Alternative Regimes for the Use of Subsoil in Ukraine By Dmytro Syrota © Ukrainian Legal Group, 2006.

Two main regimes: I.Licensing Regime and II.Production Sharing Agreements (PSA) Regime © Ukrainian Legal Group, 2006.

Licensing regime:  based on the Subsoil Code (1994), the Law “On Oil and Gas” (2001); Budget Laws (new Law each year) and by- laws;  more traditional and widely applied regime;  regulatory rather than contractual regime (a license/subsoil permit is required);  Contains practical flaws, but is being constantly developed. © Ukrainian Legal Group, 2006.

Brief description of the licensing procedure I.Standard Licensing Procedure (suspended since 2004 until now):  A special tender must be held;  The Ministry for Protection of Natural Environment issues a license/permit/special permit (“Permit”) to the winner;  A licensing agreement must be entered into once the Permit is obtained;  The Permit cannot be transferred to third persons;  The Permit is issued for a limited term depending on the type of subsoil use. © Ukrainian Legal Group, 2006.

II.New auction procedure (a temporary measure effective at this time):  The procedure was introduced as a temporary measure until a standard and permanent procedure for using subsoil has been developed;  A special public auction must be held;  The Ministry for Protection of Natural Environment issues the Permit to the winner;  The Permit cannot be transferred to third persons;  The Permit is issued for a limited term depending on the type of subsoil use. © Ukrainian Legal Group, 2006.

Main problems with the licensing regime:  Conflicting legislation (several uncoordinated licensing procedures exist, some of these are either ineffective or have been suspended);  The legislation and licensing bodies are often changed;  Poor protection of foreign investors’ rights and lack of stability/transparency, uncertainty (unstable investment climate);  Complicated practices and poor qualification of government bodies. © Ukrainian Legal Group, 2006.

PSA regime:  based on the Law “On Production Sharing Agreements” (1999);  more progressive and investor-friendly contractual regime;  the Permit is still required, but is issued automatically;  the State cannot alter a concluded PSA;  special regulations for many important matters;  poor practical implementation. © Ukrainian Legal Group, 2006.

Brief description of the PSA procedure:  A special tender is announced;  Both foreign and domestic bidders can file their applications;  A special body (PSA Commission) issues its recommendations to the Government whereby the latter approves the winner;  A PSA is entered into, all relevant Permits are issued automatically. © Ukrainian Legal Group, 2006.

Certain special features of the Ukrainian PSA regime:  List of Subsoil Areas Eligible for PSAs;  Domestic Supply Requirement;  Local Content Requirement;  Local Employment and Training;  Assignment of Rights;  Unrestricted Carry-Forward of Losses;  Cost Recovery Production Restrictions (70%);  Dispute Settlement and Waiver of Sovereign Immunity;  No Need for Local Partners;  Unrestricted and Tariff-Free Movement of Equipment and Other Items Necessary for the Implementation of a PSA ;  Special Tax Treatment. © Ukrainian Legal Group, 2006.

Main problems with the PSA regime:  regulatory framework should be strengthened while PSA-negotiating parties should have maximum flexibility with respect to the terms and conditions of PSAs;  establishing clear priority of the PSA Law over other pieces of the legislation;  limiting the Government’s interference with the implementation of PSAs;  making licenses and other approvals subordinate to a PSA;  ensuring long-term stability;  there are no working PSA projects in Ukraine (the first PSA in oil-and- gas sphere (Prykerchynska area) will hopefully be signed before the end of this year and a new tender may be held with respect to Scythian area). © Ukrainian Legal Group, 2006.

Dmytro Syrota Ukrainian Legal Group, LLC 8th Floor, 4/6 P. Lumumba St., build. V, Kiev Ukraine