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Lean times for oil and gas producers? Tax Code hikes royalties and subsoil charges
Author: Oleksiy Didkovskiy and Yaroslav Petrov
Source: International Law Office. - 17 January 2011. - http://www.internationallawoffice.com/newsletters/detail.aspx?r=22140
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The newly adopted Tax Code, which came into effect on January 1 2011, has significantly increased royalty payments and charges for subsoil use. Royalty payments have risen by approximately 16% for natural gas and almost 29% for oil and gas condensate. Charges for subsoil use have increased by approximately 66% for oil and gas condensate and almost 90% for natural gas, calculated in units of 1,000 cubic metres (m3).

As previously, royalty payments under the new code vary according to the depth of extraction. Royalty payments for natural gas also depend on whether the gas is to be sold for supply to residential customers - a statutory requirement for companies and joint ventures in which the state holds an interest of 50% or greater - or to other customers, such as industrial and commercial operators. The charges are set out in the table below.

Type of resource

Terms and conditions

Quantity and depth of extraction

Royalty payment

Natural gas

Sold for supply to residential customers

Per 1,000m° produced from depth of less than 5,000m

UAH59.25 ($7)

Per 1,000mJ produced from depth of over 5.000m

UAH47.40{$6>

Per I.OOOrn1 produced offshore

UAH 11.S5 {Ф1.50)

Sold to other customers

Per I.OOOnr1 produced from depth of less than 5,000m

UAH237C$30)

Per 1.000mJ produced from depth of over 5,000m

UAH118.50 [$15)

Oil and gas condensate

Per ton produced from depth of less than 5,000m

UAH2.1+1.86 (£270)

Per ton produced from depth of over 5,000m

UAH792.54(£100)

Royalty payments for natural gas, except in respect of natural gas that will be sold to supply residential customers, are subject to upward adjustment by the application of a multiplier. This multiplier is calculated by dividing the average customs value of natural gas imported into Ukraine in the previous reporting month by the base price of natural gas, which is fixed by the code at the equivalent of $179.50 per 1,000 m3.

Royalty payments for oil and gas condensate are also subject to upward adjustment. In this case the multiplier is based on:

the price of Urals oil on the London Stock Exchange (converted into hyrvna using the exchange rate set by the National Bank of Ukraine) on the first day of the month following the reporting month; and a base oil price of UAH560 ($70) a barrel.

The code sets charges for production of oil and gas condensate at UAH147.63 ($18.50) a ton and UAH37.78 ($5) for exploration and production of 1,000 m3 of natural gas. Charges may be subject to multipliers set by statute.