Ukrnafta has received a formal notification from the State Service of Geology & Mineral Resources of Ukraine that 16 licenses could be suspended, in addition to the three recent suspensions that cut off oil and gas supplies.
Suspension of these 16 licenses will stop production of approximately 320 thousand tons of oil and 210 million cubic meters of natural gas in 2016. Critically, this will prevent Ukrnafta from paying forecasted rent tax of just under 1 billion UAH for these fields in the next 12 months. This is a significant portion of Ukrnafta’s annual production and places undue stress on the Ukraine’s energy security and the future growth of company. The majority of the reasons used as a basis for these suspensions are related to the ongoing historical rent-tax liabilities while others cite reasons that have been previously resolved.
The licenses are from across Ukrnafta’s portfolio – both from East and West Ukraine, and have similar complexities to the recently suspended 3 licenses. Stopping production will again affect communities that depend on gas produced from these fields, requiring an urgent resolution to this matter.
Furthermore, significant costs will be required to safely suspend production facilities and the many producing wells, which will inevitably be damaged during the suspension process and may never return to current levels of production further compromising future rent-tax cash flows to Ukraine. Once the wells and facilities are suspended, the company will be required to review manpower requirements, including redundancy, due to extreme cash flow constraints. Ukrnafta will decrease or suspend ancillary operating services, which will have a primary and secondary effect on the communities, especially in the West region where Ukrnafta is the main employer. Ukrnafta estimates that approximately one 1,000 employees – either directly or indirectly, will be affected by this license suspension.
One of the licenses under this suspension order is Verkhne-Maslovetskoe Field, where Ukrnafta recently announced the spudding of the first development well in 2016. Presently, the drilling of this well has been suspended and management is evaluating additional options of further minimizing operating costs, thereby creating an additional loss for both Ukrnafta and Ukraine.
“At times of long-lasting world oil price decrease, special permits suspension would be the most radical measures, which neither the company nor the state will benefit from. This practice of licenses suspension won’t generate any more tax to the state budget. On the contrary, it will neither let the company settle its existing tax liabilities, nor pay its current monthly tax to the state and local budgets, as it will significantly reduce oil and gas production”, – said Ukrnafta’s Chairman of the Executive Board Mark Rollins.
Is is important to note that with the new management, Ukrnafta PJSC has resumed paying its current tax and paid off its dividend debt to the majority shareholder. Despite the long-lasting decrease of the world oil prices, the company endeavors to produce oil and reinvests into the assets to increase hydrocarbon production.
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