A Draft Law #5459 was registered in Verkhovna Rada. The DL should implement a stimulating flat 12% royalty rate on natural gas produced from new wells, drilling of which started after January 1, 2017. The Association of Gas Producers of Ukraine welcomes the initiative of the members of Verkhovna Rada of Ukraine, which became the embodiment of the worldwide trend of decreasing tax burden in oil and gas industry in competition for investments and technology in the reality of new prices on hydrocarbons.

In the last two years, all national gas upstream companies were forced to cut down their investments in the industry. A drastic fall of prices on hydrocarbons, combined with the unfavorable tax policy has led to a halt in the industry development. Starting from 2014, the growth rate of natural gas production in Ukraine were decreasing every year and, as of 2016, a zero growth of production is expected. In case no measures are taken to stimulate new drilling, the members of the Association will show a decrease in natural gas production in 2017, for the first time in 10 years.

At the same time, increasing natural gas production is defined to be one of the most important directions of state policy development in the energy sector. Short time ago, the President of Ukraine, Petro Poroshenko, during the launch of the new gas fields has stated that: "Development of Ukraine's gas production is the priority for the state policy in Ukraine". In turn ,the Government of Ukraine has numerously drawn attention to the implementation of a directed strategy of achieving energy independence in 2020 by the means of increasing domestic gas production to at least 27 bcm.

Taking into consideration the key role of the domestic natural gas production industry in providing for the energy security of the country, as well as the official statements of the Government about aims of the country to full gas self sufficiency, the industry supports the initiative to restore the investment attractiveness of the sector by implementing a stimulating 12% royalty rate on new wells for all types of companies except the joint venture agreements. The proposed rate corresponds the average European fiscal burden on natural gas production. 

Such approach will not have a negative impact on the state budget revenues in 2017, since the stimulating royalty will only apply to new wells. The potential decrease in royalty payments form the state-owned UkrGasVydobuvannya will be compensated by a significant growth of gas production of both the independent and the state sectors of natural gas upstream. Implementation of the initiative will allow to attract over $1 billion of new investments, which will provide for a 35% growth by 2020, and will result in 14 billion hryvnia paid in taxes and will create 15 thousand of new high-paying workplaces.

Implementation of a stimulating regime for new investments will definitely lead to restoration of trust and interest of the professional foreign investors to the Ukrainian gas production industry. It will also create the necessary preconditions for emergence of new strong players in the gas production industry. Only with the help of professional international companies Ukraine will be able to attract the necessary technologies and experience, which in turn will allow to accomplish of Ukrainian gas revolution for independence.

Details:

The Draft Law #5459 On amending the Tax Code of Ukraine to implement a stimulating royalty rate for subsoil use with a purpose of producing natural gas from new wells was registered in Verkhovna Rada on November 25, 2016. The co-authors of the Draft Law are: Oleksandr Dombrovsky, Olga Belkova, Natalia Katser-Buchkovska, Lev Pidlisetsky, Pavlo Rizanenko, Anatoliy Yevlakhov, Oleg Kryshyn, Oksana Yurynets', Grygoriy Tymish, and Yuriy Chyzhmar.