Cabinet Plans to Hike Oil & Gas Royalties.

Discounts will be retained for oil extracted from deep wells (>5km) and gas produced offshore. If the increase in the oil royalty is approved, it would be the third in the last three years, including an almost 60% increase last year. The draft also introduces punitive royalties for state-owned companies that sell gas to customers other than those determined by the Cabinet. Vladimir Nesterenko: We think the royalty increase is likely to be approved, as parliament generally likes to beef up the budget’s spending side, and rarely tries to trim from the revenue side. Although Ukrnafta (UNAF: HOLD) has a long history of successfully dodging government attempts to choose its customers, the royalty increase would definitely hurt its valuation, and could also hurt those of affiliated refineries, Naftokhimik Prikarpattya (NAFP) and Halychyna (HANZ). We therefore put our Hold recommendation and our target price on UNAF’s stock under review.