Ukrainian gas producers face 50% royalty increase in 2013

Ukraine’s parliament amended a law stipulating the introduction of a unified oil & gas production tax since 2013 (adopted a month ago) to increase the tax for gas 1.5x. In particular, private producers will have to pay an extraction tax for gas from reservoirs shallower than 5,000 m equal to 25% of the gas import price (vs. 17% according to the law previously) and from deeper reservoirs the tax will be 14% (vs. 9% previously).

Roman Dmytrenko: Based on the current price of imported Ukrainian gas and tax calculation formula valid for 2012, Ukrainian gas producers pay a USD 68.8/tcm royalty and USD 5.3/tcm production tax on extracted gas, which effectively equals 17% of the produced value. The adopted amendments cancel the current tax calculation and imply a USD 37/tcm increase in the unified production tax. We estimate the tax increase will eat out to 6 pp of JKX Oil & Gas (JKX LN) and Regal Petroleum’s (RPT LN) gross margin in 2013 and 9 pp of Kulczyk Oil (KOV PW) and Cadogan’s (CAD LN).