Cabinet proposes own natural gas royalty rates

15 February 2022

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.