Combating “inactive production licenses”

At its meeting in March, the National Security Council approved a decision on a large-scale audit of the subsoil use sector.

In particular, it implies the verification of the legality of all subsoil use permits obtained since 1991.

The regulator should carry out unscheduled inspections of business entities that:

  • have special production permits issued without an auction and based on the results of approbation of mineral reserves without special permits for geological exploration, in particular for pilot exploitation;
  • have special permits for oil and gas production, but have not started production for two years after obtaining them;
  • have not started production within two years after the approval of hydrocarbon reserves, while having special oil and gas subsoil use permits for geological study, including pilot exploitation with further extraction;
  • have not started production within ten years after obtaining special oil and gas subsoil use permits for geological study, in particular, pilot exploitation with further extraction;

That is, at the meeting of the National Security and Defense Council, the President of Ukraine placed a high priority on addressing the issue of so-called ‘inactive licenses’ — already issued special permits for subsoil use in the areas, in which no production has occurred for many years. Unfortunately, this term is still not defined legislatively.

Citizens of Ukraine are held hostage by such inactive licenses. Due to revenue shortfalls to the budget and the lack of new jobs that should appear in the areas, for which production permits have been issued, the Ukrainian economy remains dependent on imports.

According to the SRDE “GeoInform of Ukraine”, more than 20,000 deposits and occurrences of 117 types of mineral raw materials, including about 8.7 thousand commercial deposits, have been discovered in Ukraine.

However, only 3,000 of them have been developed. This is about 15% of what we can produce in our country.

Let me give you an example. In 2020, Ukraine extracted 20.2 billion cubic meters of natural gas. However, 30.9 billion cubic meters were consumed. That is, while having its own deposits, the Ukrainian industry meets only 65% ​​of demand. We need to buy the rest from other countries, including those with which we are currently at war in the east.

One of the main reasons that negatively affect the increase in hydrocarbon production (organic compounds that are components of oil, natural gas, and products of their processing) is the inactive licenses, which are non-producing for years.

According to the State Service of Geology and Subsoil of Ukraine (Derzhheonadra), 560 special oil and gas subsoil use permits were valid as of last year. At the same time, according to the State Tax Service, 149 of their owners do not start mining activities.

It should be noted that these permits were issued before 2017. In other words, they have not been used for production for more than three years. It is estimated that every third license in Ukraine is inactive.

It is expected that the New Subsoil Code will solve key subsoil use problems. The document will regulate all types of subsoil-related economic activities, including the extraction of minerals, oil, gas, uranium, as well as subsoil water, and geothermal energy.

It is designed to implement EU Directive 94/22 and other European Union legislation in pursuance of the Association Agreement.

The new draft Code provides for the further introduction of a new tax — the subsoil use fee on the ‘produce or pay’ principle — to deal with inactive licenses.

This tax should be levied on those subsoil users who, having obtained a license, have not started the production and do not pay rent.

According to the new Subsoil Code, the period from which a subsoil user will be required to pay a tax will depend on the minerals and subsoil use type.

This is not a new practice. Introducing subsoil use fees is a widely used mechanism to combat inactive licenses in countries with developed extractive industries.

For example, a similar tax applies to subsoil users who do not start the timely production of minerals in the UK, Norway, the USA, Azerbaijan, and Croatia.

If the new Subsoil Code is adopted and the subsoil use tax is approved, even the most conservative estimates show that the national budget will receive an additional 2 billion hryvnias.

Therefore, we hope that the audit of the subsoil use sector announced at the National Security and Defense Council’s meeting is only the first step towards a large-scale restart of the system and Ukraine’s chance to break out of the energy dependence circle.

SourceEconomichna Pravda