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Ukraine’s Energy Market Developments

Ukraine’s Energy Market Developments

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Last year Ukraine took several significant steps to encourage investments into the energy market. The Government announced a strategic goal of making Ukraine self-sufficient in energy and abandoning its dependence on imported gas.

Increasing the attraction of investment into Ukraine’s exploration and production industry is expected to be achieved by both improving relevant legislation and creating more opportunities for investors. Such new opportunities include Production Sharing Agreement (PSA) tenders, online concession auctions, and Production Enhancement Contracts offered by Ukrnafta and UGV, the largest Ukrainian state-owned oil & gas companies.

On renewable energy, a step forward was made when the draft law on renewable energy sources passed its first reading in the Parliament. The draft law introduces renewable energy auctions and should come into force on January 1, 2020.

PSA Tenders: On December 18, 2018, the Government approved the carrying out of nine onshore tenders for oil & gas PSAs for 50 years, the winners of which will be determined in June 2019. The tendered PSA areas vary in size from 286 square kilometers to 3,470 square kilometers.

All produced petroleum is divided into the Cost Petroleum and Profit Petroleum. The Cost Petroleum Share (i.e., the amount of the produced oil & gas which will be transferred to the investor to cover its expenses) will be no more than 70% of total petroleum production. The remaining petroleum will be considered Profit Petroleum and will be shared between the State and the Investor. The State’s share of the Profit Petroleum cannot be less than 11%.

PSAs are highly-regarded due to the high level of investment protection which their investors enjoy.  Ukrainian PSAs offer all key industry protections, including: (i) legal stability (i.e., no subsequent changes of law will apply to investors, other than legislative changes relating to matters of defense, national security, public order, and environmental protection); (ii) fiscal stability (no tax increases will apply to investors); (iii) international arbitration; and (iv) a separate tax regime.

Online Concession Auctions: In 2018 the Government amended the regulation of concession auctions by providing for the organization of the auctions via the online platform ProZorro.Sales. The introduction of electronic auctions is expected to provide greater transparency to the process.

The State Geological Survey has prepared 31 oil & gas blocks for auction via the ProZorro.Sales system. The total acreage of the blocks is 4,630 square kilometers. Each block comes with a number of minimum exploration program requirements, such as the obligation to conduct new seismic data research and to drill a certain number of wells. The bidder offering the highest price for a block will be considered the winner.

Three licensing rounds, offering a total of 26 auction blocks, have been proposed so far. The pioneering first round was held on March 6, 2019, involving the sale of three auction blocks in the Poltava and Kharkiv regions for a total of USD 5.1 million to UGV, DTEK Oil & Gas, and the Burisma Group. The second and third licensing rounds (consisting of seven and nine auction blocks, respectively) are planned for April and June 2019, respectively. The Government is also planning a fourth licensing round, which will involve five auction blocks in Western Ukraine and the Kharkiv region.

Renewable Energy Developments: On December 20, 2018, at first reading, the Parliament approved a draft law on renewable energy sources, introducing the long-awaited move from fixed feed-in tariffs to competitive auctions to make renewables support more economically viable.

Auctions are scheduled to be launched in January 2020 and will be conducted twice each year until December 31, 2029. Pilot auctions are to be undertaken in 2019.

Auctions will be required for all types of renewable energy technologies achieving a 15% share in the total volume of power production from renewable energy sources. To date, only wind power projects and solar projects have reached such a share. Thus, all wind projects with a capacity exceeding 5MW and solar projects with a capacity exceeding 1MW will be subject to auctions.

Currently, Ukraine offers the highest feed-in tariff in Europe. For Ukraine, 2019 may be remarkable in terms of putting various renewable energy projects into operation, as there have been many investments in the renewable energy market, including a 250MW wind power plant near Syvash Lake in the Kherson region of the country. The project funding, which totalled EUR 380 million, was sponsored by Norwegian developer NBT AS and French-based Total Eren and was provided by J.P. Morgan Securities Plc (as debt coordinator) and a pool of lenders, including the EBRD, NEFCO, FMO, and the Black Sea Trade and Development Bank, advised by Redcliffe Partners. This makes the Syvash project the biggest investment in the renewable energy sector in Ukraine to date. 

By Dmytro Fedoruk and Zoryana Sozanska-Matviychuk, Partners, and Vladyslav Zakon, Junior Lawyer, Redcliffe Partners 

This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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