Government Will Raise Oil Extraction Royalties By 73%.

A draft law on changes to the state budget was submitted by the Cabinet to the Verkhovna Rada. This law, if passed, would increase oil extraction royalties from USD 59.4 per tonne (~USD 8.10 per bbl) to USD 103.0 per tonne (~USD 14.05 per bbl) starting in July. The proceeds would be directed toward funding the 2005 state budget, and cross-subsidization of the coal and electricity industries. The government maintains that the royalty increase would not be detrimental to Ukrnafta and Ukrgasvydobutok’s financials.Concorde Capital: The royalty increase would significantly curtail Ukrnafta?s (UNAF: BUY) cash flows and either cause it to freeze its investment projects, or require it to assume substantial debts. If maintained after 2005, such a high level of royalties would eventually bury the Ukrainian oil industry. Therefore, we do not believe that even if approved these high royalties will remain in effect after 2005. We expect the draft law to face fierce resistance from Parliamentary factions lobbying oil industry interests. We believe that Privat Group will try to convince governmental officials to leave the royalty level alone.