Ukraine's Gas Woes

James Stafford of Oilprice.com has the goods on Ukraine’s recent energy legislation: 

Ukraine doesn’t need Russia to take it down—Kiev is doing fine destroying itself, most recently with a new tax code that doubles taxes for private gas producers and promises to irreparably cripple new investment in the energy sector at a time when reform and outside investment were the country’s only hope.

Ukrainian President Petro Poroshenko on August 1 signed off on a new tax code that effectively doubles the tax private gas producers in Ukraine will have to pay, calling into question any new investment, as well as commitment from key producers already operating in the country.

The stated goal of the new tax code—a legislative package embraced by the parliament on July 31 with more than 300 votes--is to raise $1 billion, of which $791 million would go to fund the war effort in eastern Ukraine.

According to the Kyiv Post and Ukrainian law firms, the new code will remain in force until the end of 2014 during which time gas drillers will be required to pay 55 percent of their subsoil revenue for extracting under five kilometers. This is up from 28 percent--so it’s a significant hit for producers. Additionally, for any extraction beyond five kilometers, the tax will be 28 percent--up from 15 percent.

The only saving grace here is that this wasn’t the worst possible scenario: An early version of the bill called for a 70 percent tax on gas extraction.

Ukraine may have some of the most attractive gas prices in the world—the only thing that could have possibly lured investors there—but the new tax law renders this irrelevant, especially considering that in European countries, the tax does not exceed 20 percent.

The oil sector will also be hit with the new tax code, which increases rates to 45 percent for drilling under five kilometers—up from 39 percent. But it is the gas tax hike that will really cripple potential investment in Ukraine.

Private gas producers lobbied energetically against the new tax laws, arguing that it will crush investment and force investors to re-think their commitment to Ukraine. They also argue that it benefits some members of the political-business elite, and has nothing at all to do with funding the war effort in the east. Instead, it is the next phase in the battle among energy oligarchs to secure their interests in the dynamic political arena shaping up after the fall of President Viktor Yanukovych.

In an open letter sent to Parliament on July 29, a group of private producers stated: “The draft law may lead to a rapid increase in the tax burden on private gas producing companies, a significant decrease in project cost effectiveness in general (up to closing down due to unprofitability) and a general decrease in attractiveness of the Ukrainian market for foreign investors."

Speaking to Oilprice.com from Kiev, Robert Bensh—a veteran Ukraine energy executive and partner and managing director of Pelicourt LLC, the majority shareholder in Ukraine’s third-largest gas producer, Cub Energy—was highly critical of the new tax law and fearful of what it means for Ukraine’s future at such a critical juncture its energy dynamics.

“This law is dangerous to the long-term security of Ukraine. It adds little to the budget and discourages drilling and investment in the upstream oil and gas sector, as well as calls into question the ability to invest in Ukraine at all,” said Bensh, who has been one of the most visible lobbying forces against the law.

“No one will invest in a country that arbitrarily punishes investors who are creating value by increasing reserves and production, or who are paying taxes and employing hundreds of thousands of people. No one will invest in an industry with the risk that taxes will be double or triple within a few months,” he said.

Bensh called the bill “highly political” and pointed to its two key beneficiaries: energy magnates Rinat Akhmetov and Ihor Kolomoyski, who “either own oil or mining assets that were taxed immaterially and punitively taxed gas producers.”

According to OP Tactical’s intelligence wing, the tax code was clearly maneuvered by Akhmetov and Kolomoyski and should serve as the first sign that key reforms of the energy sector will be challenged at every step to ensure that these interests are secured at the expense of the state.

“The failure of Ukraine to develop gas supplies, either due to years of corruption and or failure to attract outside investment into the upstream sector, is a material factor in Ukraine's current economic crisis and issues with Russia. Ukraine has always sought the easy solution.  This tax and the failure to see the strategic impact upon the country is yet again another example,” Bensh said.

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James Stafford, “Who Needs Russia? Ukraine Will Destroy Itself with New Gas Tax,” Oilprice.com, August 7, 2014. Stafford has a August 12 update here, citing the protests of Cub Energy, Geo Alliance, Burisma, Kub Gas, and Regal Petroleum. They warn that “the 55 percent tax rate could ‘lead to the collapse’ of large- and medium-scale projects in Ukraine.”  Extension of the tax beyond the end of 2014 will lead these firms to leave Ukraine and mean “no further foreign investment in the country’s beleaguered gas sector.”

Avian Flu Bigger Threat Than Ebola

From Michael Specter at The New Yorker, putting the Ebola outbreak in West Africa into perspective:

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. . . As many as ninety per cent of those infected with Ebola will die. There is no cure or treatment. There are several vaccines under development; in early animal tests, more than one has shown promise. But it will be years before they are ready for humans. Until then, if you get Ebola, you are most likely done for. The virus can eat away at capillaries and blood vessels, causing you to drown in your own blood. As David Quammen wrote in “Spillover,” the definitive book about the origin and evolution of human epidemics, “Advisory: If your husband catches an Ebola virus, give him food and water and love and maybe prayers but keep your distance, wait patiently, hope for the best—and, if he dies, don’t clean out his bowels by hand. Better to step back, blow a kiss, and burn the hut.”

Still, Ebola’s more prosaic symptoms—abdominal and muscle pain, fever, headache, sore throat, nausea, and vomiting—also apply to at least a dozen other conditions. Could an infected airline passenger make it to the United States? Absolutely. But in this country every doctor and nurse in every clinic and hospital uses gowns, latex gloves, masks, and disinfectants. Those precautions are rarely available in the parts of Africa where the epidemic has been most severe. Ebola is contagious only when it is symptomatic, and by that time people are almost invariably too sick to travel. (Patrick Sawyer, the only American to die so far in this outbreak, collapsed after a flight from Liberia to Lagos. He was planning to fly next to Minnesota. He never got on that plane.)

“I wouldn’t be worried to sit next to someone with the Ebola virus on the Tube, as long as they don’t vomit on you or something,” Peter Piot told Agence France-Presse this week. Piot, the director of the London School of Hygiene and Tropical Medicine, was one of the two people who, in 1976, discovered Ebola. He then ran the United Nations’ AIDS program for more than a decade. “This is an infection that requires very close contact,” he said.

Ebola is truly deadly, but the many lurid headlines predicting a global pandemic miss a central point. In its epidemic reach, Ebola is often compared with H.I.V. But they are nothing alike. H.I.V. has killed at least thirty million people, mostly by spreading quietly, burrowing into the cells it infects, and then, at times, lurking for years before destroying the immune system of its host. Ebola’s incubation period is between two and twenty-one days long. The virus kills rapidly. There is nothing insidious about it.

Ebola won’t kill us all, but something else might. Like everything living on Earth, viruses must evolve to survive. That is why avian influenza has provoked so much anxiety; it has not yet mutated into an infection that can spread easily. Maybe it never will, but it could happen tomorrow. A pandemic is like an earthquake that we expect but cannot quite predict. As Quammen puts it, every emerging virus “is like a sweepstakes ticket, bought by the pathogen, for the prize of a new and more grandiose existence. It’s a long-shot chance to transcend the dead end. To go where it hasn’t gone and be what it hasn’t been. Sometimes the bettor wins big.”

He’s right, of course, and it is long past time to develop a system that can easily monitor that process. If we don’t, the next pandemic could make Ebola look weak.

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Michael Specter, “After Ebola,” The New Yorker, August 1, 2014