Customs warehouse regime for extended gas storage by foreign gas traders and introduction of backhaul transactions

Ukraine now allows VAT-free temporary storage for up to 1095 days (3 years) of natural gas by gas traders in Ukraine’s Underground Gas Storage Network (UGSN). This significantly eases cross-border transportation of natural gas and realistically also opens up opportunities to collaterize stored gas for financing.

In accordance with Order No. 292 of 27 February 2017 of Ministry of Finance of Ukraine which entered into force on 4 April 2017 (available in Ukrainian), it is now possible for foreign gas traders to import foreign gas to Ukraine under a “customs warehouse regime” allowing storage of natural gas for a period of up to 1095 days (3 years) without payment of VAT or customs duties. The regime also allows for transfer of ownership to the gas among non-residents and subsequent export of the gas without paying Ukrainian VAT.

VAT and customs duties are payable once a Ukrainian customer/trader purchases such gas and imports the gas into Ukraine (thereby exiting the customs warehouse regime) or if the customs warehouse regime is changed to another regime which envisages payment of VAT, such as import or temporary import.

Prior to the effective date of these changes, foreign traders could store their gas in Ukraine only in a “transit” regime which did not allow to store gas in Ukraine for more than 31 days and did not allow transfer of ownership of the gas without paying VAT.  The “transit regime” also did not contemplate re-export of such gas. Given the still low price of storage of gas in Ukraine, the changes could create new opportunities for EU gas traders to store and collaterize gas in Ukraine with further sales to Ukrainian counterparties or foreign parties with re-export.

The actual implementation of the customs warehouse regime will take some time.  Currently PJSC “Ukrtransgaz” (the Ukrainian TSO and owner of Ukraine’s UGSN) will have to apply to Ukraine’s customs authorities to obtain permission to allow the UGSN to serve as a customs warehouse under the customs warehouse regime. Only after obtaining the relevant permission, can Ukrtransgaz actually start providing customs warehouse services.

Although the customs warehouse regime does not require payment of VAT for gas traders, gas producers or traders nevertheless will need to pay, in addition to the standard fees for cross border gas transportation services, fees to the TSO for the use of entry/exit points (including virtual points) in order to import/re-export gas. These fees were relatively recently introduced and vary from 16.74 to 32.8 USD/1,000m3 depending on the location of the exit points. Please note that for certain exit points (we are told to be most interesting to EU traders), the exit tariff has not been set by the Ukrainian regulator.

Order 292 also explicitly recognizes and defines backhaul transactions and lists the documentation which needs to be executed, the terms for filing customs declaration’s etc.).  Backhaul transactions previously were contemplated in general by the Customs Code of Ukraine, but implementing regulations did not allow for implementation.

New licensing terms for gas supply

In accordance with Resolution No. 201 of 16 February 2017, National Energy and Utilities Regulatory Commission of Ukraine, the Ukrainian Regulator, adopted new Licensing Conditions for Performance of Business Activity in the Natural Gas Market (the “Resolution”), available in Ukrainian. The Resolution was published on 25 March 2017 and took effect on 26 March 2017.

The Resolution, in particular establishes:

1. Licensing conditions for natural gas transportation
2. Licensing conditions for storage (injection, withdrawal) of natural gas
3. Licensing conditions for the Distribution of Natural Gas
4. Licensing conditions for natural gas supply

Based on the Resolution, all gas suppliers which supply gas to end users will have to bring their activities in accordance with Resolution, in particular they will need to obtain a new or updated license within 3 months after its publication (i.e. by 26 June 2017).

In order to obtain the respective license, a gas supplier shall submit an application together with a copy of its general manager’s passport (or his/her tax ID) and relevant data on its ability to supply gas (its website, phone number and e-mail, information as to leased or owned premises, etc.).

Pursuant to the Resolution, a gas supplier now is required, inter alia, to fulfill the following requirements:

• To secure operation and maintenance of its web-site
• To create point of contact for provision of information to consumers
• To create a so called “personal office of a household” at the web-site
• To store a number of documents and materials as well as submit certain information and documents to the Regulator
• To inform its customers of the occurrence of certain data, such as conditions for gas supply, prices, clarifications of legislative acts regulating relations with the supplier, termination of licensed activities in general or at a certain location
• To own or lease buildings and/or premises where it will service customers (now the Draft does not differentiate between industrial customers and households and it makes sense to clarify that this requirement only relates to households)
• To place certain information at its web-site, including prices for consumers
• To hire a certain minim number of employees with respective education and expertise
• To take other actions in the course of dealings with customers and the Regulator

Please note that as of the date of this publication, several gas suppliers have already obtained new licenses for gas supply.