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28.12.2016

Battle for rent. What happened at the “budget” night?

 

On December 21 the Verkhovna Rada of Ukraine adopted the State Budget of Ukraine for 2017. The decision-making was traditionally accompanied by disputes, search for voices and political arrangements. That night was also marked with the two laws from the “budget package” that have a direct impact on oil and gas production. What impact will it have? Let’s try to understand.Among the pleasant surprises of the evening was the adoption of draft law No. 3038 that provides for the distribution of rent for subsoil use payable for production of oil, gas and gas condensate in the following proportions: 1% – to village, settlement, town and city budgets, 2% – to the regional budgets and 2% – to the relevant district budgets. The remaining 95% will be credited to the State budget.

For local government authorities this means an increase in the financial capacity at the local level, so they will be able to improve the economic situation of their settlements. It will also promote effective dialog between the parties. In particular, local residents will no longer consider that the extractive companies only cause damages to the environment and destroy the infrastructure, and that must facilitate fruitful cooperation between the parties.

The draft law was initiated and submitted to the Verkhovna Rada of Ukraine in autumn 2015, but put to voting only this year. Overnight into December 21, People’s Deputies from Petro Poroshenko Bloc, People’s Front and the Radical Party made a proposal to support the law. Disputes arose over the commencement of the Act. A People’s Deputy Lev Pidlisetskyi (“Samopomich”) called to adopt the law in 2017, taking into account that the previous voting for amendments to the Budget Code imposed many additional obligations on the local budgets. At the same time, this decision was opposed by Anatolii Matvienko (Petro Poroshenko Bloc) who stressed that such decision could unbalance the budget, and question the adoption of the law in general.

As a result, a compromise was to postpone the entry of this law into force from 2018. The reason was the gap of UAH 2.4 billion proceeds to the State Budget 2017, that failed to be compensated. However, despite the adoption of the law, now it is important to determine the mechanism for managing the funds that will be obtained at the local level. According to the forecasts of the Cabinet of Ministers of Ukraine, the rent for subsoil use in 2016 should amount to almost UAH 54 billions. Thus, this may mean that local government authorities will obtain additional UAH 2.7 billions.

Thus, a need has arisen to adopt other, equally important, draft law No. 4840 “On Disclosure of Information in Extractive Industries”. It is aimed to achieve accountability of companies and recipients of payments at the local level as well as to control the process of allocating funds through the disclosure of information according to the standards of the Extractive Industries Transparency Initiative (EITI). Due to the implementation of these standards, which are implemented in more than 50 countries, the local community will have access to information on the participation of extracting companies in social projects, employment and proceeds to the local budgets – regional, district and community budgets.

Everything seems to be quite promising. The transfer of rents to local budgets, the ability to manage these revenues, etc. So this raises another problem: whether there will be anything to transfer and manage if the investment attractiveness of the industry is so poor? According to the Minister of Energy Ihor Nasalyk, Ukraine plans to increase gas production by 6.7 billion cubic meters by 2020, mainly due to market factors (due to the alignment of gas prices). However, this alone may not be enough.

At the same night, the People’s Deputies lowered the rent for oil production. So, for oil deposits of up to 5,000 m the rent is reduced from 45% to 29%, for deep deposits of more than 5,000 m – from 21% to 14%. Ukrnafta benefited from such decision. According to the estimates, the largest oil company in Ukraine in 2017 can save up to UAH 1.3 billion.

At the same time, the Parliament and government officials had an opportunity to reduce rents for gas production from new wells drilled after January 1, 2017, to 12%. According to the authors, namely People’s Deputies Victoria Voytsitska (“Samopomich”) and Olha Belkova (Petro Poroshenko Bloc), the appropriate rate will attract major players to Ukrainian gas market and create favorable conditions for increasing production of Ukrgazvydobuvannia. This normative standard was supported by Naftogaz and a number of other large companies. According to the estimates made by professional associations, the new rent would have an additional economic benefit in the form of USD 1 billion of investments, extra 8.3 billion cubic meters of domestic gas production, and UAH 14 billion of taxes.

The corresponding draft law No. 5132 had been prepared for the second reading during two days, but at the decisive meeting of the Tax Committee of the Verkhovna Rada of Ukraine the parties failed to reach compromise. On Monday, December 19, the Committee supported the relevant amendment, while on Tuesday it unexpectedly declined the same, explaining that the rate reduction would lead to unlawful transition to low rates by the majority of productive wells.

Instead, the People’s Deputies unexpectedly supported an amendment proposed by a People’s Deputy Oleh Kryshyna ( People’s Front) to reduce to 2% the rate of rent for the extraction of hydrocarbons from tight reserves or exhausted deposits. Appropriate amendment immediately acquired the status of corruption. Thus, according to the Deputy Chairperson of the Board of Directors of Naftogaz Yurii Vitrenko, the relevant initiative includes many corruption risks, as there is great dependence on the decisions of the government authorities. In his opinion, it will also lead to a more significant closure of the market for foreign investors. Corruption threats were also noted by Prime Minister Volodymyr Groysman who insisted upon the abolition of a provision in draft law No. 5132, but that particular amendment suddenly appeared in another draft bill No. 5368, which was supported by the People’s Deputies.

So far, it is unclear whether the amendment which was not voted at the plenary session is valid. Chairperson of the Tax and Customs Policy Committee of the Verkhovna Rada of Ukraine Nina Yuzhanina assured that the amendment was rejected, but no official position of the Ministry of Finance was announced.

While oil companies, in particular Ukrnafta, benefited from the political games, gas companies failed to benefit. However, this questioned the implementation of the government plans to increase gas production. It is not clear due to what they plan to attract additional funds into the gas production.

It seems that the Government wanted to “appease” the People’s Deputies with the law on the rent decentralization in favor of maintaining its current rates. Let us hope that by 2018 legislation will not be changed again and the local communities will receive part of the proceeds from extraction in their territory. Similarly, there is a hope for the introduction of strict transparency regime in calculation, payment and use of these funds.

 

Mariia Melnyk
Specialist for European Integration Programs

Тижневик

Our platforms

https://ksep.energy/en/

Independent energy educational center

http://eiti.org.ua/

National website of Extractive Industries Transparensy Initiative in Ukraine 

http://ua-energy.org/

Information and analitical website “Ukrainian Energy UA-Energy.org” is unique   platform to inform

Our platforms

https://ksep.energy/en/

Independent energy educational center

http://eiti.org.ua/

National website of Extractive Industries Transparensy Initiative in Ukraine 

http://ua-energy.org/

Information and analitical website “Ukrainian Energy UA-Energy.org” is unique   platform to inform