Ukraine s Gas Industry Reform: Rhetoric and Reality

Transcription

1 Ukraine s Gas Industry Reform: Rhetoric and Reality 1

2 Independent Producers: Only Source of Ukraine s Gas Production Growth in Recent Years Gas production dynamics in Bcm Bcm Distribution of gas production 2014 Total gas production (LHS) State-Own (LHS) Private (RHS) Gas production by state-owned companies has stagnated and recently declined (lack of investment and loss of Crimea) Independents experienced gas production surge, responding to favorable changes in market conditions (high netbacks, access to market) Over the past two years independent gas production has surged (30% in 2014) Private gas production now at 3.1bcm (17% of total; 25% with JAAs) Ukrgazvydobyvannya 14.0 Ukrnafta JAAs (with Ukrgazvydobyvannya and Ukrnafta) Other independents Independents hold nearly 100bcm of gas reserves, which means they could, in theory, increase their production to 5-6 Bcm/year quickly But most of these reserves are relatively difficult to develop (small, deep, tight) and require a favorable investment environment Chernomornaftogaz Source: Energobiznes, Ministry of Energy and Coal, State Statistics Service, Interfax 2

3 Punitive Tax Rates for Private Producers, First Introduced as Temporary Measure, Were Made Permanent on December 29, 2014 Changes in subsoil fees* in gas production Independents: sales to industrial users (< 5000m depth) Independents: sales to industrial users (> 5000m depth) Naftogaz: sales to domestic sector (> 5000m depth) Naftogaz: sales to domestic sector (> 5000m depth) 20% 14% 28% 55% 2014 (since August) 2014 (until August) % 10% 20% 30% 40% 50% 60% Subsoil fees** (equivalent of royalty) jumped substantially: From 28% to 55% above 5,000 meters (m) From 15% to 28% below 5,000 m Fifth increase in tax within last four years Effective royalty maximum rate is 66% Additional measures: 70% royalty for Joint Activity agreements Elimination of 2-year tax breaks for new wells introduced in August 2014 Elimination of preferential (2%) royalty for PSA All recommendations from producers, domestic and international experts, and the IMF (!) ignored Result: Ukraine presently boasts one of the worst hydrocarbon fiscal regimes in Source: IHS Energy, Ukraine Tax Code Robert 2014 Bensh, IHS Leadville the Resources world with marginal tax rates over * Includes both royalty and subsoil fee when applicable prior to % ** Expressed as a percentage of maximum price. 3

4 Temporary Gas Market Restrictions Imposed Monopoly By Decree for Gas Sales to Industrial Users To Cover Naftogaz Financial Deficit Share of Naftogaz in Ukraine's domestic gas market % 86% Until recently, access to market has been relatively easy (share of private participants grew until 2014) Severe restrictions on market access imposed in 2014: Bcm Other suppliers Naftogaz supplies 71% 57% 43% 29% 14% 0% 170 largest industrial customers forced to purchase gas from Naftogaz De facto monopoly on imports imposed in spite official liberalization in 2011 This has severely limited gas marketing options and led to large discounts to the maximum sales price (and even higher effective royalty) for private producers Several appeals from European Energy Community (EEC) ignored! Growing evidence of continued restriction on access after March 1, 2015: Draft law on Emergency Situations Naftogaz proportionality principle Other Naftogaz share, (RHS) Source: Ministry of Energy and Coal, State Statistics Service, Interfax 4

5 The Result: Less Gas Produced, More Imports and Lower Tax Collection in $ 300$ Gas production by private producers under two tax regimes ,7 ~15% of existing production capacity currently shut in during winter Bcm 4 3 3,1 Import 6 bcm less gas to be produced in the next 3 years ,7 resulting in USD 1,5-2 billion spent on gas imports from hard currency reserves ProducDon tax rate 55/28% Assump*on: 250$ per 1000 cm, years ProducDon tax rate 28/15% 1. Excluding gas of private companies within JAAs and joint ventures with state- owned enterprises. 2. Excluding CIT, VAT and salary taxes. 3. Exchange rate USD 1 = UAH 17. Source: workgroup analysis, companies data Effect on royalty collection will be neutral (tax increases offset lower production), but this does not account for losses in VAT, CIT and salary taxes 5

6 Possible Causes and Likely Implica*ons Possible Explanations (two extremes): Victims of circumstance Emergency situation Financial crisis Populism (tax the oligarchs!) All part of a plan Asset revaluation Control Channelling foreign investment Implications Damage done to Ukraine s investment environment Integrity of Ukraine s gas reform process in question (form over function?) Ukraine unlikely to realize its considerable gas resource potential under current industry structure 6

7 The Real Prize IHS View of Ukraine s Gas Production Potential (2012) Current Domes*c Consump*on Assumption: US$10 bln investment per year and thus a stable investment environment, as Robert well Bensh, as Leadville an attractive Resources fiscal regime 7

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9 Cross Subsidy: Key Problem for Ukraine s Gas Industry Gas prices for different categories of consumers and import gas price in Ukraine Structure of Ukraine s Gas Market in USD/Mcm BCM Industry Pipeline needs District heating cross subsidy 5.4 Bcm Independents Storage Reverse flow from Europe Imports from Russia Import gas price District heating companies Industrial users (wholesale price) House holds Consumption categories Ukrgazdobycha Chernomor NG and Ukrnafta Sources of Supply Households (weighted average without a meter) Source: workgroup analysis, NERC, Interfax 9

10 Naftogaz key problem has been non-payments 4 Gain/loss from domestic gas sales $ billion Annual non-payments by consumers Gain from gas transit to Europe -4 Revenues from domestic gas transportation Naftogaz annual gain/loss Source: IHS Energy 2014 IHS Non- payments first and foremost in the hea*ng sector have grown over the years 10

11 Ukraine now has by far highest royalty rates in Eastern Europe on upstream production Ukraine s marginal tax rates now resemble those of a hydrocarbon exporter rather than those of its true peers Ukraine Independents, sales to industrial users Hungary Romania Croatia 60% 60% 60% 60% 50% 50% 50% 50% 40% 30% 20% 10% 0% 28% > 5000m depth Tax rates differentiated by field depth Profit tax 18% Source: IHS Energy 55% < 5000m depth Tax concession provided for two years for new wells included (45% discount to applicable tax rate) 40% 30% 20% 10% 0% 18% 12% 12% unconventional 36% 30% production production <=0.3 > 0.5 Bcm/ Bcm/year year Tax rates differentiated by production volumes Tax rate depends on oil price level Lowest tax rate of 12% applied to mature fields and unconventional production Profit tax 19% 40% 30% 20% 10% 0% 26% 27% 4% 8% production <=0.12 Bcm/year production Bcm/year Tax rates are differentiated by production volumes 28% 13% production > 2.4 Bcm/ year Tax rates increased in 2014 as part of price liberalization reform; but tax reduced by investment in E&P and by applies to only incremental revenue above previous royalty Profit tax 16% 40% 30% 20% 10% 0% 10% same for all producers Higher tax rate only applies to new licensing round No differentiation in tax rates Profit tax 20% 2014 IHS 11

12 Result: Among lowest producers margins regionally for conventional onshore gas and globally for onshore unconventional gas Estimated Costs and Margins for Selected Gas Production Projects Capex Opex $/Mcm E&A Govtake Margin 50 0 Source: IHS Energy Ukraine: Donets- Dnieper onshore gas Hungary: Pannonian onshore gas Poland: North Carpathians onshore gas Romania: Carpathian onshore gas Canada: Utica Basin shale gas US: Eagle Ford shale gas Argentina: Neuquen shale gas Note: From IHS Global Window for hypothetical projects; solved for price at which project NPV = zero; this break-even price is than arrayed against prevailing market price to determine indicative margin IHS 12

13 Tax Burden Increase in Combination with Falling Price for Natural Gas Create Perfect Storm for the Sector - JKX/PPC Case Study PPC's margin after production tax expense, $ / mcm PPC s estimated direct production expense expenses are equal to 150 $ / Tcm % Gas price % 28% 55% % 55% Gas price: 360 Tax rate: 28% Gas price: 360 Tax rate: 55% Gas price: 300 Tax rate: 28% Gas price: 300 Tax rate: 55% Gas price: 250 Tax rate: 28% Gas price: 250 Tax rate: 55% PPC's margin a_er producdon tax expenses ProducDon tax expenses 13

14 More than 70% of Ukraine s gas prospective resources (C3) are deep and expensive to explore and appraise Distribution of natural gas resources (C3) in Ukraine by depth 4-5 tcm of conventional gas remains to be found on-shore Ukraine 31% 19% 29% 21% These deep, hard-to-recover resources represent future of Ukraine s gas industry Bcm, or 71% of prospective resources are below 3 km Yet relatively little exploration is taking place due to lack of fiscal stimulus (even under the old tax rates) Current tax breaks not good enough for most deep appraisal/ exploration opportunities < 3 km 3-4 km 4-5 km > 5 km Source: IHS Energy 2014 IHS 14

15 Ukraine needs more small independents to develop its still large but increasingly mature resource base After over 100 years of production, Ukraine s main producing areas Carpathian and Dnepr-Donetsk basins are very mature: Cheap Soviet-era gas fields operated by Naftogaz rapidly running out Remaining reserves increasingly harder to extract due to quality and scale Great deal of recent focus on developing unconventional gas resources, but timeline for their development is likely to be long (uncertainty around geology and development cost) Meanwhile,1 tcm of conventional gas reserves still remain R/P ratio is close to 50 years compared to 14 years on average for the EU suggesting that Ukraine could significantly increase its gas production in the short term Opportunities for quick wins include: Existing field redevelopment (more than half of Naftogaz reserves are not fully in production, 27% due to lack of investment and technology) Small field development (third of Ukraine s reserves now in small fields (less than 5bcm); nearly 100 discovered small fields not in production But these will require capital, technology and focus, namely a large number of small hydrocarbon producers developing their own niche businesses 15

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