By Victoria Sergeeva
On September 14, 1999, the Parliament of Ukraine passed a long-awaited law on production sharing agreements (PSAs). The law came into effect on October 14, 1999. The PSA law includes benefits for investors—for example, exemptions from profit repatriation tax for PSA profit and from value-added tax (VAT) and customs duties for exported PSA product—while bringing badly needed income to government coffers through excise duties and through VAT on the product sold locally. The Ukrainian Government expects the PSA law to attract strategic investors for the extraction of mineral resources, particularly for oil and gas resources.
Although Ukraine’s hydrocarbon reserves do not rival those of Russia and Azerbaijan, significant opportunities exist for foreign companies in this sector. Estimates indicate that Ukraine has about 5 percent of the world’s mineral wealth. The state budget, however, lacks funding for the exploitation of these deposits. Some Western companies have already expressed an interest in the exploitation of gas deposits in the Dnipro-Donetsk area. Gas deposits in the area are estimated at 500 billion cubic meters, and unexplored gas resources are estimated at another 600 billion cubic meters.
Major Provisions of the PSA Law
Under the newly adopted PSA law, a production-sharing agreement regulates the relationship between parties involved in mineral resource exploration and extraction. The law outlines the division, transportation, processing, storage, utilization, and sale of the extracted product. The state parties to a PSA are the Cabinet of Ministers and relevant local authorities of the region where the PSA is performed. The investor could be one or more Ukrainian or foreign citizens, or legal entities or corporations carrying mutual responsibility for the assigned PSA. Investors are commissioned by the State of Ukraine to perform all work at their own expense and risk, and is to be compensated with the product after it has been extracted and divided among parties. The law is believed to correspond to international standards for PSAs.
Some key features of Ukraine’s PSA law are:
¨ The list of mineral deposits allowed for exploitation in accordance with a PSA, and their size, is to be approved by the Cabinet of Ministers. The investor can apply to the Cabinet or to the State Interagency Commission (SIC) to add any new mineral deposits to the list. The Parliament has yet to approve a list of subsoil areas prohibited from being used in PSAs.
¨ The Cabinet decides on a tender for a PSA. Within two months, SIC works out the tender documents and announces the tender. SIC then evaluates the submitted bids, and sends recommendations to the Cabinet, which selects the winner.
¨ Investors and subcontractors are exempt from licensing and quota limitations when importing into Ukraine equipment necessary to perform work under a PSA, as well as when exporting this equipment out of Ukraine after completion of the PSA. This equipment is not subject to VAT and custom duties (except customs fees).
¨ The Ukrainian state retains ownership of the product before it is distributed among the PSA parties. At the time of production sharing, the ownership rights for the compensation portion of the product and the profit portion of the product (determined by each specific PSA) are vested in the investor. The product obtained by an investor is subject to VAT when sold locally, but not subject to any tax and custom duty payments (except custom fees) when exported.
¨ The Cabinet can terminate, suspend, or restrict an investor’s right to utilize mineral resources under a PSA “in case of a direct hazard to human life and health or to the environment.” This right is restored as soon as the investor remedies the factors that caused the rights restriction.
Further Steps to Be Taken
The adoption of the PSA law is expected to im-prove opportunities for foreign oil and gas extraction firms interested in opening or expanding operations in Ukraine. However, some steps still need to be taken. Ukraine’s Parliament is currently considering enabling legislation that will make relevant laws consistent with the PSA law. The enabling amendments are expected to be passed in early 2000. In addition, the Cabinet of Ministers (advised by the relevant ministries and committees) must approve a list of deposits that can be used for PSAs, and the Ukrainian Government needs to delineate the investment tendering procedures.
It is expected that oil and gas deposits on the Black Sea shelf will take precedence on the list of PSA deposits. The geology committee of Ukraine conducted an international tender in 1996 for oil and gas extraction on the shelf. A geological survey was conducted by Western Geophysical (Houston, TX) and sponsored by the geology committee. Shell Oil Co. affiliate Pecten International Company (Houston, TX) won the tender, but the joint activity agreement was not signed because the PSA law was not yet adopted at the time.
For more information on the PSA law, visit BISNIS Online at www.bisnis.doc.gov/bisnis/country/wstnis.htm#Ukraine.
Interested investors are encouraged to contact their nearest Export Assistance Center (www.ita.doc.gov/uscs/domfld.html) for detailed information on Ukraine’s oil and gas market.
Victoria Sergeeva is a commercial assistant at the U.S. Embassy in Kyiv.