1. Legal Structure of the Ukrainian Hydrocarbon Market
by Yaroslav A. Petrov, Associate

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•General terms & conditions for subsoil use;
•Exploration of oil & gas under production sharing
agreements (“PSAs”);
• Incentives to investors and contractors; and
• Special terms for exploration & production of unconventional
hydrocarbons.
Scope of the Presentation

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• The Ukrainian nation owns all subsoil located within its
territory and its continental shelf.
• State and municipal bodies manage ownership rights of
the Ukrainian nation over subsoil.
• Subsoil can be granted to subsoil users into use only.
• Subsoil users: Ukrainian and foreign natural and legal
persons.
• Extracted oil & gas is owned by subsoil user.
Subsoil Ownership

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To explore and/or extract mineral deposits in Ukraine a
person has to obtain:
•a special permit for subsoil use (the “Special Permit”);
•a mining lease/allotment (not necessary for exploration
works); and
•documents evidencing the allocation of a land plot for
subsoil use.
Legal Grounds for Subsoil Use

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• The main document granting rights for subsoil use.
• The State Agency for Geology and Mineral Resources
issues Special Permits.
• Special Permits include information with respect to:
• a special permit holder;
• types of subsoil use activity;
• subsoil block’s boundaries;
• subsoil use term; and
• annexes, including an agreement on subsoil use terms &
conditions.
Special Permit

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• exploration of oil & gas, including pilot production (up to 5
years onshore and up to 10 years offshore);
• production of oil & gas (up to 20 years onshore and up to
30 years offshore);
• exploration and production of oil & gas (up to 20 years
onshore and up to 30 years offshore);
• construction and use of underground oil & gas storage
facilities (up to 50 years);
• operations under production sharing agreements (up to 50
years).
Note: subject to user’s compliance with statutory terms &
conditions the term for subsoil use may be extended.
Special Permits Are Issued for the Following Activities and for
the Following Terms:

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• Special Permits are issued at auctions with a few exceptions.
• Special Permits may be issued upon a non-auction procedure in
limited cases, including:
• in case of extension of the size of the previously granted subsoil
block of up to 50% for purposes of additional exploration and
increase of production;
• exploration financed from the state budget;
• exploration and production by fully or partially state-owned
companies;
• implementation of production sharing agreements.
• A starting auction price is calculated upon a special statutory
approved methodology.
• A fee in the amount of the starting auction price is payable to obtain
the Special Permit without an auction.
Issuance of Special Permits

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• Limitations on Transfer:
• A Special Permit may not be transferred or assigned as a gift
be disposed, trough sale or otherwise, including transfer to a
charter capital of a joint venture with a Special Permit holder
or as a contribution to a joint activity.
• Limitations on Size of Blocks:
• max 500 square km;
• max 1,000 square km for the Black Sea;
• Special Permits issued based on production sharing
agreements may cover larger areas.
Special Permits Are Subject to the Following Legal
Limitations:

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• Option 1: Buying a Special Permit;
• Option 2: Establishing a non-incorporated joint activity with
a Special Permit holder;
• Option 3: Establishing an incorporated joint venture with a
Special Permit holder with its 50% equity;
• Option 4: Entering into a production sharing agreement
with the State of Ukraine.
Legal Options for Getting Access to Subsoil Use
Rights:

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• Non-conventional hydrocarbons means shale gas, coal
bed gas (methane), basin-center type gas, crude oil,
condensate or other hydrocarbon materials located in non-
conventional collectors.
Definition of Non-Conventional Hydrocarbons

11. Production Sharing Agreement

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• The Law of Ukraine “On Production Sharing Agreements” No.1039-XIV, dated
14 September 1999, as amended.
• PSA means an agreement between the State and investor(s), where investor
undertakes to explore and produce oil & gas at its own cost while its expenses
are compensated with its share of cost production and subsequent sharing of
profit production with the State.
• An investor may be:
• (a) a Ukrainian or foreign companies or natural persons, consortium of Ukrainian
and/or foreign companies acting separately or jointly possessing all relevant financial
and economical capacities or a relevant qualification for subsoil use upon winning a
relevant tender; or
• (b) a company fully owned by the State, selected through a competitive tender or a
legal entity established by such state owned legal company (may act only as an co-
investor together with the investor, described in item (a) above); or
• (c) an assignee of either (a) or (b).
• PSA may be executed with several investors upon their joint and several
liability under the PSA.
PSA: Definition and Parties

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• PSA is executed with a winner of a tender announced by
the State with a few exceptions.
• An investor may request the State to tender out a
particular subsoil block.
• A tender is valid upon participation of at least one
participant.
• PSA may be entered without a tender:
• for a subsoil block with non-significant deposits;
• upon request of the Special Permit holder intending to
enter into PSA.
PSA Tenders

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• Stabilization against adverse legislative changes.
• Flexibility in the most significant provisions of the PSA.
• Free disposal of hydrocarbons.
• Assistance in obtaining of governmental approvals, work
permits for expats, importing of goods and equipment.
• The State assists in obtaining land use rights for purposes
of PSAs.
• Liberal controls over currency and payments.
• A preferential tax regime.
• Compensation of investor’s expenses incurred before
execution of PSA.
• Max statutory cost production should not exceed 70%.
Advantages of PSAs for Investors

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• Assistance in Obtaining Governmental Approvals
The State facilitates issuance to operator's contractors and
subcontractors of all approvals, quotas, licenses to carry out
exploration and use of mineral deposits and other authorizations
related to the subsoil use and performance of works under PSA.
• Assistance in Labour Issues
The State facilitates issuance of work permits and service cards
(applicable to employees of foreign companies' representative offices)
to foreign employees of investors' contractors and subcontractors.
• Assistance in Importing Goods
The investor's contractors are not subject to licenses and quotas for
importation to Ukraine of their own or leased equipment, materials and
other assets required for performance of works under PSA.
Advantages of PSA for Investor’s Contractors

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PSA may include special stages, procedures and rules
related to exploration and production of unconventional
hydrocarbons. Those provisions may deviate from the
statutory provisions related to exploration and production of
conventional hydrocarbons.
PSA and Unconventional Hydrocarbons

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Yaroslav A. Petrov
Leonardo Business Center, 14th floor
19-21 Bohdana Khmelnytskoho Str.
Kyiv, 01030, Ukraine
Tel. + 380 44 230 6000
Fax + 380 44 230 6001
E-mail: yaroslav.petrov@
asterslaw.com
Website: www.asterslaw.com