Ukrnafta is forced to reduce significantly its investment program in the second half of the year due to non-extension of 9 licenses for oil and gas production and related financial losses. The company is also considering cost-cutting measures, including lay-offs in a number of structural units, in order to ensure timely payment of current taxes. The company is preparing the relevant plans and will commence their implementation around the end of this month.
As of 18 August, the company has already missed UAH 560 mln in net revenue due to unlawful refusal by the regulator to extend the licenses leading to stoppage of production at a number of fields. By the end of 2017, the missed revenue will have amounted to UAH 1.8 bln. The financial modeling shows that if the situation with the licenses does not change, the company will only be able to cover in full its current taxes by cutting capital investments and ongoing operating costs, including salaries.
The Management Board of Ukrnafta has set to prepare a plan of cost-cutting measures to ensure that the company can pay current taxes on time and in full. The measures will include suspension of a number of investment projects and reduction of the investment program by at least UAH 500 mln, which will lead to decline in production not only this year, but also in the following years. The company is also considering personnel reduction at a number of production and service units, which may affect as many as 1,500 employees.
Jonathan Popper, Ukrnafta’s EVP Strategy and Business Development
«The economic losses will ultimately impact the State and the shareholders and approximately 75% of the loss accrues to the State through lost tax revenues, lost production and lost profits. The situation will also negatively affect Ukrnafta’s workers and their families, taking into account that the company will be forced to lay-off personnel».
Ukrnafta continues to insist that the refusal by the State Geological Service to extend the company’s licenses is illegal. This is confirmed by a number of court rulings obligating the regulator to extend and issue 9 licenses expiring in 2017. The company expects that the State Geological Service should unequivocally comply with the court decisions and extend the licenses. At the same time, given the risks of non-compliance on the part of the state regulator, the company needs to plan to implement cost-cutting measures.
Notes to editors
In November 2016 and March 2017, the company filed 2 lawsuits to extend 3 licenses (for Zavodivske, Korzhivske and Koziivske fields) and 6 licenses (for Pivdenno-Panasivske, Anastasivske, Artyukhivske, Rybalske, Kachalivske and Lypovodolynske fields). On 3 August 2017, the ruling by the Kyiv District Administrative Court was sustained in the court of appeals and entered into effect obligating the regulator to extend for 20 years and issue the Zavodivske, Korzhivske and Koziivske licenses. The court indicated that the State Geological Service acted illegally in denying the licenses on the pretext of the tax debt. On 11 August 2017, the State Enforcement Service opened proceedings to enforce the court decision.
The court of first instance also issued a favorable ruling in Ukrnafta’s lawsuit concerning the 6 licenses. The regulator filed an appeal and the parties are awaiting for the date of hearing.
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