A recent decision by the Cabinet of Ministers orders private gas producers to pump 50 percent of their output to state-owned underground gas storage (UGS) facilities, to be safeguarded for the winter.
The June 19 decision, which had not been published on any government website before the Kyiv Post went to print, states that for the period of July 1 to Oct. 15, gas producers are obliged to pump “not less than 50 percent” of gas to storage facilities “with the right to take it back from the UGS for further sale to customers in the autumn-winter period.”
The resolution only became public because information agencies who were present at the Cabinet meeting reported on it.
The new rule does not apply to companies that are majority-owned by the state, and to those working on joint projects with state-owned enterprises. Only independent producers must comply with the order.
Energy Minister Eduard Stavytsky said he hopes Ukraine can amass an additional 1 billion cubic meters of gas as a result of introducing the new regulation, according to Ukrainian News. The Ministry of Revenues and Duties has one month to prepare the necessary amendments to the Tax Code, according to the Cabinet decision.
Predictably, producers are not thrilled about picking up the burden and are not rushing to fill the government-owned storage with their gas. Last year private companies produced 1,978 million cubic meters of gas, about 9-10 percent of overall production.
The new rules could lead to substantial financial losses, the financial director of Poltava Gas and Oil Company Evgheniy Palenka believes. His enterprise is a subsidiary of the London-listed JKX Oil&Gas, one of the five biggest Ukrainian private gas producers.
“If we have to pump into storage 50 percent of produced gas, at the moment we will still have to pay taxes on production and income tax for the previous year. It means that pumping of the 50 percent of gas will lead to negative effects on cash (flow) of gas producers. In addition, it will be necessary to declare force majeure on gas contracts,” Palenka says.
Another problem is that the Cabinet document only provides some details on how the new regulation should work, CMS Cameron McKenna LLC partner Vitaliy Radchenko says. It’s still unclear who exactly should pay for the pumping and storing the gas. Also, the state energy regulator also raised tariffs for pumping, transportation and storing gas, Radchenko adds.
Radchenko says producers could potentially lose out in three ways: on selling just half their product immediately, if they have to cover pumping and storage expenses, and if their gas is not returned in the autumn-winter period as promised.
Shell Ukraine head Graham Tiley said the firm was worried about “legislative attempts to intervene in the operation of the gas market, especially in terms of pricing, settling obligations to sell gas to certain groups of consumers, etc.”
Clients who buy gas directly from private producers could also be affected. Malyn Paper Mill board chairman Andriy Panchenko, who usually receives gas from Shell, says disruption in gas supplies could cost the company millions of dollars that could force him to shut down furnaces.
As the law has yet to be published, and has thus not yet come into force, experts and industry actors hope they will be able to change the government’s mind, and spur it to find a different solution to Ukraine’s gas dilemma.
Kyiv Post staff writers Kateryna Kapliuk and Svitlana Tuchynska can be reached at [email protected] and [email protected], respectively.
