A number of oil and gas fields appear to be functioning illegally in Ukraine now that this country is increasingly becoming a state ruled by law. When local tax authorities are fed up with watching such illicit operations, they close down the fields. As a result, natural resources and jobs are lost, because deep under the surface of the earth begin flooding and other technological processes that are difficult to reverse, spelling the end of excavation.
Bohdan Krupsky, member of the board of NAK Naftohaz Ukrainy, says that a major stumbling block for local oil and gas companies is the still unregulated issue of licensing the exploitation of natural resources. Such licenses cannot be renewed regardless of how much time and effort have been invested in a given deposit. But licenses can be purchased at auctions. This geologist feels sure — and practice shows — that this approach is ineffective. Either there are no bids, or the licensees don’t like the starting prices. Mr. Krupsky says there have been three auctions to sell such licenses, and only one ore deposit was purchased. This year it is expected that UAH 150 million will be generated by selling licenses at auctions. Half a year has elapsed without any headway. No one feels like making any forecasts, but everyone wants to know about compensations, stresses Mr. Krupsky.
“If we stop the Yuryevske and other deposits now, we’ll end up a billion cubic meters of gas short by the end of the year,” the Naftohaz Ukrainy representative prognosticates. “Who will be held responsible for the consequences? Yet by keeping these deposits running, we are acting contrary to the law. As a matter of fact, Naftohaz Ukrainy has invested millions in these deposits.”
The licensing situation is also a pain in the neck for Naftohaz’s subsidiary, Ukrhazvydobuvannia. According to Volodymyr Benko, deputy general manager for geology, last year his company managed to renew 11 licenses, but they’re also developing 9 unlicensed deposits: “We’re operating on the wrong side of the law, and our enterprises are constantly monitored by the mining technological and geological controlling authorities, plus the public prosecutor’s office. There are several criminal cases involving Ukrhazvydobuvannia executives precisely because of such unlicensed deposits. There could be more such cases launched before the end of the year because we’ll have 28 licenses terminated by then.”
All hopes are on parliament and the government, which, according to specialists, should cancel the budget code’s proviso ordering the implementation of all deposit development licenses only through auctions. Gas and oil traders are also worried about rent payments, which constitute the lion’s share of tax returns to the central budget. Mr. Krupsky believes that rent payments should be differentiated. At present, they are the same even for the Okhtyrsky deposit, where each oil well yields 50 tons every 24 hours, and for Stary Boryslav, which produces only 1-2 tons. In view of these indicators, Naftohaz Ukrainy should have long ago discarded such low-yield deposits, but the company is taking its time because there are large environmental disbursements to be taken into account.
Commenting on differentiation, Mr. Krupsky notes that it should be based not so much on commercial calculation (e.g., whether or not a given oil well is profitable), as on objective mining conditions. Russia has long been implementing this approach.
In Ukraine, land on which prospecting operations are underway with an eye to actually developing oil and gas deposits is shared. As a result, some obtain plots and become their legitimate owners, while others buy licenses allowing them to develop such deposits. Ivan Makarenko, acting chairman of the State Natural Resources Committee, cited some examples to journalists. He believes that the state must stop this situation, and instead guarantee all users of natural resources free use of the plot after buying the license.
Experts believe that licenses for new deposits should be sold at auctions, and that existing licenses should be extended without auction sales. Geologists from various agencies insist that licenses, or special permits, to use the correct term, should be sold after setting up a mineral resources exchange.
