Ukrainian Parliament passed Law № 7038-D on new rents on natural gas production

At its sitting on March 15, 2022, the Parliament of Ukraine voted in favor of the Law № 7038-D on raising rents on natural gas production. The new rent will apply during the martial law and state of emergency. This is an alternative Law proposed by the Parliamentary Tax Committee that is softer than previous drafts.

The new Law № 7038-D, like the previous ones (Law №7038 and Law №7038-1), envisages the introduction of a differentiated rent on the production of natural gas depending on prices for natural gas. The Law № 387038-D was initiated by the Prime Minister of Ukraine Denys Shmyhal and the Parliamentarmy Committee on Finance, Tax, and Customs Policy.

The price of natural gas will be calculated as the largest of the 3 values, namely:

1. the average customs value of natural gas imported into Ukraine;
2. the arithmetic mean between "Bid" and "Ask" prices for natural gas in €/MWh according to information by Argus on quoteations on the German THE gas hub. The quotes will be translated into UAH/tcm at the forex rate of the National Bank of Ukraine;
3. the average sale price of gas under all terms of payment on Ukrainian energy commodities exchanges (the list is determined by the Cabinet of Ministers of Ukraine). This price for natural gas will be published monthly on the website of the Ministry of Economic Development.

Noteworthy, all indicators will not include 20% VAT. The introduction of differentiated rent is effective March 1, 2022.

One may remember that today the rent on production of natural gas in Ukraine is 29% for the natural gas wells up to 5 000 m deep, and 14% for natural gas from old wells over 5,000 m deep. The rent rates for natural gas production from various types of wells is changed as follows:

For old wells up to 5 000 m deep:

• If the natural price of gas is up to 150.00 $/tcm, the rent is 14.5%;
• If the price of natural gas is from 150.00 $/tcm up to $ 400.00 $/tcm, the rent is 29%;
• If the price of natural gas is more than 400.00 $/tcm, the rent is 29% (of the natural gas price of $ 400.00 $/tcm) and 65% (of the natural gas price of exceeding 400 $/tcm).

For old wells over 5 000 m deep:

• If the price of natural gas is up to 150 $/tcm, the rent is 7%;
• If the price of natural gas is from 150.00 $/tcm up to 400 $/tcm, the rent is 14%;
• If the price of natural gas is more than 400 $/tcm, the rent is 14% (of the natural gas cost of 400.00 $/tcm), and 31% (of the natural gas price of more than 400.00 $/tcm).

For natural gas from new wells launched after 2016, the rent is 12% for natural gas from wells up to 5 000 m deep, and 6% for natural gas from new wells over 5 000 m deep. For natural gas from these wells it is planned to change the rent as follows:

For new wells up to 5 000 m deep:

• If the price of natural gas is up to 150.00 $/tcm, the rent is 6%;
• If the price of natural gas is from $ 150.00 $/tcm up to 400.00 $/tcm, the rent is 12%;
• If the price of natural gas is more than 400.00 $/tcm, the rent is 36% .

For new wells over 5 000 m deep:

• If the price of natural gas is up to 150.00, the rent is 3%;
• If the price of natural gas is from 150.00 $/tcm up to 400.00 $/tcm, the rent is 6%;
• If the price of gas is more than 400.00 $/tcm, the rent is 6% , and 18%, if the natural gas price is more than 400.00 $/tcm).

Currently, private companies are showing a steady growth in production of natural gas, reaching a record 5 bcm in 2021. According to the State Tax Service of Ukraine, during 2021, the revenues to the state budget from the rent on natural gas production reached UAH 59.23 billion, of which UAH 50 billion was paid by the state-run JSC UkrGasVydobuvannya.

One may remember the last year's average customs value applied for the rent calculation ranged from 210.00 $/tcm (in March 2021) up to $ 1 185.00 $/tcm (in December 2021), which was a historic record high. During March-December 2021 there was a gradual increase in the average customs value of imported natural gas.