Formula Pricing Will Allow Creating Reserves Transparently and at a Fair Price

Thursday, 9 Nov 2017

Formula Pricing Will Allow Creating Reserves Transparently and at a Fair Price

Formula Pricing Will Allow Creating Reserves Transparently and at a Fair Price

The Working Group at the State Reserve Agency continued working on the creation of strategic reserves of crude oil and oil products. The scheduled meeting attended by representatives of the Ukrainian Oil & Gas Association, was held on November 8.

The main issues discussed were the expert group proposals on the development of strategic reserve models, in particular, the options for allocating the financial burden placed on the State Budget, which include the use of capacities of market participants, attraction of long-term loans on preferential terms, or, possibly, cost reduction by introducing an additional excise on fuel, etc.

One more task to be completed for starting the Reserve creation process is the development of the Law of Ukraine on the minimum reserves of crude oil and oil products and introduction of appropriate amendments to the effective legislation, in particular, to the Tax Code, as well as creation of an independent authority for managing oil reserves by the State Reserve Agency.

The Ukrainian Oil & Gas Association experts stressed once again that they generally support the concept proposed by the State Reserve Agency. However, they noted that the developers still have not considered a number of issues that may subsequently lead to the same corruption scandals as the ones around the Ministry of Defense and some other departments of the country.

In particular, the issue of pricing for future reserves has not been taken into account. UOGA offers a formula pricing model similar to the ones used in international contracts, in which purchase amounts, frequency of supplies, and prices are tied to international quotations and exchange rates. This model is generally accepted in the world oil products market. It will boost market competition, contribute to the formation of economically justified fuel prices, and will consequently eliminate the possibility of manipulation.

The Cabinet of Ministers plans to lay the finalized proposals for the creation of the State Reserve of Crude Oil and Oil Products on the tapis by December. The Association hopes that the interests of oil and gas market participants will be taken into account in the updated version of the proposals of the State Reserve Agency.

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