The end of 2021 and the beginning of 2022 were surprisingly active in terms of initiating various disastrous legislative initiatives by the government. The draft law No. 7038 "On Amendments to the Tax Code of Ukraine on the Introduction of Differentiated Rent for Natural Gas Production" was no exception. This document envisages a large-scale increase in rent rates for natural gas production and at the same time jeopardizes the implementation of the strategic plan to provide Ukraine with its own gas by 2030.
"The so-called extra-margin mentioned by the initiator of the draft law should be aimed at developing private gas production in the country. After all, production companies need to act strategically and make significant investments in increasing the resource base and production volumes, otherwise we will never achieve energy independence. The current price situation is favorable for this. It has allowed private extractive companies to resume their investment programs after the crisis year of 2020, and in 2021 to increase production to a record 5 billion cubic meters, which is more than 25% of the country's total gas production. However, due to such harmful initiatives by the government as the draft law No. 7038, all these achievements may actually come to naught, as we will be forced to return to curtailing investment programs and reducing production. According to preliminary estimates, due to the rent increase envisaged by Draft Law No. 7038, in 2022, the National Bank will have to cut its development program by at least one billion hryvnias. Such initiatives will certainly destroy private gas production in Ukraine and lead to its complete import dependence,"
said Mykhailo Bakunenko, Chairman of the Board of PrJSC MC Ukrnaftoburinnya.
Sudden and radical changes in legislation will have a detrimental effect not only on the oil and gas industry but also on Ukraine's investment attractiveness in general, reinforcing the image of Ukraine as a country with extremely risky and turbulent business conditions in the eyes of investors.
In 2020, when gas prices were at record lows (in May-June, the price of gas was less than UAH 2 thousand per 1 thousand cubic meters), no one supported the call of private gas producers for state support for the sector and lower rental rates. At that time, companies were forced to curtail their capital investment programs, suspending drilling, canceling exploration projects, cutting operating expenses, and reducing staff, but still fulfilling their obligations in good faith and paying rent on time. 2021 was a year of recovery for the industry - important projects were resumed to maintain and increase production, which is an important prerequisite for the country to achieve energy independence.
Oil and gas production is a risky and capital-intensive business that requires constant investment in exploration and development of fields, drilling of new wells, reconstruction and modernization of infrastructure. Current government initiatives that significantly increase the tax burden on extractive companies will hit producers hard and force them to cut capital expenditures. This will inevitably lead to a reduction in the resource base and production volumes and will gradually bring private gas production in the country to zero. This approach is not about achieving energy independence for our country, but rather about its complete import dependence and deterioration of its investment image.
It should be noted that in 2021, Ukrnaftoburinnya fully fulfilled all its financial obligations to the state as stipulated by law. The amount of rent for subsoil use for oil, natural gas and gas condensate production amounted to about UAH 2 billion. In particular, UAH 97.5 million was paid to local budgets.
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