Ukraine oil and gas 2019: a look at the nation's petroleum fiscal framework
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Improved fiscal terms but possible political risks in Ukraine upstream industry

03 May 2019 (Last Updated May 7th, 2019 12:45)

Ukraine is currently organising a series of licensing rounds for 2019 through several online concession tenders and a PSA tenders.

Improved fiscal terms but possible political risks in Ukraine upstream industry
Ukraine is currently organising a series of licensing rounds for 2019 through several online concession tenders and a PSA tenders.

Over the past 10 years, Ukraine has modified several elements of its petroleum fiscal framework, which will continue to be based on both concessions and production sharing agreements (PSA).

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 oil and gas 2019

Ukraine is currently organizing a series of licensing rounds for 2019, which will offer around 40 blocks, both onshore and offshore, through several online concession tenders and PSA tenders. These licensing rounds are part of the country’s strategy to increase its domestic production.

All new awards will be based on the reduced royalty fees, effective from January 2019, which should partially reduce the front-loaded state take improving the cash flows required for the licensees in a country that still has elevated regulatory and political risk.

Overall, it is likely that policies will continue to look to support the sector, as the government is committed to increase gas production to 27-30 billion cubic meters of gas by 2020.

Despite these improvements, the petroleum fiscal framework has been modified several times over the last 10 years, and it is possible that for economic and political reasons it may change again in the coming years.

Figure: Ukraine, Regime Flow Chart – Royalty/Tax

Source: GlobalData

Zelenskiy’s political agenda

The first task for the newly elected Ukrainian president Volodymyr Zelenskiy will be to provide a defined political agenda, which was not part of his electoral campaign. Most of the voters expect the new administration to reduce gas prices for households, implement anti-corruption regulations and lower the wages of civil servants. ]

However, Ukraine needs to stabilise and increase its economic growth. It is still unclear what economic reforms the new administration will implement. Moreover, especially in relation to economics, it won’t be easy to replace former President Poroshenko’s administration, which improved the economy (2.5% GDP growth), established better relations with the European Union and the International Monetary Fund, took measures to reduce corruption (in spite of Poroshenko’s campaign being marred with a corruption scandal itself), raised the level of both the healthcare and the banking sector, and created an effective Ukrainian army.

These improvements at the state level did not translate into tangible and, more importantly, understandable benefits for the Ukrainian citizens, who experienced higher utility bills (gas), low wages coupled with currency devaluation and the reduction of social security networks.

Foreign relations

Relations between Ukraine and Russia will continue to be tense, with Russia using the energy lever to move forward its interests in Ukraine. Russia did not support any of the three main candidates in Ukraine’s presidential elections, although initially had a neutral stance toward Zelenskiy. This changed during the last part of the electoral campaign when Zelenskiy proposed a confrontational stance toward Russia.

Energy outlook

As a response, a few days before the second round of the presidential election, Russia declared its intentions to introduce restrictions for exports of both crude oil and crude oil derivatives to Ukraine with effect from 1 June 2019. These energy restrictions may have a heavy economic impact on Ukraine, as Russia may increase the price of its exports or find a way to partially or fully restrict exports to Ukraine.

It’s worth recalling that in November 2015, Ukraine stopped importing natural gas directly from Russia; since then, Ukraine has been importing Russian natural gas via reverse flows from Hungary, Poland, and Slovakia. In addition, Russia is building two new gas pipelines to export gas to Europe which bypass Ukraine ─ the Nord Stream 2 pipeline, offshore the North Sea from Russia to Germany, and the TurkStream pipeline, offshore the Black Sea from Russia to Turkey. Once the pipelines are complete, Ukraine’s position as a transit hub toward Europe (including transit fees) will diminish and for Ukraine it will be more difficult to access gas through the reverse flows.

Petroleum fiscal framework

The present political and macroeconomic instability does not rule out the possibility of new fiscal and regulatory changes to the petroleum fiscal framework, which may deter prospective investors. In 2019, Ukraine has launched three online concession tenders and two PSA tenders. The first two online concessions tenders, already concluded, have been disappointing, with limited interest received from international energy companies whose capital and technology Ukraine needs to develop its hydrocarbons sector. The first online concession tender was concluded on 6 March, with the assignment of 3 blocks (out of 10) to Neftegazopromyshlennaya Geology LLC (Burisma Group), DTEK Naftogaz, and UGV. The second online concession tender was concluded on 2 May with the assignment of 6 blocks (out of 7) to UGV (5 blocks) and Yedyna O&G Company (1 block). Bid submissions will close for the third online concession tender on 18 June. The round offers 9 blocks, but it is unlikely that many international energy companies will participate in the round.

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