Kyiv, July 2, 2015. Ukraine needs to expand its portfolio of investors by attracting funds from both international organizations and private investors, said Volodymyr Demchysyn, Minister of Energy and Coal Industry of Ukraine, during a round-table discussion at Ukraine Crisis Media Center.
According to Demchyshyn, so far only large companies such as Energoatom have allocated funds to the energy industry. Another source of finance is institutional investors like the World Bank and EBRD who invest on favorable terms and aimed for long-term development. However, financial assistance from the latter comes with many strings attached, as well as they mainly suit for state-owned enterprises.
Ukraine’s Energy Minister made a case for private investments: “We need a torrent of investments through forming comfortable conditions for small-scale, medium scale or even large-scale companies, which would invest regardless of state guarantees on repayment,” said Demchyshyn.
Thus Demchyshyn argued that the legislation should be modified in order to boost investors’ confidence in the Ukrainian energy market: “Gas extraction is a huge segment attractive for foreign investors, which is very important for Ukraine that encompasses 1 trillion cubic meters of gas. If these resources are exploited, gas extraction can be increased to 5-8 billion cubic meters within next 2-4 years maximum. It would strengthen Ukraine’s energy independence from external sources, such as the EU and Russia, making us more self-sustaining.“
Ilhem B. Salamon, senior energy economist at the World Bank, said that foreign investors are willing to invest into Ukraine, but it has to undertake commitments in regards to transparency. “It is a serious factor for attracting investors. They have to receive a clear-cut legal structure and see the long-term strategy. The government is working on such a program in order to create such multilateral strategy for energy sector, particularly for the extraction industry,” said Salamon.
Mykhailo Bno-Airiyan, head of the European integration department of the Ministry of Energy and Coal Industry of Ukraine, addressed the same issue, arguing that there are other factors beyond the reach of the Ministry of Energy: “An investor who wants to work in gas extraction has to get 75 permits from 15-17 state agencies; only two permits are obtained directly from the Ministry of Energy and Coal Industry. If there is a mistake somewhere, the work will be suspended.” Bno-Airiyan called for close involvement of civil society and radical deregulation in order to shape the new rules of the doing business in the area.
According to Olena Pavlenko, the President of Dixi Group analytical center, confidence in the government and stable transparent rules are the key to new investments in Ukraine. She noted that competition is also important, for monopoly in the market is risky for an investor.
Olena Pavlenko believes that public gas balance and open access to the payment data are among the main factors. Ukraine has already made commitments on increasing transparency, and a new report that complies with the international standards will be published in October.
“Two types of information should be included into the report. This first one is conceptual information, such as the maximum amount of data on extraction: volumes, list of main deposits, players and licenses. The second part is information on payments: how much taxes each company paid and to which budget”, Pavlenko said.
Speaking of the power sector, Serhiy Soroka, project coordinator at Nova Krayina civic platform, referred to the excessive market regulation as one of the reasons for low energy efficiency and lack of investments. Another reason is absence of energy efficiency stimulation and low investment appeal of Ukraine.
Exhaustion of gas deposits, absence the positive dynamic in deep-hole drilling sites, high tax levies on gas extraction industry and fierce political fights are all the factors slowing the development in gas extraction sector, said Nataliya Slobodyan, director of Energy department of International Center for Prospective Studies. In her opinion, efforts must be directed on development of exploration drilling, revitalize the technological and recover idle wells. “Wells recovery would give us an opportunity to extract 3 – 5 billion cubic meters of gas within 5 years,” added Slobodyan.
Volodymyr Demchyshyn is convinced that it is necessary to strike the right balance – investors should be motivated and at the same time there should be increased flow into the budget. He expressed hope there will be legal changes made soon, particularly to the Budget Code on the issue of the tax rate. “If lease payments for private companies are reduced, we can expect it would draw hundreds of millions in investments every year for the next several year”, Demchyshyn concluded.