Distribution of Rent in Extractive Industry Discussed in Kharkiv Region
18 May 2017

On May 16, at a meeting of the Kharkiv Oblast Local Government Association, experts of the NOVA Energia NGO initiated a public discussion on the topic: Strengthening the Local Financial Initiative of Kharkiv Extractive Regions. The discussion participants included representatives of central government authorities, local governments, the public, and mass media from the Kharkiv oblast.

The experts of the NOVA Energia NGO have told the participants about the legislative changes and legislative initiatives in regulating the extractive sector operations. The event participants have discussed the distribution of the rent paid by oil and gas companies and the issues related to the financing of extractive regions.

One of the most important taxes paid by extractive companies to the state (rent for use of subsoil resources) is now fully remitted to the state budget. At the same time, the regions where minerals are actually extracted experience a number of problems (destruction of transport infrastructure, worsening of environmental conditions, worsening water supplies etc.) to address which they are lacking funds.

On 20 December 2016, the Verkhovna Rada of Ukraine (VROU) passed the Law #1793-VIII “On Amending the Budget Code of Ukraine with Regard to Crediting the Rent for Using Subsoil Resources for the Extraction of Oil, Natural Gas, and Gas Condensate,” according to which as of 1 January 2018, 5% of the rent for use of subsoil resources for the extraction of oil, natural gas, and gas condensate shall be retained by extractive regions (including 2% to be remitted to the oblast and raion budgets, 1% to local government budgets, and 3% to budgets of oblast-significant cities and amalgamated territorial communities, where hydrocarbons are actually produced).

According to the State Fiscal Service, the Kharkiv Regional Office of the Ukrainian Treasury received about UAH 13 billion in rent in 2015, and UAH 15.8 billion in 2016. Five percent of this sum will amount to UAH 790 million. These are the funds that the Kharkiv oblast can potentially receive next year according to the adopted Law #1793-VIII, and this amounts to 3.4% of the oblast’s 2016 consolidated budget. Accordingly, raion budgets of extractive regions may receive about UAH 300 million (2%), and local government budgets about UAH 150 million (1%).

At the same time, gas extracting companies are lobbying the bill #5459 “On Amending the Tax Code of Ukraine” to try and introduce a stimulating rate of the rent for use of subsoil resources for the extraction of natural gas from new wells. According to this bill, the rent for use of subsoil resources will amount to 12% for the natural gas extracted from the wells, the drilling of which started after 1 January 2017, irrespective of the deposit depth (other than the natural gas extracted under joint operation agreements).

Supporters of this bill refer the Concept Paper of Ukraine’s Gas Extracting Industry until the Year 2020, according to which state-owned companies are expected to increase gas production up to 20bn cu m by the year 2020 (14bn cu m at present) through commissioning of new wells.

The companies, however, may use this provision to their own benefit by stepping up production from new wells, “reopening” the wells previously mothballed, and suspending the currently producing wells in order to minimize their taxes. In this case, extractive regions will be left without the abovementioned revenues.