Ukraine Lowers Gas Production Tax, but Problems Remain for JKX

Ukraine has passed legislation to reduce the gas production tax in Ukraine from 55% to 29% with effect from 1 January 2016, according to UK registered producer JKX. This paves the way for further investment upstream and reinstating independent companies’ suspended drilling programmes, it said in a statement Thursday.

But a separate problem is JKX's $270 million international arbitration claim for damages for the recovery of overpayment of production taxes by its subsidiary Poltava Petroleum Company (PPC). A court in the Hague has agreed the figure as being JKX's entitlement, but a further tribunal hearing is due in the summer. At that hearing, a key requirement will be the evidence given by JKX's executive directors.

A Russian-backed investment bank, Proxima, which owns just under 20% of JKX, is seeking to convene an extraordinary general meeting to take place before that event, in order to have all five directors removed. It will need 50% of the votes in support of its motion.

If the vote fails, Kiev could settle its debts by offsetting the damages payable against JKX’s future other tax liabilities [e.g. corporation tax, payroll and excise]. This would be more easily enforceable than having to seek cash back from a cash-constrained government, say lawyers.

The claim arises because JKX (and its subsidiaries) were induced to invest in Ukraine in return for certain commitments regarding not charging production tax. But since 2011, Ukraine has been charging PPC rental fees in breach of its commitments.  Most drastically for PPC, in August 2014, the rental fee rate in respect of gas rose from 28% to 55%. JKX’s main claim is that Ukraine is in breach of international law by imposing rental fees on PPC.

William Powell