Gov’t Extends UkrNafta Production Licenses for 20 Years

October 02, 2017

UkrNafta, Ukraine’s largest oil producer, has resumed oil & gas extraction at nine fields after the State Geological Service finally granted new licenses for these fields, the company reported on its official website on Sept 27. The licenses were extended for 20 years. The fields are located in Lviv province in the west of the country and in Sumy province in north-central Ukraine. UkrNafta said it was forced to suspend extraction at the fields in April and has lost about UAH 1.0bn in revenue since then.   
The State Geological Service, on the orders of Ukraine’s top authorities, had repeatedly refused to extend the licenses, citing UkrNafta’s large tax debt. UkrNafta has the advantage of a ruling from the District Administrative Court of Ukraine, which was sustained in the court of appeals and entered into force on 17 January 2017, stating that the existence of the tax debt is not a lawful reason to deny the extension of the licenses.   

UkrNafta hopes it will not face the same problem with the government when it has to renew another 27 licenses that are expiring next year. Nevertheless, this regulatory risk continues to harm the company’s investment attractiveness. A separate unresolved problem remains UkrNafta’s UAH 13bn (USD 490mn) tax debt, which was accrued when long-time UkrNafta controlling shareholder Igor Kolomoyskiy refused pay higher oil & gas production taxes that were imposed back in August 2014. In his latest statement, UkrNafta CEO Mark Rollins admitted that the company has still not reached a deal with the government on a restructuring of this debt. The company sent a detailed restructuring proposal to the State Fiscal Service (SFS) in May, but the SFS says it needs further consultation with the Finance Ministry on the UkrNafta case. Meanwhile, Mr. Rollins told the press that when the company tried to discuss the matter directly with the Finance Ministry, there was no response for a meeting. In our view, the government is playing a bureaucratic game with UkrNafta for political reasons. It remains unclear whether President Poroshenko, Prime Minister Groysman, and Ukraine’s fiscal authorities want to force Kolomoyskiy to sell his stake or whether they simply have not been able to decide on how to deal with the tax debt issue amid controversy inside the SFS. This second point could be related to former SFS Roman Nasirov, who was arrested in March after allegations that he illegally allowed a delay in rent payments from certain private natural gas producers.               
The Kyiv-listed UNAF stock surged by 10% almost immediately after the news first appeared. The stock advanced by 14% over the week to close at UAH 142 per share.

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