The Association of Gas Producers of Ukraine welcomes the Government's decision to support the natural gas production industry by implementing a stimulating flat 12% royalty rate on natural gas produced from wells, drilling of which started after January 1, 2017.
Yesterday, on December 6, Verkhovna Rada has passed in the first reading the Draft Law #5132 On amending the Tax Code of Ukraine to balance the budget revenues in 2017, which was initiated by the Cabinet of Ministers of Ukraine and embodies amendments of the taxation of the upstream industry.
The royalty on natural gas produced from wells, drilling of which started after January 1, 2017, regardless of the depth, is supposed to be 12%. This does not include the joint venture agreements.
At the same time, the Concept for Development of Ukraine's Gas Production Industry by 2020 is under the Government's review. The document establishes the main priorities of the industry's development, all of which are aimed at achieving domestic gas production of 27 bcm by 2020. We consider the registration of the DL #5132 to be the first step en route to implementation of the Concept's Action Plan.
As stated by the Association before, implementation of a stimulating flat 12% royalty rate on gas produced from well, drilling of which started after January 1, 2017, will not have a negative effect on the state budget revenues, because the stimulating royalty will only be applied to new wells. This initiative is a compromise implementation of the Canadian experience of decreasing the tax burden on the oil and gas industry in competition for investments and technology in the age of low hydrocarbons prices.
Implementation of this initiative will allow to attract over $1 billion of new investments in the industry. Those investments will facilitate a 35% growth of production by 2020, which will result in 14 billion hryvnia paid in taxes and approximately 16 thousand new workplaces created.
To remind, according to the independent expert research performed by Deloitte, the tax burden on natural gas production in Ukraine is more than twice greater compared to the average European rates. This means that by maintaining the current tax regime, Ukraine ultimately loses the competition for international investments. At the same time, it is the increase in investments from internal and external sources, drilling new wells on brown- and greenfield, and attraction of modern technologies that should be the main driving force of the natural gas production growth. Passing the DL #5132 in part of implementing a stimulating royalty will become the first milestone in the trust-based relationship between Ukraine and the investors, both domestic and international.