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

On September 20, 2022, the Parliament of Ukraine approved draft law No. 7732 “On amendments to subsection 10 of Chapter XX “Transitional provisions” of the Tax Code of Ukraine (concerning specifics of taxation with royalty use of the subsoil for the production of natural gas)” . The bill modifies the mechanism determining the actual selling price of natural gas, since the royalty for the production of natural gas is determined by its actual selling price.

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

At present, the actual sale price of natural gas used for the needs of domestic consumers and thermal power producers 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 constitutes the natural gas resource for domestic consumers (i.e. Naftogaz) and thermal energy producers.

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

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

Bill No. 7732 proposes to establish that the actual selling price of sales of natural gas extracted in Ukraine from August 1, 2022 is the maximum of one of the following three values:

  • Weighted average gas price in UAH, which is specified in purchase and sale contracts with Naftogaz of Ukraine
  • Weighted average price of gas in UAH based on auction results on organized commodity markets. Besides Naftogaz of Ukraine and its controlled companies
  • UAH natural gas price, which is an average arithmetic quote of UA VTP gas price on “advance payment” terms for the next month and the value between “Bid” and “Ask” prices

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

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