In Ukraine, 84% of oil and gas subsoil use rights are provided without competitive tendering

13-09-2018

Ukraine has huge reserves of energy resources, but it still depends on imports. Natural gas reserves in Ukrainian subsoils allows to fully meet the country’s needs for 30 years, and oil and condensate reserves – for 15 years. At the same time, 81% of oil needs and 44% of gas needs are met through imports. The state policy in regulation of oil and gas subsoil access does not reach its goals and requires a radical change in approaches.

 In Ukraine, the hydrocarbon production is officially carried out by more than 100 entities, but, in fact, the market of strategically important energy resources is monopolized by several state-owned companies. For example, about 80% of gas are produced by the JSC UkrGasVydobuvannya, and 86% of oil – by the PJSC Ukrnafta.

The government, business, public and expert community representatives discussed the market issues during the regional Roundtable “Regulation of oil and gas subsoil access” on September 13. The event was organized by the BRDO Office with the support of EU4Business/FORBIZ as part of the Public Dialogue #PRODialogue.

BRDO experts conducted a systematic market regulation analysis showing that one in four of 83 regulatory acts in this sector has signs of being illegal and/or irrelevant. One-third of regulatory instruments provoke high corruption risks, and the sector operates under non-transparent and discriminatory conditions for the allocation of subsoil use rights.

“In 2017, there was no auction for the sale of special oil and gas subsoil use permits. As a rule, 84% of rights to use them are provided to existing market participants without competitive tendering procedures. Access to geoinformation is artificially blocked by the administrative system, and subsoil users pay huge additional costs, spending 400-800 thousand dollars each year,” the BRDO Energy Sector head Oleksiy Orzhel said, when presenting the research.

The average figure of hydrocarbon production intensity in the world is 6% of the total reserve volume per year, while in Ukraine, it is only 2%. Existing deposits are mostly depleted, and more intensive exploration and production of new deposits requires significant investments and modern technologies, which are not available to existing market participants. At the same time, state regulation controls almost all operations of oil and gas companies, distorting the market model and hindering the promotion of competition.

For example, the procedure for granting a special oil and gas subsoil use permit is very complicated and provokes abuses by government bodies. In particular, for businesses, it means unpredictable expenses on the social infrastructure development, which should be covered at the expense of rent. Its size is an additional factor of destabilization, since it is changed every 2 years.

Another market barrier is non-public, inaccurate and expensive geoinformation. In spite of the lack of direct legislative provisions, subsoils users are required to buy from the state all geological information about a location, for which a special permit was granted. Such expenses amount to 800 thousand dollars every year with 70% of the relevant information being non-digitalized and outdated.

In addition, the current regulation is not harmonized with EU practices, which also hampers the integration of fuel and energy markets and attracting foreign investments in the industry. The relevant Directive 94/22/EU provides for equal access for participants to hydrocarbon exploration and production activities.

According to BRDO, adjusting the state policy regarding oil and gas subsoil access requires comprehensive changes to remove market development barriers:

  • Creating equal and transparent conditions for subsoil access, in particular in the implementation of electronic auctions for the sale of special permits for their use.
  • Making the state geological information publicly available and free.
  • Establishing optimal terms of taxation for oil and gas companies.
  • Implementing the provisions of Directive 94/22/EU in Ukrainian legislation.
  • Developing mechanisms for attracting investments into the oil and gas industry, taking into account the need for market deconcentration.

The event was also attended by Roman Malaniy, the head of the Ivano-Frankivsk Regional State Administration, Andriy Levkovych, the President of the Ivano-Frankivsk Chamber of Commerce and Industry, Valeriy Prokopets, the Director of the Department of Regulatory Policy and Entrepreneurship Development in MEDT, Andriy Pavliv, the representative of the Government UkraineInvest Investment Promotion and Support Office in Western Ukraine, Oleksiy Tyroshko, the representative of the Ministry of Energy and Coal Industry, the State Fiscal Service, oil and gas business and expert community representatives.

For information:

The Ministry of Economic Development and Trade and the State Regulatory Service with the assistance of BRDO are the initiators of the regulatory reform in Ukraine. The project is supported by the EU as part of the EU4Business/FORBIZ initiative.

BRDO is a leading independent expert-analytical center for regulatory policy in Ukraine.

The Public Dialogue between the government and businesses aims to improve the state regulation and the business climate in Ukraine.

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