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Oil & Gas Laws and Regulations in Ukraine

Oil & Gas Laws and Regulations in Ukraine

Oil & Gas Comparative Guide: 2022
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Contributed by Hillmont Partners.

1. SUMMARY 

In brief, in the last few years the Ukrainian oil & gas market has been characterized by legislative trends favoring both international and domestic investments, including inter alia: (1) the development of the new Subsoil Code of Ukraine (it has not yet been adopted by the Ukrainian Parliament) aimed at harmonizing Ukrainian legislation with the European Union acquis; (2) opening up access to geological data for all potential investors; (3) promoting PSAs; (4) reducing rental rates for produced oil & gas; (5) unbundling the largest oil & gas company (JSC Naftogaz of Ukraine) and launching the competitive internal gas market; and (6) introducing the regulation of biomethane in Ukraine.

Ukraine’s subsoil use sector has in recent times undergone significant transformation and major development. In 2019, for the first time in several years, auctions for the sale of special subsoil use permits and tenders for production sharing agreements (PSAs) for numerous oil & gas fields were conducted. In December 2019, the Investment Atlas of Subsoil Users was presented, with over 100 investment-ready facilities. Included in the list were 23 prospective oil & gas deposits with an area of more than 3,500 kilometers. Having considered the regulatory deficiencies and poor results when holding subsoil use auctions in the past, the Ukrainian authorities have taken the necessary steps, which promise to deliver tangible progress in the years to come.

Significant changes were introduced to the Law On Production Sharing Agreements, the Subsoil Code, the Land Code, and other legislative acts, which:

  • Simplified the issue of subsoil use permits and land access required for subsoil activities;
  • Moved forward the requirement for an environmental impact assessment (EIA), and it will now be conducted only after the PSA has been executed. Previously, the draft PSA was subject to an EIA before its execution;
  • Introduced electronic bidding for auctions on the sale of special permits for subsoil use.  Therefore, all auctions for issuing special permits shall be held only through the ProZorro online public procurement platform. 

2. OVERVIEW OF THE COUNTRY’S OIL & GAS SECTOR 

2.1. Legal framework – a brief outline of your jurisdiction’s oil & gas sector

Despite having large deposits of oil & gas, as demonstrated below, Ukraine is still heavily dependent on imports. Therefore, Ukraine is changing its legal environment to make the exploration and production of oil & gas more attractive for foreign investors. The major principles of oil & gas legislation are as follows: (1) subsoil belongs to the people of Ukraine; therefore subsoil areas may be granted to investors for oil & gas exploration/production only on a temporary basis; (2) there are two ways of acquiring the right to explore/produce oil & gas: either to get a license (special permit) or conclude a production sharing agreement (PSA) with the state; (3) special permits are usually awarded through auctions to the bidder offering the highest price; (4) PSAs offer more flexible rules governing oil & gas exploration/production: the parties may choose the applicable law and the dispute resolution forum, investors may enjoy stabilization clauses protecting them from unfavourable changes in legislation, the state undertakes to issue all necessary permits and approvals in a timely manner and get permission from the land owners for access to the drilling site, etc.; (5) in addition to the auction price the holders of special permits pay rental payments charged on the produced hydrocarbons produced; (6) investors under PSAs transfer to the state its share of the produced hydrocarbons, but the terms of PSAs may contain additional terms as, for example, the payment of a signature bonus, etc.; (7) with some minor exception the investors may freely dispose of the produced hydrocarbons, including their export outside of Ukraine or sale on the Ukrainian gas market.

In recent years, several important events in the field of oil & gas have taken place. Among others, we may recall the introduction of incentive taxation for drilling new gas wells in 2018. Such a novelty not only appeared to be an effective mechanism to combat the natural decline in gas production but also increased the interest of investors in new drilling. As an outcome, in the four years of this rule being in operation, 273 new gas wells have been created.

In addition, in 2019, Ukraine held the largest wave of tenders for the conclusion of production sharing agreements and proposed to investors 12 promising oil & gas blocks with a total acreage of 11,000 square kilometers. At the beginning of 2021, 8 product sharing agreements were signed with leading Ukrainian gas production companies, including Naftogaz Group, DTEK Naftogaz, Geo Alliance Group, Zakhidnadraservis, and the American company Aspect Energy. All the companies together must invest at least USD 400 million in drilling 39 new exploration wells over the next five years. Three additional product sharing agreements with the UK company York Energy and the European energy holding EPH (Nafta) are in the process of being concluded. Their signing is expected at the beginning of 2022, and the minimum investment in the development of these blocks in the first five years will be USD 70 million.

Lastly, at the beginning of 2021, the Ukrainian government approved the National Economic Strategy 2030, in which it determined an increase in gas production and complete abandonment of foreign suppliers as the central goal in the sector of oil & gas. This way, it is expected that, by the end of 2030, domestic gas production will meet domestic gas demand in Ukraine. To achieve this strategic goal, national gas-producing companies have developed and are implementing their own strategies to increase natural gas production. At the same time, however, the Ukrainian government will support foreign investment in the industry, either directly or in partnership with Naftogaz and private producers.

2.2. Domestic oil & gas production and imports/exports 

Among the main legislative acts which regulate the oil & gas market in Ukraine, we may consider the Constitution of Ukraine, the Subsoil Code of Ukraine, the Laws of Ukraine On Oil and Gas, On the Natural Gas Market, On Production Sharing Agreements, On Pipeline Transport, several international treaties, ratified by the Ukrainian Parliament, and other legal acts, which inter alia set out regulations for environmental protection and competition in the relevant markets.

As regards imports and exports, it should be outlined that national producers currently satisfy only two-thirds of domestic consumption. Ukraine’s annual gas production is about 20.7 billion cubic meters, while an additional 9.1 billion cubic meters of gas are imported from Western Europe via pipelines. The main suppliers are Poland, Hungary, and Slovakia. Nowadays, Ukraine’s economy remains heavily dependent on natural gas and oil imports.

2.3. Foreign investment and participation 

Broadly speaking, foreign investors in Ukraine enjoy the same rights as national legal entities and individuals, while foreign investments may be performed in any form that is not prohibited by law, including the incorporation of Ukrainian entities, purchasing of shares or stakes in existing Ukrainian undertakings, purchase of movable or immovable property, etc. However, there are certain important limitations: it is prohibited to obtain control over (i.e., to privatize) a gas Transmission System Operator or its property used in gas transportation via main gas pipelines and gas storage; the same restriction applies to the National Joint-Stock Company Naftogaz of Ukraine and its subsidiaries and their respective property used for the same purpose. Apart from this, foreign investors enjoy complete freedom and protection under the numerous investment protection treaties to which Ukraine is a signatory/party.

 2.4. Protection of investment 

The Association Agreement between Ukraine and the European Union, Memorandum of Understanding concerning the Strategic Energy Partnership between Ukraine and the European Union, the Energy Community Treaty, the Protocol on the Accession of Ukraine to the Treaty Establishing the Energy Community, as well as the Energy Charter Treaty (ECT) are among the main international treaties in the oil & gas sector of Ukraine that should be mentioned. 

Investors may seek protection under a multilateral treaty like the ECT or bilateral international treaties (e.g., the UK-Ukraine BIT).

Remedies available to investors under the ECT include:

  • Unlawful expropriation – the host state may not “take” (directly or indirectly) or substantially interfere with the investment of an investor,unless it is done for a public purpose, is non-discriminatory, is in accordance with the due process of law, and prompt, adequate and effective compensation is paid. 
  • Fair and equitable treatment – the host state must provide a transparent and stable legal and regulatory framework for the investments of investors. It must not act unreasonably or arbitrarily, nor contrary to the legitimate expectations of the investor and it must provide due process. 
  • National treatment – the host state must grant Investors the same treatment that is given to its own nationals. 
  • Most favored nation treatment - the host state must provide the investor with treatment as favorable as that given to nationals of any third country.

The types of damages that may be claimed, include, but are not limited, to lost profits over the expected life of the investment, sunk investment costs, contractual losses, finance costs, and legal fees and costs.

Undeniably, all the above legislative acts have a significant impact on the regulatory framework of the oil & gas market in Ukraine. This is because they envisage further approximation of Ukrainian legislation with the European Union acquis, and the development of competitive, transparent, and non-discriminatory energy markets, etc.

3. EXPLORATION OF OIL & GAS 

3.1. Granting of oil & gas exploration rights 

The main documents shaping the legal/regulatory framework for oil & gas exploration in Ukraine are the Subsoil Code of Ukraine, the Law On Oil and Gas, the Law On Production Sharing Agreements, and two by-laws regulating the procedure for issuing special permits for subsoil use, namely, the Resolution of the Cabinet of Ministers of Ukraine No. 615 of May 30, 2011, and the procedure for holding auctions for the sale of special permits for subsoil use, namely the Resolution of the Cabinet of Ministers of Ukraine No. 993 of September 23, 2020.

Although the oil & gas sector in Ukraine has traditionally been regulated by two ministries, i.e., the Ministry of Energy and the Ministry of Environmental Protection and Natural Resources, oil & gas exploration issues such as issuing subsoil licenses, monitoring the activities of subsoil users, and imposing sanctions for infringement of subsoil use conditions traditionally belong to the competence of the State Service of Geology and Subsoil of Ukraine (Derzhgeonadra).

Major governmental initiatives in the oil & gas sector include, inter alia: 

  • expected adoption of a new Subsoil Code harmonizing Ukrainian legislation in this area with the European Union acquis;
  • stimulation of domestic production of oil & gas by reducing rental payments;
  • stimulating conclusion of PSAs, which resulted in increasing the number of PSAs concluded in the last two years, etc.

3.2. Foreign exploration

Under the Constitution of Ukraine subsoil resources belong to the people of Ukraine, therefore investors (both foreign and domestic) may only be granted the right of temporary use of subsoil. The right of use can be granted both under a license and pursuant to the relevant PSA concluded between the State and a foreign investor.

Foreign investors in the Ukrainian oil & gas sector enjoy the same rights as domestic ones. Under a license (special permit), foreign investors may explore and use subsoil resources for testing or commercial production of oil & gas within the time limits set by the relevant special permit and subsoil use agreement attached thereto.

Theoretically, a PSA may contain some exploration period, but in practice, the state proposes subsoil areas for PSAs with deposits of hydrocarbons that have already been confirmed. 

At present, a special permit for subsoil use is not transferrable. That is, a party that has received a special permit may not transfer it to another party, even to a related one. However, Ukrainian law does not prohibit the change of control in the shareholders of a company possessing a special permit.

The draft of the new Subsoil Code provides for a possibility of transfer of the license subject to a new licensee meeting the requirements and assuming the obligations of the initial license holder.

3.3. Stages of the exploration process 

There are two types of special permits related to the development of oil & gas deposits:

  • A special permit for exploration, including experimental commercial development, with an initial duration of five years; and
  • a special permit for exploration, including experimental commercial development with subsequent commercial production with an initial duration of 10 years, which, in some cases, can be extended to 20 years (30 years for sea shelf).

There is a possibility of one-time prolongation of the above permits, but only for a period that does not exceed the initial terms (that is, five and 10/20/30 years).

3.4. Obligatory state participation 

Under the special permits regime, the state benefits from selling a special permit at auction and later, in the event of production of hydrocarbons, from rental payments. PSAs may contain different terms, including signing bonuses.

Natural gas and crude oil are not subject to excise duties, only petroleum products and LNG that are sold to customers.

Pursuant to Regulation No. 939 of November 7, 2018, secondary geological data (i.e., interpreted geological data) received in the course of the exploration process belongs to the explorer and can be used as an asset. At the same time, the explorer has to report some part of the geological data to the State Geological Data Fund (Geoinform of Ukraine). 

3.5. Risks to be considered

The main risks associated with oil & gas exploration in Ukraine are:

  •  lack of open geological data;
  •  potential problems with getting access to exploration/drilling sites (sometimes an easement may only be established after a long-lasting litigation process);
  •  non-transferable special permits, etc.

4. PRODUCTION OF OIL & GAS 

4.1. Granting of oil & gas production rights 

Oil & gas production in Ukraine is governed by the same legal acts as the process of exploration, so please refer to Section 3.1.

4.2. Foreign production 

In terms of the production of hydrocarbons, foreign investors enjoy the same rights as national producers.

Under the special permit regime, the specific rights and obligations of foreign investors are set out by the relevant special permit and the Subsoil Use Agreement, and the Working Program attached to the special permit. The obligations of foreign investors contained in these documents inter alia define the time frames and number of wells, their depth, the expected debit of such wells, etc.

Special permits for oil & gas production are not transferrable. For more information, please refer to Section 3.2.

PSAs are more flexible in regulating the relationship between the state and investors. Upon the state’s consent, the investor may transfer its rights and obligations to another investor, provided that the latter has the organizational and financial capacity to undertake the commitments of the initial investor under the PSA.

4.3. Stages of the production process 

Two major stages of oil & gas production envisaged by two different types of special permits are:

  •  commercial production that takes place during experimental commercial development; and
  •  commercial production after confirmation of the deposits.

The volume of hydrocarbons produced during experimental commercial development shall not exceed 10% of the preliminary estimated total volume of the deposit.

4.4. Obligatory state participation 

  •  Under the special permit regime, the major interest of the state lies, in addition to selling special permits at auctions, in receiving rental payments. As of 2022, the rates of the rental payments paid to the state budget by oil & gas producers are as follows:
  •  for old wells up to 5 kilometers in depth – 29% of the value of the extracted hydrocarbons;
  •  for old wells deeper than 5 kilometers – 14% of the value of the extracted hydrocarbons;
  •  for new wells up to 5 kilometers in depth – 12% of the value of the extracted hydrocarbons;
  •  for new wells deeper than 5 kilometers – 6% of the value of the extracted hydrocarbons.
  • The terms of PSAs may differ and contain additional incentives for the state as, for example, signature bonuses.

Under the special permit regime, investors are not limited in their right to dispose of produced oil & gas. It could be used for their own purposes, to be sold on the domestic market, or to be exported outside of Ukraine. However, on December 30, 2021, the Cabinet of Ministers of Ukraine adopted Regulation No. 1433, which obligates all gas producers to temporarily, until April 30, 2022, sell gas on the Ukrainian Energy Exchange to meet increased domestic consumption.

Under a PSA a part of the produced hydrocarbons usually goes to the state, but the investor may freely dispose of its part of the produced hydrocarbons. This is a general rule but each PSA may contain specific rights and obligations of the parties.

4.5. Risks to be considered

The major risks to be considered by foreign investors in the course of oil & gas production are:

  •  frequently changing tax rules/rates;
  •  temporary obligations to sell 20% of the produced hydrocarbons on the domestic market; 
  •  problems with connection to oil/gas pipelines, etc.   

5. TERMINATION OF PRODUCTION OF OIL & GAS 

5.1. Abandonment and decommissioning  

5.2. Environmental and HSE consideration 

The obligations of oil & gas explorers/producers regarding decommissioning of wells and production sites are established by the Subsoil Code of Ukraine, by the laws On Oil and Gas, On Environmental Protection, and some secondary legislation.

Exploration/production site decommissioning measures to be taken by oil & gas explorers/producers are set in the relevant Environmental Impact Assessment Report and the working program that constitutes a part of the special permit.

The major principle to be observed by the oil & gas explorers/producers is to restore to the maximum extent possible the exploration/production site to its pre-development condition. Or, when complete restoration is impossible, to take compensatory measures to mitigate the harmful effect of exploration/production on the environment. 

6. SAFETY OF OIL & GAS EXPLORATION AND PRODUCTION 

6.1.  International treaties to which the jurisdiction is a party 

Ukraine is a party to the Convention on the Continental Shelf (1958), which establishes the rights of member states over the continental shelf for the purpose of exploration and exploitation of its natural resources. Proceeding from the articles of the convention, states have the right to right to construct, maintain and operate relevant structures and other installations on the continental shelf. At the same time, the member states should create security zones around those structures and undertake appropriate measures for the protection of the environment. Also, the exploration of the continental shelf and exploitation of its natural resources should not unreasonably interfere with shipping, fishing, or scientific research carried out for the purpose of publication.

6.2. Offshore Safety Directive

Although the Offshore Safety Directive is not implemented into the domestic legislation of Ukraine, protection of the environment and rational use of energy resources are among the core principles of the Ukrainian oil & gas market. To illustrate, the Law of Ukraine On Oil and Gas stipulates that the undertakings involved in the use of oil & gas subsoil, production, transportation, storage, processing, or sale of oil & gas are obliged to comply with environmental legislation, be responsible for its violation and carry out technical and organizational measures in order to reduce harmful effects on nature. Alternatively, reference could also be made to the Order of the Ministry of Energy of Ukraine No. 686 of 02.11.2015 On Approval of the Rules on the Security of Natural Gas Supply, which was issued to ensure the security of natural gas supply in Ukraine by forecasting and assessing possible risks, taking measures to prevent risks or reduce any possible damage from such risks.

7. IMPORT, EXPORT, AND SALES OF OIL & GAS 

7.1. Import and Export of oil & gas

Pursuant to Article 3 of the Agreement on the Implementation of Coordinated Policy in the Field of Transit of Oil and Oil Products by Main Pipelines, ratified on June 11, 1997, the transit of oil & gas should be carried out in accordance with multilateral and bilateral protocols for the coordination of transit quantities and schedules, taking into account the volume of their production. Accordingly, the specificities of oil & gas supply are commonly governed by transit agreements (contracts), which determine the capacity booking, transportation, or any other specific conditions. The same also stems from Article 2 of the Law of Ukraine On Oil and Gas, which provides that the transit of oil, gas, and the products of their processing, should take place in accordance with the respective agreements.

7.2. Transportation 

Relationships in the field of transportation pipelines are generally regulated by the Laws of Ukraine On Transport, On Pipeline Transport, and other legal acts. Taking into consideration that transportation pipelines and associated infrastructure play an important role in the economic prosperity and defense of the state, it is normally owned by Ukraine. At the same time, trunk pipeline facilities built at the expense of undertakings belong to them.

PSA investors have the right to build and operate pipeline facilities provided that they comply with Ukrainian legislation. Activities related to the construction, repair, and operation of pipeline transport facilities are carried out on the basis of a license, which is issued in the manner prescribed by law. Furthermore, the enterprises, institutions, and organizations of pipeline transport carry out reception, storage, transshipment, and transportation by pipelines, including for the purpose of transit on the basis of contracts taking into account the economic efficiency and capacity of the main pipelines. 

To determine environmental safety during the placement, construction of new and reconstruction of existing pipeline transport facilities, as well as during their operation, an environmental impact assessment is carried out in accordance with the procedure established by the legislation of Ukraine. Also, when building oil & gas pipelines and related infrastructure, it is mandatory to comply with urban conditions and restrictions on land development, engineering and geodetic works, development, and approval of the external gas supply project and its budget. Lastly, permits for the location of pipeline transports should be obtained from the local bodies of state executive power and bodies of local self-government.

7.3. Land rights 

Pursuant to Article 19 of the Law of Ukraine On Oil and Gas, land plots of all forms of ownership and categories could be granted to the holders of special permits for the use of oil & gas subsoils for construction, placement, and operation of oil & gas facilities by establishing land easements without changing the purpose of these land plots, except for nature reserves, health, recreation, historical and cultural purpose, and water fund. Landowners and land users are compensated for losses caused by the use of their lands. Financing of land management works and state registration of easement is carried out at the expense of the persons in whose favor the easement is established. Alternatively, Ukrainian legislation provides the possibility for the compulsory expropriation of land. In this case, reference should be made to the Law of Ukraine On the Expropriation of Land Plots and Other Privately Owned Immovable Property for Public Needs, which establishes the powers of state authorities to acquire the relevant lands.

7.4. Access and integration 

As a general rule, entities operating on oil & gas markets have equal rights to access the transportation and distribution system. Producers of biogas or other types of gas from alternative sources also have the right to such access on condition they comply with the relevant technical and legal standards, as well as safety requirements. The operator of the transmission or distribution system is obliged to provide the aforesaid undertakings with appropriate access and provide the required service. Transportation or distribution of oil & gas is usually carried out on the basis of and in accordance with the agreement in the manner prescribed by the Code of the Gas Transmission System and other regulations. Under the agreement, the gas TSO undertakes an obligation to provide the customer with transportation or distribution services for the period and conditions specified in the agreement, while the customer promises to pay the price for the respective services. The term of service provision and the amount of fees payable are also determined in the agreement.

7.5. Gas transmission and distribution 

See Sections 7.2 and 7.4

8. TRADING 

8.1. Trading license 

The major instrument governing natural gas trading is the Law On the Natural Gas Market. Pursuant to this law, wholesale natural gas trading in Ukraine does not require a license. At the same time, a natural gas trader shall obtain a special identification number (EIC code) and conclude a contract with the state-owned gas TSO. All major rules applicable to natural gas trading are set out by the Code of the Gas Transmission System.

Natural gas may be traded both through the system of bilateral contracts and the Ukrainian Energy Exchange.

8.2. Products

Natural gas is commonly traded on the Ukrainian Energy Exchange, which is an association of market participants, i.e. sellers and buyers, created for the sake of providing favorable conditions for pricing, trade, and conclusion of agreements.

9. COMPETITION

9.1. Authorities

The Antimonopoly Committee of Ukraine (AMCU) is a Ukrainian competition watchdog. The AMCU, as a state authority with special status, is responsible for the protection of economic competition. The Cabinet of Ministers of Ukraine is not directly involved in the enforcement of legislation on the protection of economic competition. However, it may authorize certain mergers, as well as concerted practices which were prohibited by the AMCU if the latter have an overwhelming positive effect on competition. When deciding on a case the Cabinet of Ministers of Ukraine may involve any governmental authorities (including ministries) as well as independent experts.

9.2.  Anti-competitive actions 

There is a general prohibition of anti-competitive concerted practices unless an exemption applies.

Anti-competitive concerted practices typically take one of the following forms:

  • fixing prices or other purchase or sale conditions;
  • limiting production, markets, technological development, or investment;
  • dividing markets or sources of supply according to territory, type of goods, sale or purchase volumes, or classes of sellers, buyers, or consumers;
  • distorting the results of trading, auctions, competitions, or tenders;
  • ousting other companies from the market or limiting their market access;
  • applying different conditions to identical agreements to put a specific company at a disadvantage;
  • executing agreements that are conditional on the contracting party’s acceptance of additional obligations unrelated to the subject of the agreement;
  • substantially limiting the competitiveness of other companies without justifiable reasons; or
  • parallel behavior (similar actions or omissions), which resulted or may result in the prevention, elimination, or restriction of competition is also considered a violation unless there are objective reasons for this behavior.

The AMCU can authorize (grant an individual exemption to) certain potentially anti-competitive concerted practices if both these conditions are met:

  • the parties can prove that these practices encourage manufacturing, technological or economic development, or other efficiencies; and 
  • the practices do not lead to a substantial restriction in competition.

The AMCU clears mergers under either the standard or simplified procedure. 

The standard timeline of the filing review by the AMCU is as follows:

Phase I

  • First Stage – 15 calendar days

15 calendar days for the AMCU to conduct a formal review of the notification and accept or reject it (upon expiration of the initial 15 calendar days period a merger control notification is deemed to have been accepted);

  • Second Stage – 30 calendar days

30 calendar days (beginning upon the expiration of the initial 15 calendar day period of review) for the AMCU to consider the substance of the transaction (permission is granted or an in-depth investigation is opened);

Phase II

  • Third Stage – up to 135 calendar days

three months for an in-depth investigation of the transaction (so-called “concentration case”) that starts running after the AMCU has received all additional information it needs from the notifying parties to reach a decision, but it cannot exceed 135 days. In practice, the AMCU can initiate an in-depth investigation of a transaction in what it views as a complicated case. For example, where the joint market share of the parties to the concentration upon completion of the transaction is likely to exceed 20%.

  • Fourth Stage

within 30 calendar days after the AMCU’s decision prohibiting the transaction, the notifying parties may apply for clearance to the CMU if they can prove that the positive social effect of the transaction will outweigh its anti-competitive impact. This stage in practice is rarely resorted to.

At the same time, Ukrainian law allows the simplified procedure of consideration of merger notification, lasting 25 days from the date of submission of the notification (as opposed to regular 45 days under the general procedure). The parties to a transaction may take advantage of the simplified procedure if:

  • only one party to the transaction is active in Ukraine; 
  • the aggregate market share of parties to the transaction does not exceed 15% on the same market; or
  • share of any party or aggregate shares of parties to the transaction do not exceed 20% on key markets.

In certain cases, AMCU may clear the merger with conditions or, rarely, reject issuing merger clearance.

In recent years the fuel and energy sector was one of the most popular sectors applying for AMCU clearance. 

10. STABILITY CLAUSE AND DISPUTE RESOLUTION 

10.1. Stability clause 

Only PSAs can contain stabilization clauses protecting investors from unfavorable changes in fiscal and other policies affecting the exploration and production of hydrocarbons. But this advantage is not available to investors under the special permits system. Consequently, the investors under the special permits system may be affected by an increase in oil & gas production rental rates.   

10.2. Compulsory dispute resolution procedure

The choice of applicable law and a dispute resolution forum is only possible under PSAs concluded between the state and foreign investors.

Subsoil use agreements that are parts of the relevant special permits are governed by Ukrainian law and are subject to the mandatory jurisdiction of Ukrainian courts.

According to the Law of Ukraine On the Natural Gas Market, the governmental regulator on the oil & gas sector has the remit to approve the procedure and review complaints against the actions of participants in oil & gas markets (except for consumers), as well as resolve disputes between them. According to the procedure, the regulator provides its binding decisions within a specified period of time and posts them on the official website. An appeal can then be submitted against such a decision in the national courts of Ukraine.

10.3.  International treaty protection 

Ukraine is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In the process of implementing an arbitration decision against governmental authorities or state organs, a foreign investor may normally face two problems. First, in the event of the state disagreeing with the arbitration decision or it being unwilling to execute it voluntarily, the foreign investor will be forced to search for state property independently and then apply for recognition and enforcement of the decision in various jurisdictions. Second, an issue could arise that a significant part of state property enjoys protection under state immunity and, thus, may not be subjected to coercive measures or be the subject of legal proceedings.

As for those instances in the Ukrainian oil & gas market where a foreign corporation successfully obtained a judgment or award against governmental authorities, a vivid example could be Case №2‑к‑8/12, where the District Court of Kyiv granted permission to Remington Worldwide Limited (UK) to enforce an arbitral award against the state of Ukraine under the New York Convention (1958).

Guide Contributors For Ukraine

Tetiana Mylenka

Counsel, Head of Energy Practice

mylenka@hillmont.com

+380 44 277 2447

 

Shota Tatarishvili

Junior Associate

tatarishvili@hillmont.com

+380 44 277 2447

 

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