Member Article

In 2012, the Ukrainian government has conducted three tenders for production-sharing agreements (hereinafter - SRS) in respect of hydrocarbons that will be produced on land for 2 subsurface areas and in one section of the Black Sea shelf. Based on the results of these tenders winners were companies: Shell, received the rights to develop Yuzovsky area (eastern Ukraine), Chevron, won the tender for the production of hydrocarbons in Olessky region (Western Ukraine) and the consortium of Exxon Mobil, Shell, OMV and PAT NAK " Nadra Ukraine ", received at the disposal site" Scythian "on the Black Sea shelf. January 24, 2013 in Davos between the Government of Ukraine, by Shell Exploration and Production Ukraine Investments (IV) BV and Company "Nadra Hughes" was concluded in respect of the PSA Yuzovsky site, and in the fourth quarter of 2013 and is expected to approve the conclusion of the PSA regarding Olesko and Scythian license areas in Ukraine.

Stability of legislation stimulates attract investors

The participation of major international oil companies to bid for the conclusion of the PSA in 2012 clearly shows a significant investor interest in the exploration and production of oil and gas in Ukraine. Many investors agree that the recent legislative changes in the industry to create in Ukraine is quite favorable legal regime of production sharing agreements.

The basic rules and principles stipulated in the Law "On Production Sharing Agreements» № 1039-XIV of 14.09.99, the (hereinafter - the Law on PSA). One of the most challenging provisions of the PSA is a stabilization clause , according to which during the term of the PSA (ie, not more than 50 years) the rights and obligations of the investor shall be managed in accordance with the legal regime that existed at the date of the PSA, as well as adopted in future legislation favorable to the investor. That is in accordance with the law, which reduces or abolishes certain taxes, simplifying regulation in the sector of exploration and mining operations, facilitates the procedure of customs, currency, tax and other controls, as well as reduces the amount of liability of the investor. This favorable legislation, which will operate in the future, to be applied from the date of its entry into force.

Pursuant to the PSA stabilization clause does not apply to legislation on national defense and security, public order and the protection of the environment. These exceptions are extremely important to investors because they create a certain confusion regarding some of the legal field, requiring special attention, such as environmental regulation and liability of the investor.

However, it is important that even in the event of adverse changes in the law beyond the limits of stabilization clauses that may affect the investment according to the PSA, a foreign investor has the right to demand compensation for the losses incurred by the law of Ukraine on protection of foreign investment or the relevant ratified by Ukraine International agreements, such as bilateral agreements on investment protection and the Energy Charter Treaty. Thus, the mechanism of the PSA in Ukraine provides investors with sufficient legal protection against possible adverse changes in legislation.

Freedom of contract in accordance with the mechanism of PSA

In contrast to the strictly regulated and in many ways unfavorable to investors of the legal regime in force in respect of exploration and production of oil and gas, PSA Law allows the parties to the PSA set their own rules with regard to activities related to the PSA , including on production sharing, transportation, treatment, storage, processing, use, sale of minerals, construction and operation of the relevant industrial facilities, pipelines and other facilities and equipment. In particular, in accordance with the PSA investor and the state can agree on a contract basis:

• a procedure for determining the amount of reimbursable expenses of the investor in accordance with the requirements stipulated in the Law on the PSA;

• the conditions and procedure for sale (alienation) of extracted mineral resources (hydrocarbons) and other payments to the operator side of the PSA;

• the investor's right to use the property transferred to the state, and the conditions of such use;

• responsibility of the parties for failure to perform its obligations under the PSA, in addition to the mandatory provisions of the PSA;

• a procedure (a) the suspension and termination of action (including by canceling) a special permit for use of natural resources, and (b) the restrictions, a temporary ban (suspension) or termination of mining operations in the event of an imminent threat to life and health or the environment medium;

• the procedure and conditions for early termination of the PSA.

Other favorable conditions for investors

Besides the possibility of wider application of the principle of freedom of contract, PSA Law provides for the investors of other important benefits and privileges, such as:

a) The privileges in obtaining governmental approvals

The State shall ensure the issuance of investors (including the operators of the PSA), and simplifies the process of providing them to their contractors and subcontractors of all necessary approvals, quotas, special permits for subsoil use licenses for the exploration and utilization of mineral resources, guarantee issue of mining leases, documents the right to use land and other permits related to the use of natural resources and the performance of work in accordance with the PSA (hereinafter - State permits). The issue of such permits is carried out according to the approved order.

The state also guarantees the issuance of work permits and official IDs (for employees of representations of investors) to foreign investors to employees, as well as simplifying the issuance of such documents to employees of contractors and subcontractors.

b) The privileges for the import of goods

Investors and their contractors are not subject to the need to obtain licenses or quotas on imports to Ukraine's own or leased equipment, materials and other assets required for the performance of work under the PSA.

c) The right of the investor to the free disposal of hydrocarbons

The investor has the right to freely dispose of its share of mineral resources (hydrocarbons) produced in accordance with the PSA, any elected to the buyer on the agreed terms. Such hydrocarbons do not require obtaining any export licenses or quotas, and not subject to any other restrictions on the disposal of the territory of Ukraine. Restrictions may apply only if they have been expressly provided for in the PSA tender.

d) The privileges in respect of currency and payments

Pursuant to the PSA investor has the right to freely convert into Ukrainian or foreign currency, and export from Ukraine of the funds received pursuant to the PSA. PSA may also contain special conditions in respect of currency and payments.

The state provides the exclusion of the application of foreign exchange restrictions imposed by the laws of Ukraine regarding the activities of the investor under the PSA (including activities related to the procurement of equipment, materials and other goods, as well as works and services required for the operation in accordance with the PSA) under the following operations :

(A) payments on the export and import operations within appropriate deadlines;

(B) obtaining foreign currency loans from residents and non-residents, the repayment of such loans in accordance with the requirements for registration of loans from the National Bank of Ukraine and the limitations on interest rates;

(C) the transfer of funds in foreign currency to other investors under the PSA and the State in accordance with any requirements of the need to obtain an individual license of the National Bank of Ukraine;

(D) the transfer of funds in foreign currency to non-residents to pay for goods, services and intellectual property rights in accordance with the requirements in respect of (i) the cost of mandatory peer review to confirm that the level of market prices and (ii) document the actual performance of work, provision of services and the transfer of intellectual property rights;

(E) the purchase and sale of foreign currency to make payments to non-residents and the repayment of loans in foreign currency, and

(E) the placement of currency values ​​in foreign accounts, including in accordance with the requirements of the need to obtain an individual license of the National Bank of Ukraine.

e) Tax benefits

According to the Tax Code of Ukraine investor acting under the PSA, is obliged to pay only the value added tax, income tax and pay a royalty. Exemption from payment of all other state or local taxes and mandatory payments offset the duty to distribute minerals (hydrocarbons) between the state and the investor in accordance with the terms of the PSA. In respect of the tax are the Tax Code provides for investors PSA reduced rate of 1.25% for natural gas and 2% for crude oil.

CONCLUSION:

As noted above, the existing regulatory regime in Ukraine PSA favorable for investors. Many of its principles were implemented through initiatives and proposals of international investors, making directly or with the participation of international business organizations in Ukraine, such as the American Chamber of Commerce and the European Business Association.

Despite these improvement of legislation, there are also additional opportunities for further development of the PSA regime in accordance with the best standards of international practice, as well as to gain experience through the implementation of new projects PSA in Ukraine. Legal analysis gives hope for the successful application of the PSA regime by many investors in the oil and gas industry and other sectors of the economy related to mining, and the receipt of positive economic results.