Ukraine Finance Ministry preannounces gas production tax cut

Finance Minister Natalie Jaresko announced on July 13 that new legislation has been drafted  to cut the production tax for natural gas producers in Ukraine. The production tax will be reduced from the current 55% (28% for wells deeper than 5 km) to 28% (14%) as of 4Q15, said Jaresko, referring to the legislation that MinFin reportedly submitted to the Cabinet of Ministers for review. The Ministry also offers a 20% (10%) royalty rate for new wells since 2016, with “an additional corporate surcharge tax at a 30% rate.” Jaresko expects such measures will enable stimulating growth in gas production by private companies to 8.5 bcm p.a. by 2025 and to 11.0 bcm by 2035 (from 3.3 bcm in 2014).

Alexander Paraschiy: At first glance, MinFin’s initiative looks encouraging for investors into Ukrainian gas production companies, but we have yet to see the draft of the initiative to understand all the peculiarities of the new gas E&P taxation policy. Given that the reduction of gas taxes is one of the IMF’s core demands, we are confident that any initiative will be adopted by parliament by the end of 3Q15. However, there is a risk that a “stimulative” subsoil taxation will be partially offset by “prohibitive” profit taxation of gas E&P companies.

All in all, we see the MinFin report as largely neutral (with some plus-side prospects) for companies like JKX Oil & Gas (JKX LN) and Serinus Energy (SEN PW), as well as for those less exposed to the current prohibitive taxation: Regal Petroleum (RPT LN) and DTEK (DTEKUA).