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Legal Framework for Upstream Activities in Ukraine Dr. Irina Paliashvili Unconventional Oil & Gas Conference Kyiv 30 October 2013.

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Presentation on theme: "Legal Framework for Upstream Activities in Ukraine Dr. Irina Paliashvili Unconventional Oil & Gas Conference Kyiv 30 October 2013."— Presentation transcript:

1 Legal Framework for Upstream Activities in Ukraine Dr. Irina Paliashvili Unconventional Oil & Gas Conference Kyiv 30 October 2013

2 Latest developments in the legal regime for the upstream activities (conventional and unconventional resources) The legal regime for upstream activities in Ukraine continues to be divided into more traditional Licensing Regime, with Subsoil Licenses (referred to in legislation as “special permits” to use Subsoil) generally offered at auctions, and the alternative PSA Regime under which the investor obtains the rights to use Subsoil under a PSA concluded with the State. The main legal instruments for Licensing Regime: either directly obtaining the Subsoil License (accompanies by the Licensing Agreement with the State) or concluding a Joint Activity Agreement (JAA) with the existing License Holder. Over the years, the Licensing Regime and its legal instruments have been consistently compromised by the Government of Ukraine (GOU) and Ukrainian courts, with the rights of investors threatened, Subsoil Licenses and JAAs challenged or cancelled. Investors are abandoning the Licensing Regime in favor of the PSA Regime. The main legal instrument for the PSA Regime is a production sharing agreement (PSA) concluded between the investor/s and the State of Ukraine. Currently there are two options to enter into PSA: 1)the competitive option based on a PSA Tender; 2)the direct option based on the conversion of the existing Subsoil License into a PSA (PSA Conversion). 2

3 Changes in the Licensing Regime and regulatory bodies Changes in the Licensing Regime and regulatory bodies The reforms of the Licensing Regime have been “work in progress” for many years, with various versions of the new Subsoil Code appearing and disappearing, and very little real progress. There are also several other less significant bills pending. Good news for investors concerning regulatory bodies: (1)This year the new solid triumvirate of regulatory bodies under homogeneous leadership has emerged: Ministry of Energy and Coal Industry (“Ministry of Energy”), Ministry of Ecology and Natural Resources (“Ministry of Ecology”) and State Service for Geology and Subsoil of Ukraine (“Derzhgeonadra”). (2)The PSA Interagency Commission (the “PSA Commission”) was reinstated. The Working Body of the PSA Commission is the Ministry of Ecology. The Head of the Commission is the Minister of Energy. Reinstatement of the PSA Commission assures investors that there is indeed one institution within the Government formally responsible for all key PSA issues. 3

4 Production Sharing Agreements (“PSA”) Regime: update on the adopted and pending legislation Production Sharing Agreements (“PSA”) Regime: update on the adopted and pending legislation Two main interconnected issues emerged with regards to unconventional resources: environment protection and incorporating the interests of local communities into the PSA conclusions and implementation process. Both issues are perfectly legitimate, but several bills currently pending in the Parliament address these issues in very different way: from proposing extreme measures, such as approving each PSA by the Parliament, to proposing reasonable measures, such as allocating 10% of the State's share of production for the local needs. Establishing incentives for local communities and clear procedures for granting these incentives, despite requiring additional time and efforts, is an inevitable positive measure needed for the efficient and fair PSA conclusion and implementation process. Unconventional Hydrocarbons were added to the PSA Law as natural resources eligible for PSAs. Furthermore, PSAs made specifically for Unconventional Hydrocarbons are distinguished from regular requirements, and a special regime may be established for them in the PSA itself. Thus, the PSA Law allows to establish in an individual PSA some specific provisions applicable to Unconventional Hydrocarbons, which may differ from the legislation applicable to conventionals, and which will prevail in case of a conflict. 4

5 Legal instruments for investing in Ukraine’s upstream sector: conversion of existing Subsoil Licenses into Production Sharing Agreements (PSA Conversion) The current version of the PSA Law offers an opportunity to investors of entering into a PSA on the basis of the conversion into PSA of existing Subsoil License/s (held mostly by local State or private companies – License Holders). PSA Conversion is the most intriguing new possibility for an investor to directly negotiate a PSA with the GOU without holding a PSA Tender. Several PSA Conversion projects are currently being negotiated, with one known PSA Conversion Application already filed and the positive decision of the Cabinet of Ministers issued to approve this Application. 5

6 PSA Conversion Procedure for Multilateral PSAs  The License Holder and the Investor/s file with the PSA Commission the joint Application, signed separately by each Investor, with a proposal to enter into a multilateral PSA, along with copies of the documents evidencing each applicant's legal status and financial capabilities, copy of the Subsoil License(s) and other information and materials, as may be requested by the PSA Commission. In practice, the Investors may be also required to include in the PSA Application information about their qualifications and experience in the use of subsoil (including on the Shelf – if applicable).  The Working Body of the PSA Commission (the Ministry of Ecology) registers the Application.  The PSA Commission may request additional documents necessary for it to make its proposals to the Cabinet of Ministers as to whether a PSA can be entered into, and such additional documents must be provided by the Investors.  The PSA Commission provides to the Cabinet of Ministers its proposals as to whether a PSA can be entered into.  The Cabinet of Ministers considers the Application and approves a respective decision within three months after the date on which the Application was filed and registered by the Ministry of Ecology. 6

7 PSA Conversion Procedure for Multilateral PSAs  The PSA shall be entered into not later than twelve months after the date on which the relevant decision of the Cabinet of Ministers was approved.  Under the general rule of the PSA Law, the Investor must draft the PSA. In some cases, however, if the GOU decides so, the PSA Commission may be responsible for the drafting of the PSA.  The multilateral PSA is signed and registered.  Based on the executed PSA the existing Subsoil License is reformulated into a single new Subsoil License (combining all existing Subsoil Licenses – if more than one) based on the procedure established by the PSA Law and the PSA itself. The new Subsoil License is issued in the names of all Investors, which are parties to the PSA.  The Investors-parties to the multilateral PSA, must enter into an operation agreement and appoint the Operator (choosing between Investors).  Foreign Investors must establish a representative office in Ukraine within three months from the date of the PSA execution. 7

8 Selected key legal issues and risks in considering PSA Conversion PSA Conversion has not been tested and has no precedents in Ukraine. The legislative basis for this option is also quite ambiguous and underdeveloped. Selected key legal issues and risks have emerged in practice during consideration of the pending PSA Conversion projects:  Inclusion of an investor into PSA Conversion in case the License Holder is a third party. “Multilateral” PSAs.  Qualification requirements to the investor: confusion as to which of them apply to the investor in the PSA Conversion.  Parent Guarantee in case the investor is entering the PSA through an SPV.  Carry of local License Holders by investors.  Protections and immunities available under the law to local License Holders, which are State- Owned Companies  Joint and several liability of all non-State parties to the PSA.  Difficulties combining several Subsoil Licenses/License Agreements/Work Programs into one PSA License. Can there be changes in the original terms and conditions?  The risks of the defects in the existing Subsoil License negatively affecting the new PSA Subsoil License. 8

9 Thank you! 9


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