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Ukraine: Further Tax Incentives for Oil and Gas Projects

Wednesday, 08 January 2014   (0 Comments)
Posted by: Authors: V.Radchenko, V. Kolvakh and I. Antipova
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Authors: V. Radchenko, V. Kolvakh and  I. Antipova (CMS Cameron McKenna)

On 7 November 2013 the Cabinet of Ministers of Ukraine (CMU) adopted a number of regulations that give preferential tax treatment to investment projects in the production of hydrocarbons from depleted fields and reserves that are difficult to access ("Investment Projects”).

Under these tax privileges, the rate of the subsoil use fee for additional volumes of extracted hydrocarbons is two per cent of their value, as compared to the standard rate of 25% for natural gas and 39% for oil extracted from a depth of over 5000m.

The new legislation establishes clear rules for the selection and approval of eligible projects and consists of the following procedures:

1. the Procedure for Selecting and Approving Investment Projects (the "Selection Procedure”).

2. the Procedure for Calculating Additional Volumes of Hydrocarbons (the "Calculation Procedure”) and

3. the Procedure for Exercising Control over the Implementation of Investment Projects (the "Control Procedure”).

Under the Selection Procedure only new Investment Projects of the following entities may be selected and approved by the Ministry of Energy and the Coal Industry: (i) business entities with a state share (direct or indirect) of at least 25% in their charter funds; (ii) subsidiaries, representative offices or branches of these business entities; (iii) joint activity agreements executed by these business entities, their subsidiaries, representative offices or branches (hereinafter each and all of the above – the "Applicants”).

Investment Projects may be in the form of an investment project, a programme or an agreement that was approved by the Applicant after the Selection Procedure became effective (i.e., after 3 December 2013).

An Investment Project must increase the production of hydrocarbons from depleted fields (subsoil areas, deposits) or reserves that are difficult to access and/or overhauled wells or wells restored after plugging and abandonment. New production must represent an increase in production levels that existed before the Investment Project. Geological criteria qualifying reserves or fields as depleted or difficult to access are defined in the Selection Procedure.

In accordance with the Selection Procedure, Investment Projects are generally divided into the following: (i) drilling of new wells; (ii) reconstruction of plugged and abandoned wells and repair or total overhaul of existing ones; (iii) construction and reconstruction of facilities; (iv) purchase of equipment necessary for extraction, transportation and processing of hydrocarbons and/or performance of any other auxiliary operations.

Investment Projects are prepared on the basis of approved projects for pilot production and commercial production and are therefore available only for explored fields. Consequently, as of today no unconventional gas projects can technically be nominated as Investment Projects.

Applications must include, among other things, a description of the Investment Project, constituent and registration documents, accounts, field appraisal reports and a special permit for subsoil use. They should be submitted to the Ministry of Energy and the Coal Industry, which has ten days to decide whether a project is eligible.

The Selection Procedure does not contain a list of criteria or a procedure for making a selection; however, it provides that an Investment Project will be accepted if it is to be implemented in subsoil areas (deposits) with complicated production conditions.

Under the Calculation Procedure, the additional volumes of hydrocarbons will be established based on different formulae that calculate basic and incremental production.

Under the Control Procedure, the Ministry of Economic Development is responsible for inspecting and reviewing Investment Projects. Applicants must submit reports (including information about the performance of an Investment Project, compliance with the joint activity agreement (if any), production volumes, taxes paid, etc.) to the Ministry before 1 April of each year.

Law: Resolution of the Cabinet of Ministers of Ukraine No. 838 "On Certain Issues of the Performance of Existing and New Investment Projects (Programmes, Agreements) Aimed at Increasing the Production of Hydrocarbons” dated 7 November 2013.

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