Improvements of the approaches to royalties determination for the use of subsoil for natural gas recovery

Logatskiy V.

Economy and Forecasting, 2015, issue 3, 58-70

Abstract: The aim of the article is to improve the taxation system of natural gas recovery in Ukraine. Author has systematized key characteristics of actual domestic natural gas reserves and resources, and features and conditions of natural gas recovery in Ukraine. In order to determine the actual rates of tax payments in fiscal sense for natural gas resources, the author proposes to distinguish the term of royalty as part of the rent as the term in economic sense and gives a schematic arrangement of distribution of the value received from the use of mineral resources. The author proposes an improvement of the current approaches to tax payments for natural gas recovery based on the determination of the royalty rate for each natural gas field (reservoir). Also, a correlation-regression model is built based on gas recovery cost interdependence from five key geological and operational factors (reserve size, depth of recovery, well flow rate, gas condensate factor, reservoir's life) for 133 natural gas fields under study. The array of these 133 reservoirs accounts for over 85% of Ukraine's gas recovery in 2013. The new approach is applied to royalty rates differentiation and determination for each gas reservoir from the array under study as option 1, and for other potential gas field based on the ranges of the affecting factors of the model as option 2. The author proposes calculation algorithms and formulas for royalty rates determination as share (%) of natural gas sales price as well as the price (value rate) for the natural unit of gas recovered (in currency for 1000 cubic meters). In order to prove the proposed approach, the author uses the examples of natural gas recovery operational expenses and royalty calculation by two described options for Yablunivske oil-gas condensate and natural gas field. In conclusions, the author formulates the main conditions and incentives to increase domestic natural gas recovery based on proposed improvement of royalty determination approach. The author recognizes that the proposed approach requires a large massive of data about expenses and prices of natural gas recovery and sales. At the same time, Ukraine is currently going to apply EITI principles whose implication will help to provide all necessary data for royalty rates determination.

Date: 2015
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