Serinus Departs Ukraine Citing Government Policy Decisions
Serinus Energy Inc. has decided to depart Ukraine, citing difficult circumstances as a result of a series of laws and regulations imposed by Ukrainian authorities during the course of 2014 and 2015 which have materially impacted its operations.
The Canadian based company announced that it has entered into an agreement with an unnamed private company for the sale of all of the 70% of the outstanding shares of KUB-Gas Holdings Limited it currently holds. KHL in turn, owns 100% of the shares of KUB-Gas LLC. KUB-Gas (directly and indirectly through its subsidiary, KUB-Gas Borova LLC) owns 100% of and operates the six licences/permits in Ukraine which contain the Olgovskoye, Makeevskoye, Vergunskoye and Krutogorovskoye gas fields.
KUB-Gas was assigned gross 2P reserves of 64.5 Bcf and 459 Mbbl of NGL's (45.1 Bcf and 321 Mbbl SEN WI)1 at December 31, 2014. Gross production in Q3 2015 was 23.5 MMcfe/d (16.4 MMcfe/d SEN WI), of which 98% was natural gas.
Serinus will receive cash consideration of $30 million plus working capital and inter-company adjustments. The sale is anticipated to close before January 31 2016 with an effective date of December 31 2015, and is subject to the waiver or expiry of the right of first refusal by the owner of the remaining 30% of KHL.
Serinus purchased its interest in Ukraine in mid-2010 for $45 million, introducing new technology and management practices, and gross production increased from 5 MMcfe/d at the time of purchase to 38 MMcfe/d in Q3 2014
Effective August 1, 2014, Ukraine increased the nominal royalty rates on natural gas to 55% from 28%. Those nominal rates are applied to prices set periodically by regulators which are based on the cost of imported gas. Serinus commented that other legislation which placed restrictions on the gas market, causing realized prices in the private sector to fall significantly below those regulated prices, resulting in effective royalty rates as high as 64%. A bill to reduce the nominal royalty rate to 29% has passed a first reading in the parliament in October 2015, however it has yet to pass a second reading and move on to presidential assent, and the Company stated it is uncertain as to when and if this legislation might be enacted. Additionally, Serinus stated that Ukraine foreign exchange controls imposed in September 2014, which restricted remittances of currency outside the country, effectively cutting off access to approximately 70% of the Company's revenues.
Tim Elliott, President and Chief Executive Officer of Serinus commented: 'The success of KUB-Gas over the last 5 years is a textbook example of what foreign investment can do for a country and in particular, what can be accomplished by Ukrainians and Canadians working together in a reasonable fiscal environment. However, geopolitical events in the region over the past two years and unfortunate policy decisions by the Ukraine government have seriously eroded the economic viability of our business there. Legislative efforts to reduce the royalty rates on natural gas back to reasonable levels have stalled, and we have little visibility or indication as to when that process may resume."