Ukrainian Energy Law
By Bate Toms and Taras Dumych
B.C. Toms & Co
The principal Ukrainian
statute governing activities
in the upstream oil
and gas industry and, in particular,
the licensing of oil and gas exploration
and production is the Oil and
Gas Act, adopted on 12 July 2001 (Oil and Gas Act). However,
in the last four years the Oil and Gas Act has been significantly
undermined by the annual State Budget Acts of Ukraine (each a
Budget Act), including the most recent Budget Act 2008, which
have each year established the requirement that all licences be
sold exclusively by auction.
The original Oil and Gas Act establishes the basic principle
that licensees performing exploration works in an area based
on an exploration licence have a priority right to be granted a
production licence for that area. It provides that, assuming the
exploration works were performed at the expense of the licensee,
if the licensee then wishes to conduct commercial production, a
production licence can be issued to the licensee by negotiation
without an auction.
However, according to Article 5 of the 2008 Budget Act, the
sale of special permits (licences) for the use of the subsoil, including
oil and gas exploration and production licences, must be
by auction, except for those cases determined by the Cabinet of
Ministers. To govern the process for issuing licences in 2007, the
Cabinet of Ministers adopted the following Resolutions applicable
to the licensing of exploration and production of oil and gas
and other minerals: (1) Approval of the Procedure for the Issuance
of Special Permits for the Use of Subsoil in 2007, No. 480 (Resolution
No. 480), and (2) Approval of the Procedure for the Carrying
Out in 2007 of Auctions for the Sale of Special Permits for the Use of
the Subsoil, No. 611 (Resolution No. 611).
Resolution No. 480 provided a general rule that exploration
and production licences are only issued to the winners of auctions,
i.e. to the bidder who offers the highest price for each license.
However, the Resolution No. 480 listed a number of exemptions
under which a licence may be issued without an auction, including
inter alia: (i) for the production of minerals discovered by the
holder of an exploration special permit, (ii) for the production of
natural gas which will be sold at state regulated tariffs, (iii) for the
conduct of exploration and prospecting at the state’s cost and as
under the state procurement; (iv) for the carrying out of a product
sharing agreement; and (v) for the production of minerals, if pursuant
to Ukrainian law, the applicant is the owner or the long term
lessee of the integral property complex used for the production
and refining of minerals located at the licensed subsoil area.
Another Ukrainian energy law development of 2008 which
has to be noticed, is the provision by the 2008 Budget Act for
the special regime, applicable to certain companies on the procedure
and pricing of the sale of the produced oil and natural
gas. In particular, according to Article 3 of the Budget Act 2008,
(i) enterprises, where the percentage of state-owned shares in
the charter capital is more than 50%, (ii) companies of which
more than 50% of shares are placed in the charter capital funds
of other companies, where the state is the shareholder and controls
majority of the shares in them, (iii) subsidiary enterprises
of such enterprises and companies, and (iv) participants of the
joint activity agreements which agreements were concluded with
the participation of the mentioned “state controlled” enterprises
and companies which contribution share in the joint activities
is over 50% of the total contributions, are required to perform
monthly sales of:
(1) crude oil and gas condensate of its own production, except
such volumes, which are utilized for personal technological
needs, as well as liquid gas – exclusively by exchange auctions, as
set out by the Cabinet of Ministers procedures; and
(2) all natural gas (including accompanying gas) petroleum
gas) of it’s own production for the formation of a natural gas
resource, which is used for the needs of the population, to the
entity which is directly authorized by the Cabinet of Ministers
to form such resource, at the price determined by the National
Electricity Regulatory Commission of Ukraine.
During 2007, the Ministry for Environmental Protection
of Ukraine, the principal state authority in the area of subsoil
use licensing, successfully sold some exploration and production
permits at auctions. However, as of 7 September 2007 the
Resolution No. 611 has been suspended in application due to
the President’s challenge of this Resolution in the Constitutional
Court of Ukraine, and, hence, the auction procedure for the issuance
of exploration and production special permits has been
effectively blocked.
Another negative development of 2007, which hopefully will
not continue further, was the questioning by some of the state
bodies, in particular the State Tax Administration, of the validity
of using a joint activity without establishing a legal entity in oil
and gas exploration and production projects. Despite the possibility of conducting such type of activity is expressly provided
in the Oil and Gas Act, and it has been widely used in Ukraine for
many years, for some strange reason these state bodies began to
doubt if it is lawful.
To summarize on the licensing regime it should be noted
that instability is certainly a serious disadvantage for both foreign
and Ukrainian investors. Although, the priority right of investors
exploring for oil and gas under an exploration special permit to
receive a production special permit, which, since 2004 is limited
by the Budget Acts, is being restored at the level of the Cabinet of
Ministers resolutions (such as the Resolution No. 480), this instability
does not allow long term planning, which is vital for the oil
and gas exploration and production industry. For example, at the
time of writing of this article, the relevant Cabinet of Ministers
resolutions governing the procedure of issuance of special permits
in 2008 have not been yet adopted, hence, the licensing regime
for 2008 remains unclear.
Until the priority right of an investor, exploring for oil and gas
under an exploration special permit, to receive a production special
permit is explicitly recognized and guaranteed on a long term
basis, private investors, especially those multinationals which are
able to bring much needed modern technology to Ukraine, will
find it difficult to justify making any investments in the exploration
of oil and gas in Ukraine. (The same problem applies to the exploration
and production of all other natural resources in Ukraine.)
The development of the law governing the Ukrainian electric
power sector is guided, in particular, by the Energy Strategy
of Ukraine through 2030 on 15 March 2006 (Energy Strategy). The
developments relate mainly to important regulatory steps towards
the restructuring of the electric power market in Ukraine and further
amendments to electricity legislation as to the procedures for
recovering debts and licensable activities in this sector.
1) Liberalization of the Ukrainian Power Energy Market
The Energy Strategy contains the main plans for the development
of all sectors of the Ukrainian energy market, including the
electric power industry.
In particular, the Energy Strategy provides for a gradual shift
from the current wholesale market model to a market model
which would include a combination of the following: (a) a balancing
market; (b) a direct contracts market; and (c) an additional
services market. (The current centralized system was originally
adopted based on a World Bank study following the UK and Argentinean
models, which are now generally considered as inappropriate
for Ukraine.)
The model proposed by the Energy Strategy is expected in the
long run to allow Ukraine to be integrated into the electric power
system of the European Union, where many countries employ a
similar market model. Liberalization of the electric power energy
market is also recommended in the Nationwide Program for the
Adaptation of Ukrainian Legislation to the European Union Law
(adopted by Ukrainian Parliament on 18 March 2004), according
to which, the energy industry belongs to one of the priority
areas for the adaptation of Ukrainian legislation to European
Community law.
The importance of the development of the electric power industry
and laws governing activities in this area has also been emphasized
by the Decision of the Ministry of Fuel and Energy of
Ukraine On the Priority Investment Projects in the Fuel and Energy
Complex of Ukraine. Among the other projects, as provided in this
Decision, investment projects in the electric power sector to the
total value of over USD 3.5 billion have been highlighted.
(2) Debt Recovery Procedures
A number of procedural regulations were adopted, further
implementing special debt recovery procedures for enterprises in
the energy industry, which were introduced in 2005 by the Measures
Aimed at Ensuring the Stable Operation of Enterprises in the
Energy Industry Act of Ukraine (Debt Recovery Act).
The recently adopted regulations govern, in particular, the
maintenance of the register of enterprises participating in debt recovery
procedures, the procedure for the settlement and verification
of indebtedness of such energy industry enterprises and the
applicable reporting requirements. The period for the application
of these debt recovery procedures, which were initially meant to be
applied for nine months only, was extended until 1 January 2008.
(3) Other Developments
The National Electricity Regulatory Commission of Ukraine
(NERC) has introduced two new types of licensable activities in the
area of electric power production and adopted the special licensing
provisions for: (a) combined production of thermal and electric
power; and (b) thermal power production by combined heat power
plants using unconventional and renewable power sources.
Furthermore, NERC has also adopted several other regulations
applicable to the electric power sector, including the procedure
for control over licensees in the electric power market to
monitor compliance with licensing requirements and the new
wording of the rules for the use of electricity.
|
