Experts: creating long-term rules of game in oil and gas sector is more important for development of the country then closing off loopholes at the expense of the state budget

Experts: creating long-term rules of game in oil and gas sector is more important for development of the country then closing off loopholes at the expense of the state budget
September 15, 2015.

Kyiv, September 15, 2015.  Ukraine must concentrate on creating long-term, clear and transparent rules of the game in the sphere of oil and gas extraction, rather than constantly changing tax and rent rates aimed at filling the state budget in order to get rid of energy dependence on Russia and become an energy independent state. Such conclusion was at the round table discussion “International experience of oil and gas resources management. Changing natural resources into stimulus for progress” that took place at Ukraine Crisis Media Center as a part of Ukraine Reforms Communications Taskforce project.

Petro Kaznacheev, managing partner of Khaznah Strategies Ltd consulting company, said that Ukraine has huge potential in the sphere of natural gas extraction, but mistakenly does not fully use it. The situation needs to be changed.  Implementation of this goal is an exceptionally challenging task, especially while the oil price is low.  This reduces investment appeal of the sector; nevertheless, it is worth an effort. “Proven deposits of natural gas amount to 0.67 trillion cubic meters, on a conservative estimate. There is huge potential but extraction in our country remains on the level of the 1980s, amounting to around 20 billion cubic meters of gas.  The available potential is not realized, which needs to be rectified,” emphasized Kaznacheev.

Participants of the round table identified three directions of the goal implementation: strengthening participation of the private sector which requires creation of investment appeal by means of stable and competitive legislation (in comparison with other countries) in field of income tax and rent rates; deregulation that suggests simplified procedure of permits issuing and reform of the state company ‘Naftogaz Ukrainy’.

Serhiy Konovets, deputy head of the board of the ‘Naftogaz Ukrainy’, said that approaches to the company management will radically change in the context of the gas market reforms: the corresponding plan of action is ready and the Cabinet of Ministers will review it in the nearest future. “We developed a corporate management plan with the help of PricewaterhouseCoopers and Baker & McKenzie consultants. It has already been presented to the Ministry [of Energy and Coal Industry]. We hope the Cabinet of Ministers will consider it soon. We must change from micromanagement by the Cabinet of Ministers to a supervisory board consisting of independent directors. It is necessary to get rid of political influence and ensure efficient work of the company in the best interests of the state,” said Konovets.

Speaking of the first two directions, investment appeal and deregulation, Olena Pavlenko, the president of DiXi Group analytical center said that countries directed at development of their own extraction are competing for investors at present. The weaknesses that Ukraine must eliminate are the absence of ‘one voice policy’ on oil and gas extraction in different state institutions, which misleads investors, and the time of extraction licenses issuance that takes 4-5 times longer than usual. “We need to pass everything we can on to the level of local authorities (aside from issues regulating the environmental sphere, health care and taxations). The country should find a model of internal coordination of the position between the state authorities and approach investors with such coordinated position. Openness of all the processes is vital here, as this is the ground of establishing trust between investor, state and local communities,” believes Pavlenko.

At present the parliament is reviewing a number of bills, which will make the extraction sphere more attractive for investors, if passed by the parliament. These bills cover regulation of land allocation issues (draft law No.3038-1), product distribution (draft law No.3027), taxation of extraction companies (draft law No.2352а). “There can’t be so-called ‘energy sector orphans’ in Ukraine, like ‘Ukrgazvydobuvannia’ company. The government can’t increase fiscal pressure on the state companies, every time it faces fiscal needs. All the companies that extract hydrocarbon in the framework of similar contracts must work in similar fiscal mode. The market must make the next step,” emphasized Olha Belkova, Ukrainian MP, deputy head of the Committee of Fuel and Energy Complex, Nuclear Policy and Nuclear Safety of the Verkhovna Rada.

Oleksandr Vovk, advisor to the Minister of Energy and Coal Industry of Ukraine, said that the government is to make strategic decisions, for instance, regarding gas balance in Ukraine in five years, before it starts making steps in the extraction industry.  This is the main question, and the answer will define the place of the extraction industry in the country, how to reduce consumption and increase extraction. Unfortunately, events of the past year prove that such strategy in the extraction industry is absent. Nevertheless, the Ministry of Energy intends to develop such strategy during the next year,” said Vovk.

Round table participants emphasized that all the members of oil and gas sector are to eliminate political component from the discussion and concentrate on technical issues. “Society is ready to separate the gas issue from tariffs and subsidies. It’s time to separate dreams from reality. Cheap gas is a dream. Unfortunately, it is unachievable. Reality is gaining energy independence from Russian and supplies from Europe. It is unachievable in short term, but if we keep postponing reforms, this reality will become more and more distant,” emphasized Belkova.

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