Bill into Law: No Royalties for Ukrainian Brown Fields
President Viktor Yanukovych signed into law a bill that provides energy companies with tax incentives and cancels royalties on oil, natural gas and gas condensate extracted from geologically complex fields as well as from workovered exhausted wells.
Dragon Capital comments on the news: In terms of oil and gas condensate royalties, the law has no immediate impact on local producers, however it definitely implies positive longer-term implications, particularly for Ukrnafta, as the company’s fields have a significant number of old and exhausted wells for which a workover was previously economically unfeasible due to high royalties. However, a provision of the bill authorizing the government to decide whether a field is complex or not implies additional regulatory complications for oil and gas companies.
Current oil and gas royalty rates in Ukraine vary depending on the depth of production reservoirs and on oil and gas prices. The base oil royalty is set at $36/bbl for deposits lying at a depth of up to 5,000m and $13.6/bbl for deposits deeper than 5,000m. These rates are adjusted monthly for a correction coefficient calculated by dividing the price of imported oil by $71/bbl, which implies current rates of $55/bbl for shallow and $21/bbl for deep reservoirs.
The gas royalties are set at $30/tcm (more than 5,000m) and $14.9/tcm (below 5,000m), with the correction coefficient calculated by dividing the price of imported gas by $179.5/tcm, which implies current rates of $49/tcm and $24/tcm, respectively.