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New Tax Threatens to Destroy Gas Production in Ukraine

New Tax Threatens to Destroy Gas Production in Ukraine

Independent gas producers in Ukraine are joining forces to pressure the government in Kiev to re-think its new gas tax before everyone makes a run for the border in search of new assets in a more stable environment.

Private producers have compiled a draft letter to Ukrainian Prime Minister Arseniy Yatsenyuk, criticizing the government’s doubling of taxes for gas producers, which was justified through the use of “wrong and misleading” data about private companies.

They also warn that their time in Ukraine will be over if the tax is extended beyond the end of this year—and there will be no further foreign investment in the country’s beleaguered gas sector.

In an open letter to Yatsenyuk--an advance copy of which was obtained by Oilprice.com on August 10--independent gas producers in Ukraine pointed out that the cost of gas production by private companies in Ukraine exceeds the capital costs of public companies, which enjoy the advantage of development well researched and more easily profitable areas. “Therefore, any estimates by the Ministry of Finance as to the cost of gas on the basis of the financial performance of public companies cannot be used to determine the profitability of private company projects, which may be 10 times higher,” the letter said.

What the Ukrainian Ministry of Finance seems to view as the extraordinary windfall of profits enjoyed by private companies is unrealistic at best, said the letter, which was signed by private producers Cub Energy, Geo Alliance, Burisma, Kub Gas, and Regal Petroleum.

Oilprice.com has learned that the group is being advised in its latest lobbying effort by Robert Bensh, managing partner in Pelicourt LLC, the majority shareholder of Ukraine’s third-largest producer, Cub Energy. Bensh is working with the group as well as advising the U.S. and Canadian governments on the potential harm the bill would cause both to investment in the upstream sector of Ukraine as well as to the long-term security of Ukraine.

The private producers note that the 55 percent tax rate increase could “lead to the collapse” of large- and medium-scale gas projects in Ukraine, and “in general, significantly reduce the attractiveness of the Ukrainian oil and gas industry to foreign investors.”

They propose to provide the government with real data on the country’s independent producers and their investment and profitability. They are also proposing to create a working group with the ministry of finance and interested stakeholders to “explain in detail the repercussions of the 55 percent tax rate” for Ukraine’s budget, as well as for state-run Naftogaz and its subsidiaries and private producers.

For now, the new tax is planned to run through the end of this year—ostensibly to feed the war machine in eastern Ukraine. However, there is already talk of extending the new tax as of  January 1, 2015, which will be the final blow to private producers firstly, and Ukraine’s energy independence, secondly.

By. James Stafford of Oilprice.com




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Leave a comment
  • Alex on August 13 2014 said:
    Ukraine needs the money for the war against Ukrainian
    civil population who voted against Poroshenko and Yatsenjuk. U.S. supports Kiev in its war against the civilian people. What does private companies and Robert Bensh want?! They should pay for the pleasure to support Kiev's war against its own population (look, Hitler did not use heavy military against German people! But Mr. Poroshenko does uses the heavy weapon against CIVILIAN PEOPLE, not "separatists" and Washington supports him). So it has smthg to do to Washington, not to Kiev!

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