Ministry of Finance Considers Oil Royalty Increase

The Ministry of Finance is considering a 25% oil royalty increase to UAH 2000/mt (USD 54.5/bbl) versus the current effective rate of UAH 1600/mt (USD 43.2/bbl). Vladimir Nesterenko: On the press-conference finished an hour ago, Ukrnafta’s CFO disclosed that most likely the governemnt aims at raising not the nominal but the effective royalty. According to him, authorities are also considering changing royalty calculation mechanism, by shifting from the current peg to 11M06 average oil price, to a new base – the price of the auction held in November 2007 (UAH 2913/mt, or USD 78.7/bbl). We estimate that the initiative will materialize in 45% yoy increase in effective royalty, from USD 28.3/bbl in 2007 to USD 41.1/bbl in 2008. In addition to the negative impact on the company’s profits, this looks like a strategic step by the government, aimed at putting Ukrnafta (UNAF: U/R) into a defensive position. Before this news Ukrnafta seemed to have a high enough leverage to bargain for higher gas prices or a lower royalty. Now the company can sacrifice its demands in exchange for retaining the status quo.