KYIV -- Four oil drilling licenses held by Ukrnafta, Ukraine’s largest oil and gas producer, recently expired. Ukraine’s State Geological Service refused to renew them until the company’s tax debts are settled. The refusal threatens to leave over 50,000 people in the oblasts without gas.
Ukrnafta’s tax debt is $480 million according to a statement by the Geological Service. The debt was built up under Ukrnafta’s previous management which was replaced in December 2015, said Roman Ilto, Ukrnafta’s head of corporate communications. Though proposals to restructure the debt have been submitted, none have been approved and some of the oil giant’s bank accounts are under sequestration.
Because of such bureaucratic obstacles, Ukraine, once the largest oil and gas producing republic of the Soviet Union, has not been self-sufficient in energy in decades.
Ukrnafta, short for ‘Ukranian Oil,’ must have up-to-date licenses to legally drill and produce oil and gas.
“If the licenses are not renewed we’ll have to start shutting down production in the coming weeks,” said Jonathan Popper, deputy chairman of Ukrnafta’s management board. “Our output will be reduced by 20%. If that happens, tens of thousands will be left without gas, starting with Ukrainians in Sumy Oblast. Thank God it’s not winter.”
Interfax news agency quoted a Geological Service statement: "Ukrnafta has a debt for almost all permits under which the company is extracting fossil fuel…despite the fact that Ukrnafta is a large deposit user, the obligation to pay royalties is mandatory, not selective.”
Popper, part of a British-American team brought in 18 months ago to turn around the state-controlled energy company, explained that if licenses continue to expire without renewal, Ukrnafta will be forced to shut down completely next year. Five additional licenses are to expire in 2017.
According to Popper, a Ukrainian court and the Ministry of Justice have ruled that the Geological Service cannot deny the renewal of Ukrnafta’s licenses because of tax debts. The Geological Service is not honoring either ruling. The Service allegedly told Ukrnafta that they only answer to the Cabinet of Ministers, not the courts.
“It is difficult to explain why [the Geological Service] might go rogue,” said Popper “But there are multiple other cases of this where court decisions have not been honored.”
Popper lamented that these types of problems are endemic to the oil and gas industry in Ukraine. He pointed to a lack of desire to address the issue of bureaucratic red tape within the government.
“It seems as though legislation only gets through when it is backed by the President or Prime Minister,” said Popper.
Naftogaz, the state gas company controls 50 percent plus one share of Ukrnafta. The largest private shareholder is Ihor Kolomoisky, whose Privat Group, based in Dnipro, controls 42 percent of shares. The company’s largest oil and gas producing region is centered around Okhtyrka, Sumy Oblast. northeastern Ukraine.
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