Burisma Holdings urges fiscal regime change and deeper Ukrainian gas market reforms

September 11, 2015

Burisma Holdings, Ukraine’s largest independent gas producer, took part in round-table discussions on Ukrainian energy strategy organized by the weekly periodical “Zerkalo Nedeli. Ukraine” together with Newfolk consulting company.

Energy experts, journalists, parliamentarians and representatives of private and public gas companies in Ukraine raised the question – “Will Ukraine keep its gas: production, taxes and investments”. Not surprisingly, they once again called for a productive and timely enactment of the domestic gas market reform, as well as feasible changes to state fiscal policy required to win back investor confidence.

Burisma Holdings’ CFO Alexander Gorbunenko believes that bringing rental rates back to the 29/14 level as announced earlier in July by the Finance Minister Natalia Yaresko and the Ukrainian PM Arseniy Yatsenyuk at the Washington investor meeting, is a clear attempt to rectify a mistake that could have been avoided in the first place, and would have spared the industry grave repercussions it has been dealing with over the last twelve months.

“Compared to 2013, past year saw only a 40% growth for private gas producers. In contrast, during a five-year period from 2009 to 2013, the industry has almost doubled. In the first year-half 2015, our Company has managed to keep the old production volumes without the usual double-digit growth. “Due to the lack of consistent fiscal policy and constant empty promises coming from the authorities, it is going to take Ukrainian gas industry at least two years to get back on track”, said Alexander Gorbunenko.

Currently, apart from its promise to bring rental rates back to adequate levels in order to increase investment activity, the Ministry of Finance is closely working on a large-scale reform process of the entire national hydrocarbon market. This primarily relates to the Law of Ukraine on “Natural Gas Market” expected to be enforced on October 1, 2015. This law will implement key EU regulations, rules and principles of the Third Energy Package that would serve as a foundation for domestic gas market liberalization, as a strategic resource for Ukrainian economy. 

At the same time, representatives of independent gas companies and other market players fear that this reform may only have a declarative character. With introduction of certain provisions, it may cause even greater industry crisis and stagnation, which in the end could bring a significant reduction of gas production volumes in Ukraine and result in stronger dependence on external suppliers. 

“The initiative on compulsory insurance stock in monthly supply volumes basically means that we, as a producer, will be paying for the gas received by our consumers”, says Alexander Gorbunenko.  “By all means, there should be certain supply security. However, when it comes to operating companies, our greatest guarantee is mineral resources and natural gas coming from wells evenly and permanently with little to no risk of unexpected setbacks. This month, around 80-90% of production volumes from previous periods (the average amount of production for 1, 3 or 6 months prior) may be subject to exception.

Should rules be applied in full at the level of operating companies that have a direct relationship with its suppliers, private gas production may come to a halt or trigger a drastic price surge that will most likely render natural gas economically unviable for industrial consumers.”

The participants expressed their concern that legal framework for the new law has not yet been finalized neither at regulatory, nor at a practical level. What is more, it may send negative signals to both current and potential investors saying that some important initiatives are just another statement or a commitment made ​​solely to proceed with the IMF negotiations. At this point, it could adversely affect business climate in Ukraine and its energy security in the future. It is clearly early to consider the reform as a reflection of the final position of the Government.

Further risks that could affect continuous industry development were noted as well. The key ones being overall confidence, trust between the market and the state undermined within past 12 months, adoption of the law on amendments to the Tax Code on rent calculation and payment mechanism relating to gas injection into UGS, transparency and disclosure in accordance with the Extractive Industries Transparency Initiative in Ukraine (standard EITI), and etc.

“We urge all interested parties to join efforts and expertise in working together with the Ministry of Energy and Coal Industry of Ukraine, the National Electricity Regulatory Commission of Ukraine, deputies, and key market players to provide high-quality and timely completion of all necessary reform regulations by October 1, 2015 “, noted Alexander Gorbunenko.

 

For more detailed information please contact our press-center: media@burisma.com

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