Rada votes to change oil royalty formula

Last Friday, the Verkhovna Rada passed a law that changes the size of oil royalty and the formula for calculating the royalty adjustment coefficient. According to the law, posted on the Rada’s website yesterday, the base royalty for oil extracted from deposits shallower than 5km will increase by 40.3% to UAH 1,529.9/mt (USD 43.2/bbl). Meanwhile, the adjustment coefficient will be calculated as the ratio of the monthly average Urals oil price to the base price of USD 100/bbl. Earlier it was calculated as the ratio of whichever is higher: the average local oil auction price or the average price of oil imported from Russia to the so-called base price of UAH 1,940.8/mt (USD 54.8/bbl). For April 2008, the coefficient was calculated at 1.7863, implying an effective royalty of UAH 1,947/mt (USD 54.9/bbl). Vladimir Nesterenko: From the first sight, this move looks like an attempt to simplify the formula for calculating effective royalty, with little impact on its size. However, if recalculated for April according to the new formula, effective royalty would have been~16% smaller than it actually was. President’s signature on the law (pending) would be positive for Ukrnafta (UNAF: SELL). However, probability of passing through is quite low, as the document also includes a number of other issues, which earlier raised much controversy between PM and the president.