New reporting standards for extractive companies in Ukraine

17 January 2019

Ukraine has sufficient natural gas reserves to meet own gas demand. According to the BP Statistical Review of World Energy, in 2017 Ukraine ranked second among the European countries by its proved gas reserves (1.1 trillion cubic meters), with only Norway surpassing (1.7 trillion cubic meters).

However, it is only fourth by production volumes with nearly 20 bcm, while Norway extracts 6 times more - 123 bcm.

At the same time, Ukraine remains dependent on natural gas imports. In 2017, the total gas consumption was 32.2 bcm, of which 14.1 bcm (43.8%) was imported. According to the Ukraine Extractive Industries Transparency Initiative (EITI) Report, the budget proceeds from upstream in 2016 amounted to almost 132 bn UAH (5.15 bn USD) or 5.4% of GDP.

Against this background, the government has identified the extractive sector reform among its priorities both for achieving energy independence and for increasing economic growth. In other words, the government sets itself the task of creating proper conditions for the operation of upstream companies.

Over the recent two years, Ukraine has achieved significant results in improving the business climate in the gas production industry. The most important results are actions aimed at predictability and higher liquidity of the sector. In this context, royalty levels have been reduced and their stability is guaranteed until January 1, 2023, at the legislative level. This is to encourage companies to invest in exploration and production and, given the larger volumes of extraction, total proceeds from royalties to the state budget will remain unchanged. According to the Association of Gas Producers of Ukraine, in Jan-Sep 2018, the year-to-year volumes of drilling increased by 72% – up to 38 new gas wells.

Improving the access to information in the extractive sector at all levels is an equally important task the government committed to. Considerable attention is paid to providing access to geological information – a basis for investment decisions, as well as transparent procedures of auctions for access to exploration and productions rights. In particular, a pilot project on selling of 30 special permits (licenses) was launched on the basis of the ProZorro.Sale electronic platform, which considerably reduces the human factor and, accordingly, the corruption risks in licensing procedures. The first round was announced on December 6, 2018, and it includes 10 oil and gas fields.

Another important aspect is to provide access to information on the extractive companies’ operations, in particular on production volumes, taxes paid, which is relevant in the context of the royalty decentralization introduced at the beginning of 2018 (5% of royalties split to the local budgets in communities affected by extraction). The efforts have been ongoing to address this issue since 2009 – the year when Ukraine joined the EITI Standard. In particular, this year the EITI International Secretariat first evaluated Ukraine’s progress in the EITI implementation as of the end of 2017. Following the validation, Ukraine was awarded the status of "significant progress".

By this time, three national EITI reports were published covering the years from 2013 to 2016, with each subsequent one containing a more complete list of information. The reports demonstrate the information provided by the extractive companies (partially – on voluntary basis). Despite the fact that not all companies were willing to share their information, the latest report for 2016 covers over 95% of the amount of taxes and other revenues of the government from the industry. Also, the payment data is broken down by individual companies and by payment type (rent, environmental fee, etc.); for the last two reports, it is also available in machine-readable format.

Number of companies that have provided/not provided the data for UAEITI reports

However, so far the reports demonstrate only legal entity names and payment types, and do not show a breakdown by projects. Mandatory project-level reporting is a standard for data disclosure on payments to governments, successfully applied in the EU member states, Norway, Canada and other jurisdictions. The companies with assets in Ukraine are also among those who reported. E.g., Ferrexpo and JKX Oil&gas account for 93%, or almost 50 mln USD, of the taxes paid in 2017 in Ukraine by the UK-based extractive companies. In particular, both companies reported their payments broken down by projects.

The greatest progress in the implementation of the initiative Ukraine has achieved this year, upon the adoption of the Law "On Ensuring Transparency in Extractive Industries", which combines the provisions of both the EITI standard and the mandatory reporting requirements of the EU legislation. It took 2 years, several plenary votes, dozens of stakeholder meetings and discussions to get it adopted. The Law has overcome considerable opposition due to support from the government, key business associations, civil society and international partners of Ukraine.

In the end, the final version of the law is one of the most progressive among all the EITI implementing countries, since the list of datasets to be disclosed is fixed in the law, not in a secondary regulations. The law provides for disclosure by all extractive companies and public authorities of the payments disaggregated by type and project activity, by budget line they are credited to, and of extraction volumes.

This means that local communities in Ukraine will be well aware of how much resources each company extracted on a particular field and, accordingly, how much it paid to local and national budgets. The reporting will also provide information on final beneficiaries of the company, essential terms of the contracts, and other interesting data.

Ukraine becomes more transparent both for its citizens and for business. Along with transparent license auctions and competitions for prospective oil and gas fields, the standards similar to those applicable in the EU and Canada enable potential investors to make decisions that are more informed, and avoid risks.

The author would like to express his gratitude to Mr. Miles Litvinoff, Coordinator of Publish What You Pay UK, for providing the reporting database of the UK and Europe-based extractive companies with activity in Ukraine.