Cabinet proposes own natural gas royalty rates

Ukraine’s Cabinet of Ministers proposed a progressive
scale of royalty rates for the extraction of natural gas according to a draft
of law #7038 dated Feb. 11.

 

The base for royalty calculation will remain
essentially the natural gas price.

 

Compared with the scale proposed on Feb. 9 by the parliament,
for prices higher than USD 300/tcm, the rates proposed by the Cabinet are
higher by up to 6pp for old (construction started before 2018) wells and up to
18pp higher for new wells, according to Concorde Capital calculations. However,
for the USD 200-300/tcm price range, the Cabinet’s rates for old wells are
3-7pp lower than the parliament’s.

 

In detail, for old wells with depths of less than 5
km, the royalty rate, as proposed by the Cabinet, will be 29% for natural gas
prices (the monthly average) below USD 200/tcm, 32% for USD 200-250/tcm, 36%
for USD 250-300/tcm, 43% for USD 300-400/tcm, 50% for USD 400-500/tcm, 55% for
USD 500-600/tcm, 60% for USD 600-700/tcm, 65% for USD 700-800/tcm, 69% for USD
800-900/tcm, 72% for USD 900-1,000/tcm, and 74% for more than USD 1,000/tcm.
The rate under the current mechanism for such wells is 29%.

 

For old wells with depths of more than 5 km, the rate
will increase from 14% (the current rate) to 59%.

 

The rates proposed by the Cabinet are 7pp lower than
the ones proposed on Feb. 9 by the parliament for the USD 200-250/tcm price
range, and 3pp lower for the USD 250-300/tcm price range. However, Cabinet’s
rates are higher (by up to 6pp) for prices above USD 300/tcm, according to
Concorde Capital calculations.

 

For new wells with depths of less than 5 km, the rate
will vary from 12% (the current rate) to 67%. The rates proposed by the Cabinet
are higher by up to 18pp than the ones proposed by the parliament.

 

For new wells deeper than 5km, the rate will vary from
6% (the current rate) to 53%. The Cabinet’s rates are higher by up to 10pp than
the parliament’s.

 

Ukraine’s largest private producer is DTEK Oil &
Gas (DTEKOG), which in 2021 extracted 2.06 bcm (36.9 kboepd) of natural gas, or
12% more yoy. In 2021, DTEK Oil & Gas paid about UAH 2.7 bln (USD 99 mln)
in royalty for the extraction of natural gas and condensate, according to a
Feb. 3 press release by the company. Its royalty payments (the total for
condensate and natural gas) amounted to UAH 0.88 bln (USD 33 mln) in 2020 and
UAH 1.319 bln (USD 51 mln) in 2019.

 

Dmytro Khoroshun: The rate
hike as proposed by the Cabinet will be detrimental for natural gas extraction
in Ukraine in the long term.

 

We continue to think that negotiations between
Ukrainian natural gas producers and the government that would lower the rates
might be in order.

 

Regarding the impact of the rate scale proposed by the
Cabinet, the royalty for the extraction of natural gas alone (without
condensate royalty payments) by DTEK Oil & Gas in 2021 would have been USD
353 mln, 4.0x higher than the USD 89 mln we estimate it actually paid under the
current mechanism, and 14% higher than under the scale proposed earlier by the
parliament.

 

For 2020, its natural gas royalty payments under the
Cabinet’s scale would have been USD 29 mln, 6% more than our estimate for the
current mechanism payment (USD 28 mln), but 4% less than under the parliament’s
scale.

 

For 2019, the payments under the Cabinet’s scale would
have been USD 59 mln, 38% higher than USD 42 mln under the current mechanism,
but 3% lower than under the parliament’s scale.