Royalties on oil & gas production will be significantly reduced in Ukraine

On 7 December 2017, the Ukrainian parliament adopted draft law No. 6776-d "On Amendments to the Tax Code of Ukraine Concerning Balancing of the Budget Income for 2018" (the "Draft Law"). This Draft Law significantly reduces royalties on oil & gas production in Ukraine with a view to incentivising local production in Ukraine and raising attractiveness of the industry for investment. It will enter into force on 1 January 2018, subject to Presidential signature and the official publication (except for certain provisions that will become effective later).

Key relevant changes relate to the following:

Special reduced royalties will apply for new wells

To incentivise the development of new wells, the Draft Law introduces reduced royalties for new wells where the drilling will begin from “zero level” after 1 January 2018, which will be confirmed by the act of putting into operation a drilling rig. The reduced royalties for the production of natural gas from these new wells will apply as follows:

  • 12% for fields less than 5,000m in depth (currently, the royalty is 29%);
  • 6% for fields at a depth greater than 5,000m (currently, the royalty is 14%).

An exemption is made for natural gas produced under joint activity agreements; it will not have the benefit of reduced royalties.

No increase on royalties on new wells during five years

The Draft Law contains a stabilisation clause providing for a five-year moratorium, from 2018 to 2023, on any increase in royalties on the production of natural gas from new wells. Сompanies can still opt for any new tax incentives on natural gas production should they be introduced in the future.

Royalties for the natural gas condensate production will be reduced

The royalties on natural gas condensate will be reduced by the Draft Law from 1 January 2019, as follows:

  • from 45% to 29% for production from fields less than 5,000m in depth;
  • from 21% to 14% for production from fields at a depth greater than 5,000m.

Special reduced royalties will be established for natural gas and oil produced under production sharing agreements

The Draft Law establishes the special reduced royalties for oil & gas produced under production sharing agreements as follows:

  • 2% for oil and natural gas condensate; and
  • 1.25% for natural gas.

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