It’s been almost a year since the President of Ukraine Volodymyr Zelensky announced the opening of the Investment Office, which allows direct domestic and foreign investment in the oil and gas industry.
Invest Office is a direct connection with the industry market, which, we hope, will give the necessary dynamics in the communication between the government and business.
The main players of the oil and gas market are interested in the resuscitation of the oil and gas market of Ukraine after the extraordinary consequences of Covid-19.
In 2020–2021, the oil and gas market is ready to master up to $ 1 billion in the following areas: latest technologies, IT and data, research and development, service projects, development of new oil and gas fields, intensification of existing and canned wells, infrastructure projects, incentives to increase oil and gas production.
Recently, on May 27, the government presented the Economic Stimulus Program to overcome the effects of the COVID-19 epidemic. Despite the “quarantine”, the program offers measures that will be aimed at the development of energy in general.
For the extractive industry, it foresees three changes in production rental rates, namely the establishment of:
- an incentive rental rate for natural gas, oil and condensate within five years of the start of well drilling — but the size of the incentive rate is currently unknown;
- rent rates for oil and condensate of 12% and 6% (compared to the current rates of 31% for oil and condensate production at depths up to 5000 meters, and 16% — at depths over 5000 meters, respectively); and
- rents for unconventional hydrocarbon deposits not exceeding 2%.
Reducing rental rates for gas, oil, and condensate for five years can be a significant economic incentive for investors in the extractive industry, as during the crisis at the current rental rate (29% for gas deposits at depths up to 5 thousand meters, and 14% — more than 5 thousand meters) investors are reviewing the economic models of planned projects. At the same time, investors who intend to invest through the conclusion of production sharing agreements, the profitability of which depends much less on the amount of rent, remain active.
As of today, Ukraine has already introduced incentive regulation for new gas wells — 12% for production at a depth of up to 5 thousand meters, and 6% — at a depth of more than 5 thousand meters. Such an incentive rent will be valid until the end of 2022. Moreover, the state in the relevant provision of the Tax Code directly established that such an incentive rate can not be increased, and it can not be applied to adjustment factors or other mechanisms that will lead or may lead to an actual increase in tax liabilities.
To sum up, reduced rental rates for gas, oil, and condensate will attract more investors in the extractive industry, as they will strengthen profitability for those projects that are in a “suspended state” due to falling fossil fuel prices. In addition, a gradual increase in energy prices can be expected after the lifting of quarantine measures, although lower prices for gas in Ukraine and Europe may last longer.
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