The key question of why the execution of public service announcements in Ukraine takes so long does not lie in the legislation. It is caused by a lack of political will, inconsistency and transparency of the State`s position in negotiations on public service obligations and, above all, by the absence of a so-called “one-stop-shop” approach to dealing with public service obligations. The lack of coordination between the state and other state and local authorities involved in the processes of execution and performance of messages makes the whole process less efficient and difficult to streamline. Nevertheless, we believe that the winners of the PSA tenders will find an amicable solution with the State on all the key conditions mentioned and will sign the agreements in due course. This will prove that PSA is a reliable and mutually beneficial instrument for the development of the oil and gas industry in Ukraine. “I am pleased with the successful completion of the long efforts of Aspect and SigmaBleyzer and the Ukrainian government to develop and agree on this production sharing agreement. We look forward to working with the Ukrainian state to increase hydrocarbon production in the country and achieve Ukraine`s energy independence,” said Michael Bleyzer, President and CEO of SigmaBleyzer. SigmaBleyzer is a long-time member of the U.S.-Ukraine Business Council, www.USUBC.org. The years 2019-2020 became remarkable for the Ukrainian oil and gas industry due to 12 tenders for the implementation of production sharing agreements (“PPE”). These are the first PSA tenders selected since 2012. Baker McKenzie`s Kiev office acted as legal counsel to EP Ukraine, a Dutch subsidiary of the Czech holding company Energetický a průmyslový (EPH) and the Slovak NAFTA a.s., in connection with the structuring, negotiation and conclusion of two production-sharing agreements with the Ukrainian government in relation to the Okhtyrska and Hrunivska blocks. The production sharing agreements signed on November 8, 2021 relate to petroleum products. They cover two distinct areas totalling more than 1,700 square kilometres in north-eastern Ukraine and represent an extensive investment programme that includes the execution of seismic measurements and the drilling of a significant number of exploration wells in the first phase.
The total investment is expected to reach tens of millions of dollars. On the 11th. In September 2019, the government adopted a resolution cancelling the call for tenders for the Dolphin Block, which it did in line with European Union best practices and Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorisations for prospecting, exploration and production of justified hydrocarbons. The special permit for the use of the subsoil determines both the exploration and production phases, as well as the concept of execution and scope of the work to be carried out under the PPE. Such a special permit depends on the general conditions of the PPE. Where the PSA provides for the extension of the geological exploration period after the parties have agreed on the specific duration of such an extension, the special permit should be amended accordingly. Ukraine has made significant progress in recent years in implementing its ambitious economic reform agenda. After a sharp decline in the Ukrainian economy in 2014-2015, the first signs of improvement were observed in 2016 and 2017. Energy independence is a priority for the government and can be achieved through domestic gas production to reduce its dependence on natural gas imports. But there is another question to consider when it comes to the production of profits. The government`s standard approach is that the investor must sell the government`s share of profits and transfer the proceeds to the specified bank account.
At the same time, the investor may find that the distribution of tangible shares is the most attractive option. While such disagreement may not be as binding as other issues, it is still an important aspect of PSA that should be kept in mind. SigmaBleyzer started three and a half years ago with the prospect of becoming a private international investor in energy production in Ukraine. The business community hopes that PSA`s signatures in January 2021 will be a significant breakthrough for private sector investment in Ukraine`s energy sector, opening the door to more private international investment. It should be recalled that transparent tenders for the conclusion of production sharing agreements took place in 2019. The winners are: Ukrgasvydobuvannya (Naftogaz Exploration and Production will develop the Buzivska, Berestyanska, Balakliyska and Ivanivska blocks), DTEK Oil&Gas (Zinkivska block), Geo Alliance Group (Sofiyivska field), Zakhidnadraservis (Uhnivska block). The Ukrainian authorities have recently done a lot to change the regulatory and investment environment in the field of gas production: for the period from 1 January 2018 to 1 January 2023, a special stabilisation clause for setting incentive rents has been developed, the tax system has been improved and the authorisation system has been simplified. The state`s share in profit production in Ukraine is usually set at 10-15%, which is also common. In practice, investors often apply the R-factor to gradually increase the state`s share of profit production. Since Ukrainian law does not address this issue, investors are free to offer any method of modification of production shares that they deem appropriate. The main obstacle here, of course, is whether the parties will find common ground on this issue. Ukraine will never achieve a high level of energy independence through increased local production without doing more to open up its energy sector to private investors and reduce the almost total control held by state-owned enterprises in the past.
Under a production-sharing agreement, one party instructs Ukraine (the State), the other party, the investor to develop, explore and extract mineral resources in designated underground areas and to perform the work related to the contract for a certain period of time, while the investor undertakes to perform the assigned work at its own expense and risk. with additional reimbursement of costs and receipt of payment (remuneration) in the form of part of the production profit. Such a definition of production sharing agreements is provided for in the Law of Ukraine on Production Sharing Agreements (PSA Law). To speed up the process, the managers had the idea of designing a PSA MODEL. According to USAID, the main advantages of the PSA model are (i) the availability of the basis for negotiations between Ukraine and investors; (ii) greater transparency; and (iii) the protection of Ukraine`s interests with pre-agreed arrangements. The big advantage is that investors may have identified legitimate expectations. On the other hand, the PSA model does not comply with the current law on PPE, while each tendering area is quite unique and requires different regulations in PPE for exploration and production. Another option that is being discussed is not to use the PPE model, but to define the structure and mandatory clauses of the PPE. In 2019, tenders were launched for nine hydrocarbon PSAs in Ukraine.
On December 31, 2020, production sharing agreements were signed for seven blocks: Sofiivska, Uhnivska, Balakliyska, Ivanivska, Zinkivska, Buzivska, Berestyanska. Ukrainian Energy`s agreement on the Varvynska block became the eighth signed by Ukraine. We are pleased to inform you that EY has acted as an advisor on several agreements in connection with this tender, in particular EY advised a company of the DTEK Oil & Gas group on the PSA for the Zinkivska block. Ukraine continues to attract investment in energy exploration and production by organizing tenders for the Production Sharing Agreement (PSA). In addition to the nine onshore PSA tenders that will take place in June 2019, on April 12, 2019, the government officially announced a tender for the execution of a 50-year-old PSA in the huge “Dolphin Block”, which covers 9,500 square feet…
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