Ukrnafta’s 2018 financial plan envisages repayment of UAH 1.2 bln of the overdue tax debt, which amounted to UAH 11.85 bln as of the end of last year. The company’s plan depends on the price for Urals oil remaining at or above $50 per barrel throughout the year, as well as on the timely renewal of 27 licenses.
At the same time, blocking by the state authorities of renewal of 27 licenses and subsequent stoppages may affect negatively Ukrnafta’s ability to repay part of the tax debt this year. Another risk factor could be the instability of the state-run oil auctions where the company is required to sell oil and condensate at the regulated prices. Last year 11 state-run oil auctions failed with negative impact on the company’s cash flow.
At last-week’s meeting with Vice Prime Minister of Ukraine Volodymyr Kistion, Ukrnafta’s top management emphasized that allowing Ukrnafta to increase capital investments will enable the company to pay off the tax debt faster. However, this scenario is only possible if the debt is restructured for a period of four years during which time Ukrnafta will not only repay the tax debt using solely its own cash flow, but will also reinvest in growth. Today the outstanding tax obligations restrict the company’s ability to invest sufficiently in expansion of production.
Jonathan Popper, Executive Vice President, Corporate Development & Strategy, Ukrnafta
‘The company’s ability to repay part of the tax debt this year will depend on the oil price, timely extension of licenses and resolution of the problems around state-run oil auctions. Our estimates show that if tax debt is restructured Ukrnafta will actually pay it off faster than if the debt is not restructured. Moreover, the state will be able to collect additional UAH 23 bln in taxes from the company within the next five years, as more investments will enable Ukrnafta to reinvest in growth. If things are left as they are now and the company will have to use all available cash to repay the tax debt, and we will witness the ongoing decline in production and tax revenues to the state over the next five years’.
Note to editors
Ukrnafta recorded UAH 11.85 bln of outstanding debt as of the end of 2017. This includes the debt owed by the company and its structural units, as well as the debt for the joint activities. Ukrnafta’s approach to recording and reporting tax debt is consistent with the Ukrainian law and is supported by the independent external auditor. The bulk of the debt accumulated in 2014-2015 before the management change.
Ukrnafta suggested two ways to repay the debt. The company offered to hand over to the State Fiscal Service of Ukraine 2 bln m3 of gas as tax lien. The market value of this gas is about UAH 15 bln which is more than enough to fully cover the tax debt. Another option is to reschedule the tax debt over a number of years to be repaid in installments from Ukrnafta’s own resources.
Ukrnafta forwarded the latest proposals to the SFS in May 2017. Later, according to the SFS, the company’s proposals were sent to the Ministry of Finance of Ukraine but Ukrnafta has not received any meaningful response from the government on this issue since. In January 2018, they were presented to Vice Prime Minister of Ukraine Volodymyr Kistion.
Meanwhile, the debt issue is frequently used by the government authorities as a pretext to block Ukrnafta’s operations. Last year, the State Geological Service didn’t extend company’s nine licenses in time, citing the tax debt as the reason. This practice was recognized unlawful by various court rulings.
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