Ukraine govt proposes more than tripling royalties for private gas firms

Обзоры по компаниям и отраслям 22.07.2014 The Ukrainian government submitted to parliament on July 21 amendments to Ukraine’s tax code that would significantly increase royalty payments for private producers of natural gas. The proposal calls for boosting royalties for firms that sell gas to industrial producers to 70 percent of the regulated gas price (UAH 4,724/tcm, or USD 406/tcm, based on the current exchange rate). The current legislation stipulates the royalty payment at 28% (or 15% for those firms extracting gas from wells deeper than 5 km) of the price of imported gas (USD 282/tcm in June). If the draft becomes law, private gas producers will have to pay USD 284/tcm in royalties, up from USD 79/tcm they had to pay in June. Alexander Paraschiy: The amendment, if approved by parliament, will surely ruin the attractiveness of gas production in Ukraine. The net positive effect for the state budget from such an initiative would be close to UAH 8 bln annualized, but it will be short-lived. It will also lead to a significant decrease in gas output by private producers. Note that gas output by private firms increased 33% yoy in 1H14, while output by state firms (which are restricted to low, regulated gas rates) fell 2.5% yoy. Since the initiative contradicts the government’s strategy of energy self-sufficiency, there is a chance that parliament will reject it. If approved, the legislative initiative will cause a dramatic deterioration in the operating profit of Ukraine’s listed gas production companies: Serinus Energy (SEN PW), JKX Oil & Gas (JKX LN), Regal Petroleum (RPT LN) and Cadogan Petroleum (CAD LN). For instance, with the new conditions implemented, Serinus Energy will generate only a USD 65/tcm in netback from gas sales in Ukraine, we estimate, which would be 4.6x less than the netback in 3Q13 (USD 296/tcm) and 2.7x less than in 1Q14 (USD 180/tcm). The decline will be more dramatic for Regal Petroleum, which enjoyed a preferable tax rate (paying just USD 42/tcm in royalties in June, we estimate) as it’s producing gas from deep wells.