Ukraine Upstream Fiscal and Regulatory Report - Improved Fiscal Terms but Possible Political Risks

Over the past ten years, Ukraine has modified several elements of its petroleum fiscal framework, which will continue to be based on both concessions and PSAs. Since the beginning of 2018, subsoil fees have been adjusted including reduced rates for new gas wells, with the goal of increasing the attractiveness to prospecting investors. However, political and macroeconomic instability does not rule out the possibility of further fiscal and regulatory changes. Ukraine is currently organizing a series of licensing rounds for 2019, which will offer 42 onshore blocks (almost 20,000 sq. km) through several online concession tenders and a PSA tenders. These licensing rounds are part of the country’s strategy to increase its domestic production.

“Ukraine Upstream Fiscal and Regulatory Report - Improved Fiscal Terms but Possible Political Risks”, presents the essential information relating to the terms which govern investment into Ukraine’s upstream oil and gas sector. The report sets out in detail the contractual framework under which firms must operate in the industry, clearly defining factors affecting profitability and quantifying the state’s take from hydrocarbon production. Considering political, economic and industry specific variables, the report also analyses future trends for Ukraine’s upstream oil and gas investment climate.

Scope

Overview of current fiscal terms governing upstream oil and gas operations in Ukraine

Assessment of the current fiscal regime’s state take and attractiveness to investors

Charts illustrating the regime structure, and legal and institutional frameworks

Detail on legal framework and governing bodies administering the industry

Levels of upfront payments and taxation applicable to oil and gas production

Information on application of fiscal and regulatory terms to specific licenses

Outlook on future of fiscal and regulatory terms in Ukraine

Reasons to buy

Understand the complex regulations and contractual requirements applicable to Ukraine’s upstream oil and gas sector

Evaluate factors determining profit levels in the industry

Identify potential regulatory issues facing investors in the country’s upstream sector

Utilize considered insight on future trends to inform decision-making

Table of Contents

1. Table of Contents

1. Table of Contents 1

1.1. List of Tables 3

1.2. List of Figures 3

2. Regime Overview 4 ...

1. Table of Contents

1. Table of Contents 1

1.1. List of Tables 3

1.2. List of Figures 3

2. Regime Overview 4

3. State Take Assessment 7

4. Key Fiscal Terms – Royalty/Tax 8

4.1. Subsoil Use Fees (2013 onward) 8

4.1.1. Commodity Valuation (P) 8

4.1.2. Subsoil Use Fee Rates 9

4.1.3. Adjustment Coefficient (A)) 11

4.1.4. Reduced Rate (Only for Companies With at Least 25% State Ownership) 11

4.2. Pre-2013 Regime 12

4.2.1. Rental (Royalty) (Abolished December 31, 2012) 12

4.2.2. Subsoil Tax 15

4.2.3. Geological Tax (Abolished December 31, 2010) 15

4.3. Gas Export Duty 16

4.4. Direct Taxation 17

4.4.1. Corporate Income Tax (CIT) 17

4.4.2. Deductions and Depreciation 17

4.4.3. Withholding Tax 19

4.5. Indirect Taxation 19

4.5.1. Value-Added Tax 19

4.5.2. Unified Social Contribution 19

5. Key Fiscal Terms – Production Sharing Agreements 20

5.1. Upfront Payments 20

5.1.1. Bonuses and Fees 20

5.1.2. Subsoil Use Fees 21

5.2. Cost Recovery 21

5.2.1. Limit on Recovery 21

5.2.2. Recoverable Costs 21

5.3. Profit-Sharing 21

5.3.1. Export Duty 22

5.4. Direct Taxation 22

5.4.1. Corporate Income Tax (CIT) 23

5.4.2. Fiscal Stability 23

5.5. Indirect Taxation 23

5.5.1. Value-Added Tax 23

5.5.2. Customs Duties 23

5.6. State Participation 23

6. Regulation and Licensing 24

6.1. Legal Framework 24

6.1.1. Governing Law 24

6.1.2. Contract Type 25

6.1.3. Title to Hydrocarbons 25

6.2. Institutional Framework 26

6.2.1. Licensing Authority 26

6.2.2. Regulatory Agency 27

6.2.3. National Oil Company 27

6.3. Licensing Process 27

6.3.1. Auctions for Special Permits 28

6.3.2. Direct Award of Special Permits 29

6.3.3. Award via PSA Tender 30

6.4. License Terms 31

6.4.1. Duration 31

6.4.2. Work Obligations 32

6.4.3. Domestic Market Obligations 32

6.4.4. Local Content 32

7. Outlook 33

8. Appendix 34

8.1. Bibliography 34

8.2. Contact Us 37

8.3. Disclaimer 37

List of Tables

1.1. List of Tables

Table 1: Regime Overview 4

Table 2: Ukraine, Subsoil Use Fee Rates (%), 2018 Onwards 9

Table 3: Ukraine, Subsoil Use ...

1.1. List of Tables

Table 1: Regime Overview 4

Table 2: Ukraine, Subsoil Use Fee Rates (%), 2018 Onwards 9

Table 3: Ukraine, Subsoil Use Fee Rates (%), 2013 – 2017 10

Table 4: Ukraine, Crude Oil Rental Rates, 2001–2012 13

Table 5: Ukraine, Condensate Rental Rates, 2001–2012 13

Table 6: Ukraine, Gas Rental Rates, 2001–2012 14

Table 7: Ukraine, Subsoil Tax, Oil, Condensate and Gas 2001–2012 15

Table 8: Ukraine, Geological Tax Rates, 1999–2012 16

Table 9: Ukraine, Corporate Income Tax Rates, 1991 onwards 17

Table 10: Ukraine, Minimum Useful Lives (years), Fixed and Non-Current Assets (other than wells), 2015 Onwards 18

Table 11: Ukraine, Pre-2015 Development Well Depreciation Schedule 19

Table 12: Ukraine, Bonuses and Fees, Yuzivska PSA, 2013 20

Table 13: Ukraine, Profit-Sharing (%), Yuzivska PSA (2013) 22

Table 14: Ukraine, Profit Sharing (%), Oleska PSA (2013) 22

Table 15: Ukraine, Special Permit Bidding Increments 29

Table 16: Ukraine, Special Permit Maximum Duration (years) 31

Table 17: References 34

List of Figures

1.2. List of Figures

Figure 1: Regime Flow Chart – Royalty/Tax 5

Figure 2: Regime Flow Chart – Production Sharing Agreement 6

Figure 3: Ukraine ...

1.2. List of Figures

Figure 1: Regime Flow Chart – Royalty/Tax 5

Figure 2: Regime Flow Chart – Production Sharing Agreement 6

Figure 3: Ukraine, Indicative NPV10/boe, IRR and State Take Comparison, Regional 7

Figure 4: Ukraine, Legal Framework 24

Figure 5: Ukraine, Institutional Framework 26

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