Ukraine's Energy Minister: Regulation, Taxes Biggest Obstacles to Domestic Gas
Ukraine's energy minister Volodymyr Demchyshyn has said that the biggest obstacles to domestic gas production in Ukraine are over-regulation and excessive tax burdens.
Speaking at the Ukrainian Gas Investment Forum on March 23, he outlined how rigorous and onerous is the process for gas licensing approval.
"Although the procedure [for authorisation] is clearly spelled out, [the investor is required to receive] 70-80 permissions... Today, on average, it takes several years [to complete the process]," he said.
Encouraging domestic production would improve economic development and create jobs, he said, though a long-term strategy would be needed. Such a strategy would cover tax revenue; deregulation of the oil and gas industry; a simplification of extraction permits; and the continued liberalisation and reform of the gas market to create competitive working conditions.
Making the process quicker and easier for local authorities would benefit the local authorities and encourage faster production, he said.
"They [the local authorities] would need to be encouraged to give permits that quickly go through [so that] drilling can start, and thus receive immediately any additional compensation and, consequently, income in their local budget."
The aim of the long-term strategy is to increase domestic production to 27bn m³/yr by 2020, he said. In 2014, the country produced about 20bn m3 of its consumption, the US Energy Information Administration has previously estimated.
Challenges to producers
A complicated regulation process and a high tax rate (Ukraine introduced a production tax rate of 55% in 2015 though that tax was reduced to 29% for 2016) has already affected at least one gas producer operating in the country.
On March 21, UK-listed JKX Oil and Gas said that it was focusing its efforts on Hungary and Slovakia as a high tax burden in Ukraine had impacted the company's results.
JKX, which has a 100% interest in five production licences in the Poltava region of Ukraine through its subsidiary PPC, suffered an operating loss of $10.7mn in 2015, compared with an $11.6mn profit in 2014. The high production tax for 2015 and governmental restrictions on sales both led to difficulties for the firm, it said.
"In Ukraine, the introduction of the 55% rate of production tax, foreign exchange controls and government-imposed restrictions on the sale of gas during the three months to 28 February 2015 led to cash constraints and no capital investment programme during 2015," chairman Paul Ostling said in a statement.
"The investment climate has improved following the reduction of gas production tax rates to 29% for 2016 and the lifting of restrictions on the sale of gas in February 2015. However the Ukrainian economy remains remains fragile and foreign exchange controls remain in place, making the repatriation of cash extremely difficult."
Though matters have improved, the company says it is still facing difficulties with the tax and production processes in Ukraine, Ostling said.
"The company’s subsidiary, Poltava Petroleum Company (‘PPC’), continues to experience a combination of aggressive production tax demands for periods up to the end of 2015 and also challenges to its compliance with the terms of its production licences. We have met with representatives of the Ukrainian Government in recent weeks to attempt to find a solution to all our production tax and licencing issues in-country and we are confident that an acceptable solution can be found."
Erica Mills