Interview for the NADRA.info

Next week, during the heating season that has begun, the State Geology and Subsoil Service of Ukraine may block gas production at three fields in Poltava and Kharkiv regions. The reason is the sanctions that the National Security and Defense Council of Ukraine in October applied to the ultimate beneficial owners of Ukrainian subsoil users: the Representative Office of Regal Petroleum Corporation Limited and Prom-Energo Product LLC (see Decree of the President of Ukraine Volodymyr Zelenskyy dated 08.10.2024 No. 698/2024 and the Protocol of the Subsoil Use Working Group of the State Geology and Subsoil Service No. 2024-48 dated 11.10.2024).

Both companies belong to the Smart Energy division of the Smart Holding group of companies. This will be the second time that domestic companies will be banned from extracting gas on sanctions grounds, and the Ukrainian people, by decision of their own state, will stop benefiting from the subsoil transferred for use.

The first blocking of gas production lasted from April 2023 to June 2024 and turned out to be a mistake that cost the state almost 200 million cubic meters of unextracted gas and over UAH 1.6 billion in unpaid taxes. That mistake was not only recognized, but also corrected: in the summer, the National Security and Defense Council adjusted the sanctions and lifted the ban on the use of subsoil. This decision looked Solomonic, because it unblocked the production of gas needed by Ukraine, while maintaining the restrictions imposed on the sanctioned owner of the assets. But in October, a new decision of the National Security and Defense Council was published, in which they forgot to make an exception for special permits, that is, they did not take into account the experience that forced them to adjust previous sanctions in order to protect the interests of the Ukrainian people as the owner of subsoil.

Why did this happen, and who insisted (or overlooked) that our state - during a bloody war and the heating season - once again step on the same "sanctions rake" as last year?
NADRA.INFO has already asked the First Deputy Prime Minister of Ukraine - Minister of Economy of Ukraine Yulia Svyrydenko (who heads the Interdepartmental Working Group on the Implementation of State Sanctions Policy), and the Head of the Security Service of Ukraine Vasyl Malyuk (the SBU initiated the aforementioned sanctions) to explain this. In the meantime, we asked the acting general director of the Smart Energy group of companies
Oleksiy Zayets. Here is what he answered us.

NADRA.INFO: Let's start with understanding the scale: how much and what hydrocarbons have Smart Energy Group companies produced over the past 5 years?
Oleksiy Zayets: The Group produces natural gas and gas condensate. One of our enterprises also independently produces LPG. In total, since 2019, we have: natural gas - 1.56 billion cubic meters, condensate - 148.62 thousand tons, LPG - 53.18 thousand tons. If we look at it in terms of years, the dynamics were expectedly different, but approximately similar for all group companies. Like most gas producers, before the start of the full-scale invasion, we were actively developing, we had new drilling, modernization projects, etc. Due to which gas production remained at the level of 380-400 million cubic meters per year. Due to the war and the security situation, in 2022, most projects had to be stopped, which affected the volumes.

And after the “sanctions” stop in 2023, the annual volumes were already less than half of the pre-war ones. Before the war, for two years in a row, we produced an average of more than 1 million cubic meters of gas per day. It took the group almost 5 years to achieve this result. Today, after a 15-month downtime, we have an average of 250 thousand cubic meters per day. Now, to restore to pre-war volumes, we need at least 3 years of intensive development programs and active investments. Without new stops, without new regulatory changes, taking into account the security situation. Such are the current consequences of ill-considered actions that led to the shutdown of production enterprises. How much rent and other taxes did the Smart Energy group companies pay during this period?

Was profit transferred abroad as dividends in favor of sanctioned beneficial owners? If so, what amounts are we talking about?

ince 2019, we have paid more than UAH 10 billion in taxes. The lion's share is rent. It usually makes up about half of all deductions. That is why we say that any suspension of hydrocarbon production - not only natural gas, but also condensate, oil - directly affects the reduction of budget revenues. For 2019 - I half. 2024, we transferred UAH 4.5 billion in rent to the state and local budgets. Five percent of this amount, which is almost UAH 230 million, went to the budgets of communities. Also the largest deductions: income tax - about UAH 2 billion and VAT - more than UAH 3 billion. There is also excise, land, environmental taxes, and wages.

The latter, by the way, until recently we paid to local budgets, since our mining enterprises are registered in the regions where they operate. And these are Poltava and Kharkiv regions. That is, we largely “fed” local budgets. We conscientiously paid taxes, reinvested profits in our own development and increased production. After the start of the full-scale invasion, even dividends remained in the country.