Government to mull over new 69% differentiated rent on natural gas wells

A draft law on amendments to the Tax Code of Ukraine on the introduction of a differentiated rent for the extraction of natural gas, as elaborated by MP Danilo Getmantsev ("Servants of the People" faction), has appeared on the website of the Parliament of Ukraine.

The draft law is to usher new rent payments for gas producers depending on the cost of gas sales. The cost of gas will also be calculated as the largest of the three values:

  • Traditional average customs value of imported gas;
  • The arithmetic mean value between "Bid" and "Ask" prices in €/MWh according to Argus for the German hub THE. Quotes will be translated into UAH/tcm at the eschange rate of the NBU;
  • The average sale price for natural gas under all terms of payments quoted on Ukrainian commodity exchanges (the list TBD by the Cabinet of Ministers of Ukraine).

Such a price (excl. 20 % VAT) will be published monthly on the website of the Ministry of Economic Development. starting April 1, 2022.

"The rapid rise in the price of natural gas sales does not affect the cost of production. This creates extra margin that extractive companies have ever dream of. Natural resources belong to the people, so the benefits of rising world prices should primarily benefit the people through the State Budget to establish social justice, " said in an explanatory note to the draft law incepted by MP Getmantsev.

One may remember today's rents for natural gas produced from old wells are at 29% (less than 5 000 m deep old wells) and at 14% (over 5 000 m deep old wells). Under the draft law, rents on old wells will change as follows:

For old wells less than 5 000 m deep:

  • 29% - if the price of gas is less than 200.00 $/tcm;
  • 39% - if the price of gas is within 200.00 $/tcm - 400.00 $/tcm;
  • 49% - if the price of gas is within 400.00 $/tcm - 600.00 $/tcm;
  • 59% - if the price of gas is within 600.00 $/tcm - 800.00 $/tcm;
  • 69% - if the price of gas is over 800.00 $/tcm;

For old wells over 5 000 m deep:

  • 14% - if the price of gas is less than 200.00 $/tcm;
  • 24% - if the price of gas is within 200.00 $/tcm - 400.00 $/tcm;
  • 34% - if the price of gas is within 400.00 $/tcm - 600.00 $/tcm;
  • 44% - if the price of gas is within 600.00 $/tcm - 800.00 $/tcm ;
  • 54% - if the price of gas is over 800.00 $/tcm;

For natural gas from new wells commissioned after 2016, the curremt rents of 12% ( less than 5 000 m deep new wells) and of 6% (over 5 000 m deep new wells) will change to:

For new wells less than to 5 000 m deep:

  • 12% - if the price of gas is less than 200.00 $/tcm;
  • 22% - if the price of gas is from $ 200.00 $/tcm - $ 400.00 $/tcm;
  • 32% - if the price of gas is within 400.00 $/tcm - 600.00 $/tcm;
  • 42% - if the price of gas is within 600.00 $/tcm - 800.00 $/tcm
  • 52% - if the price of gas is over 800.00 $/tcm;

For new wells over 5000 m deep:

  • 6% - if the price of gas is less than 200.00 $/tcm;
  • 16% - if the price of gas is within 200.00 $/tcm - 400.00 $/tcm;
  • 26% - if the price of gas is within 400.00 $/tcm - 600.00 $/tcm;
  • 36% - if the price of gas is within 600.00 $/tcm - $ 800.00 $/tcm;
  • 46% - if the price of gas is over 800.00 $/tcm;

This is not the first time that the Parliament of Ukraine has sharply increased the rents on natural gas wells. Thus, in August 2014, in the midst of hostilities by Russia in the Donbass, when the state needed revenues to the State Budget, the rent rate for natural gas production was increased from 29% up to 55%. In fact, it was even higher, up to 70%, due to inflation. At the time, the Cabinet of Ministers of Ukraine promised local natural gas producing companies that 55% of the rent would be valid until the end of 2014, but the rent was extended for another year.

Such arbitrary actions of the Cabinet of Ministers of Ukraine and the Parliament of Ukraine entailed a stagnation in the Ukrainian gas industry, which was overcome only in 2017.

Today, the Ukrainian privately-run companies are showing a steady growth in production of natural, yielding a record high of 5 bcm in 2021. A sharp rise in rents, like any arbitrariness and government intervention, will lead to a crisis in the industry and a drop in gas production. As a result, it will jeopardize the country's energy security.

According to the State Tax Service of Ukraine, during 2021 revenues to the State Budget from the rent on natural gas production amounted to UAH 59.23 billion, of which UAH 50 billion came from the sate-run JSC UkrGasVdobuvannya.

The average customs value at which rent was calculated ranged from 210.00 $/tcm (in March 2021) up to 1 185 $/tcm (in December 2021), which was a historic high. During March - December 2021 there was a gradual increase in the average customs value of natural gas.

15:14 / 10 February 2022

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