The Ukrainian Parliament changes the mechanism determining royalty for natural gas production in Ukraine

On 20 September 2022, the Ukrainian Parliament approved draft law No. 7732 "On Amendments to Subsection 10 of Chapter XX "Transitional Provisions" to the Tax Code of Ukraine (regarding the specifics of taxation with subsoil use royalty for the natural gas production)". The draft law changes the mechanism determining the actual sale price of natural gas, since the royalty for natural gas production is determined by its actual sale price.

As a result of the military aggression of the Russian Federation, there is a ban on the export of gas to Ukraine, so gas must be sold in Ukraine or pumped into storage. By Law No. 2261-IX dated 12 May 2022, the Ukrainian Parliament temporarily cancels the obligation to pay subsoil use royalty for the natural gas production for those volumes of gas that were not sold by production companies but were pumped into storages. This law applies from 1 April 2022 until the last day (inclusive) of martial law in Ukraine.

At the moment, the actual sale price of natural gas used for the needs of domestic consumers and producers of thermal energy is the price specified in the contract for the sale and purchase of natural gas between the production companies (i.e. Ukrgasvydobuvannya, Chornomornaftogaz) and the entity that forms the resource of natural gas for household consumers (i.e. Naftogaz) and heat energy producers.

The actual sale price of natural gas for industrial consumers is an average arithmetic quotation of prices on European exchanges, hubs and the customs value of imported gas.

Producing companies that sell gas for the population's needs sell it cheaper than they pay royalty for its extraction. As a result, extracting gas became unprofitable, leading to even greater import dependence.

The Draft law No. 7732 proposes to establish that the actual sale price of natural gas sales extracted in Ukraine from 1 August 2022 is the maximum of either of three values:

  • UAH weighted average gas price, which is specified in the purchase and sale contracts with Naftogaz of Ukraine
  • UAH weighted average gas price based on the results of auctions on organized commodity markets. In addition to Naftogaz of Ukraine and its controlled companies
  • UAH price of natural gas, which is an average arithmetic quotation of the UA VTP Gas price on the terms of "advanced payment" for the next month and the value between the "Bid" and "Ask" prices

The draft law provides for such changes from 1 August 2022 until the complete cancellation of any ban on the export of natural gas. Such novelties will allow gas extractors not to incur losses and continue to extract gas in Ukraine, reducing dependence on imports.

For more information, please contact Asters' Partner Yaroslav Petrov.

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