted for as an expense in the calculation of the financial result before taxation of the reporting individual priority business segment reporting (tax) year; and reduced by the amount of capital investments in non-current tangible assets related to exploration and development of gas fields in the individual priority of the reporting business segments, but not more than 70 percent of the difference between revenues and expenses of the reporting (tax) year this segment.

 

And further p. 136.4 Art. 136 of the Code adds a new subparagraph as follows:

"136.4.3. For business entities engaged in the extraction of natural gas and are payers of premiums to income, at the same time with the rate of income tax, as defined in paragraph 136.1 of this article, the rate of surcharge to the income tax is set at 30 per cent of the object of taxation as defined in subparagraph 134.1.6 Article 134, paragraph 134.1 of this section, "...

 

Reducing rents should encourage investment in the industry and help to increase natural gas production. According to forecasts of government officials, in some cases, differing almost by half, easing the fiscal burden will allow both private and public companies to significantly increase the amount of recoverable reserves. Sami subsoil cautious in forecasts. Firstly, the proposed bill the government proposes to keep 70% of the rent on natural gas contracts on joint activities, when private companies take in the development of government deposits, which have been mined gas. And likewise for the state mining companies. Consequently, about any substantial investment and an increase in production volumes is not necessary to speak.

 

Secondly, natural gas production in Ukraine began in 1912, and in 1975 reached a historic high in volume and has since gradually reduced, stabilized in 1998. Over the past 15 years, the annual volume of gas production in the range of 18 to 21 billion cubic meters Currently, the conditions of natural gas production in Ukraine become more complex due to the gradual depletion of the highest quality and an increase in the proportion of lower-quality stocks, with less potential for seizures and greater cost. Here it is necessary to say a high degree of exhaustion of the initial stocks of large deposits of 60-70% for Shebelynka, Yablunivskogo, Efremov and West Hrestischenskogo fields while low rates of exploration for new reserves. Replacement ratio of volumes extracted with new reserves of gas in the last 20 years, less than 100% despite the fact that there is poor quality of new reserves, much of which falls into the category of difficult and fragmented among a large number of small deposits. Also increases the depth of drilling both existing and new fields (the average depth of drilling for gas in Ukraine is around 3500 m, and the maximum is already more than 6000 m).

 

Potential natural gas reserves indicate a significant oil and gas potential of the Ukrainian subsoil. And this potential investor interest. But above certain characteristics Ukrainian hydrocarbon deposits show that new investment projects will have a much greater component of required capital investment and cost of production there will be higher. And the new taxation model projects to develop new hydrocarbon fields should provide their economic meaning.

 

The draft law on a new model of taxation, the authors refer to the Law of Ukraine "On Oil and Gas", but there is no clear definition of "investment project", and what exactly it should include in itself. Such a definition is in the Law of Ukraine "On investment activity". According to the document "The investment project - a set of targeted organizational and legal, managerial, analytical, financial and technical activities carried out by the subjects of investment activity and issued in the form of planning and settlement documents, necessary and sufficient to support, organization and management of the work on the project . Development of investment projects may be preceded by the development of the project (investment) proposals. "

 

The object of taxation of income tax in accordance with sub-paragraph 134.1.1 NKU is the profit sourced from Ukraine and abroad, which is determined by adjusting (increasing or decreasing) the financial result before tax (profit or loss) as defined in the financial statements in according to national regulations (standards) of accounting and international financial reporting standards for differences arising in accordance with the provisions of Section III of NKU.

 

Comparing the current version of the item. 134 GCC, and proposed changes, it is impossible to determine when there is a specific object of taxation in the calculation of premiums to income, and that he involves. Therefore, the introduction of additions to existing taxes can carry risks for the investor, since it is not clear how to count and how much it will eventually cost the mining company.

 

In the meantime, members of parliament are competing in law, the gas industry is trying to survive and stay afloat. Year of useless and senseless disputes and dialogue has led to the fact that in May 2015 the production decline accelerated to 2.5% compared with May 2014 Most mining companies are experiencing great difficulties with the financing of drilling projects, which means that soon production will continue to decline.

 

Parliament adopted the Law "On the natural gas market", which comes into effect in October this year, will become a stumbling block to the current discriminatory fiscal policy in the field of natural gas. Therefore, to improve the situation time is running out.

 

Roman Storozhev, president of the association "Ukrainian Subsoil Users"

 

 

August 26, 2015

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