The Association of Gas Producers of Ukraine (AGPU) is forecasting a significant decrease in growth rate of gas production in 2017 if the current tax regime for the industry is maintained. Moreover, AGPU with a high probability predicts the beginning of stagnation of gas production in the independent sector due to lack of necessary investments in new and current projects.
Members of AGPU are certain that gas production increased to 28 bcm in 2020, as predicted by the draft Concept for Development of Gas Production Industry, is only possible if the investment attractiveness of the industry is increased by the means of decreased tax burden on new investments. Thus, we are noting to the public that the Government's plans of achieving energy independence of the country and reaching gas self-sufficiency in 2020 are at risk of failure.
Domestic and foreign investors have numerously pointed out that the unreasonably high fiscal burden is the main problem, which makes attraction of new investments in gas production impossible. We emphasize that under the current tax burden and energy sources prices, search and development of new large projects in Ukraine by the independent operators has already been paused and will not be resumed due to their uneconomical nature. As forecasted by the AGPU, if the current situation is maintained, the country will receive 8.3 bcm less of natural gas during 2017-2020, which is equivalent to 14 billion hryvnia less of taxes, almost 5% less of GDP, and lack of 15 thousand of new workplaces in many sectors of the nation's economy.
To remind, according to the independent expert research performed by Deloitte, the tax burden on gas production in Ukraine exceeds the average European level by more than two times. This means that by maintaining the current tax regime, Ukraine ultimately loses the competition for the international investment capital. At the same time, it is the increase in domestic and foreign investments, drilling of new wells on brown- and greenfield, and attraction of modern technologies, which should become the main driving force of the natural gas production growth.
Gas producers unanimously support the Government in its efforts to make Ukraine energy independent and free our country from a decade-long burden of imported gas. In the forming of the State Budget for 2017 and amending of the Tax Code, we have prepared our proposed urgent changes to the tax regime starting new year for the review of the Ministry of Finance. Our position is based of the analysis of the tax policy in the European countries, detailed research performed by Deloitte, and on the basis of a complex study of Ukraine's gas production industry potential, performed last year by IHS, the international consulting company.
We think it is necessary to implement a flat 12% royalty rate on natural gas, produced from wells, drilling of which started after January 1, 2017. Thus, the industry proposes the Government to implement a stimulating royalty rate exclusively on new investments starting next year. This will allow to maintain the current tax regime on current objects. In our opinion, implementation of a flat 12% royalty rate at an average European level will allow to attract the new investments necessary for the dynamic growth of production while at the same time keeping the tax revenues intact in 2017 and significantly higher in the years to come.
According to the Association's forecasts, implementation of the flat stimulating royalty rate on new wells will allow to attract, in particular, in private sector $1 billion of new investments and increase gas production by almost 60% by 2020. Growth of production will allow to increase the annual tax payments by 22% in the industry overall, bringing a total of 195.5 billion hryvnia to the State Budget in 2017-2020.
Maintaining the current fiscal system will cancel out all the developments of the Government and the gas production sector aimed at decreasing dependence on imported energy sources by increasing domestic natural gas production. Moreover, lack of any changes in the fiscal system contradicts the international obligations, undertaken by the Government in part of reforms of the tax regime for the industry. To remind, in the last few years, the independent gas production sector was the main source of growth of gas production in Ukraine. According to the recommendations given to the Ministry of Finance last year by the consultants of IHS, the independent gas producers can significantly increase their production from the current 4 bcm to 8 bcm in 2020. However, such scenario is only plausible if a competitive and stable tax regime is implemented not later than in 2017.
The Association is again pointing out that the country should choose a path to follow: the government either keeps thinking in terms of short-term filling of the state budget by the means of royalty, or it should create competitive conditions for investments in the industry, restores trust and establishes cooperation with the national and foreign companies by the means of holding a comprehensive reform of the tax system. The reform should provide a stable base for absolute growth of fiscal revenues from the gas production industry in the long run. Ukraine can follow the example of such countries as the United Kingdom, Italy, or Canada, who have decreased the tax regime for their oil and gas industries in the past year to maintain the workplaces, building of the industry and expansion of the tax base. Such countries as Slovakia, Poland, or Czech Republic, where the royalty rate does not exceed 5% might also be an example to follow.
Again, the gas producers are arguing for a consistent and transparent updating and amending of the tax system in the industry. It is important to understand that taxes are one of the most important parts of an attractive investment climate, which is necessary to increase the domestic natural gas production. We systematically defend the expansion of the Government's planning horizons to more strategic ones. We call to consider a comprehensive effect of the tax changes in gas production industry. We are confident that stimulating new investments can ultimately guarantee a win-win scenario for both the Government and the business community. It should also provide a strong basis for further implementation of a progressive reform of the fiscal system of the upstream activities on the basis of the revenue tax after 2020.