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.
* * *
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.”
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