Ukrainian Government Passes Bill on Higher Oil & Gas Extraction Taxes
Ukrainian parliament approved a bill that would replace existing royalties on oil and gas extraction with higher mineral extraction taxes effective Jan. 1, 2013.
Dragon Capital Comments on the news: The proposed new tax on oil producers is linked to Urals and that on gas producers is tied to their sale prices. Oil tax rates were set at 39% and 17% depending on reservoir depth (up to or below 5,000 meters). For gas extraction, a wider range of tax rates was proposed. Companies whose gas is supplied to households face tax rates of 28% and 25% based on the 5,000 meter depth threshold (but not less than UAH 101.3/tcm and UAH 89.45/tcm respectively). Offshore gas production was proposed to be taxed at 15% (but not less than UAH 53.9/tcm). For other gas producers rates of 17% and 9% were proposed based on reservoir depth (but no less than UAH 594.64/tcm and UAH 318.34/tcm respectively). Companies operating under production sharing agreements (PSA) would be taxed at 2% (oil) and 1.25% (gas).
The bill, if signed by the President, will have mostly neutral impact on listed oil and gas producers such as Ukrnafta and JKX at current oil and gas prices as the proposed taxes are close to what these companies currently pay (royalties plus mineral extraction tax). Yet the proposed minimum taxes on gas production are close to the rates implied by current gas prices, thus should gas prices for industrial consumers decline from their current level of $438/tcm (e.g. in case of revision of the gas contract with Russia), gas producers would still pay the same minimum rate, implying an increased amount of taxes in relation to revenues.