E&P in Ukraine: "Legal Vacuum" or "Full Steam Ahead"?
Ukraine's recent conclusion of its production sharing agreement (PSA) with Shell was a big milestone, according to Vitaly Radchenko, Counsel, CMS Cameron McKenna.
In his presentation at the Ukrainian Energy Forum, he said, "The Shell PSA being concluded proves we can still go forward without specific and dedicated legislation."
He showed a slide depicting natural gas production in Ukraine for 2012, commenting that Naftogaz was ahead of the game at 90%, but private producers accounted for 1.8 bcm/year.
He noted that Cub Energy had shown a 250% increase in gas production last year, and that total reserves of unconventional gas in Ukraine had been estimated up to 5,000 bcm.
Of unconventionals in Ukraine, Mr. Radchenko said, "It has never been explored so there's a legal vacuum: no legal or technical framework. Will this impede companies from going forward?" he asked, answering, "No, the development can proceed further with the legislation being developed as we go as in Poland and other jurisdictions."
As to what producers were actually allowed to produce and what was written in their special permits, he said: "It comes down to a question of the composition of the gas, technology or type of the reserve. We've seen permits issued for shale gas, CBM, etc. There's still some doubt, lack of confidence that if you have a permit for shale gas and then producing conventional gas and you're not allowed according to your permit," he explained, noting that their composition was virtually the same.
Ukrainian legislation still did not address this, he said, but did mention shale gas and CBM. Producers were allowed to produce "unconventional hydrocarbons" as general term, he noted.
"There's a new taxation system, which taxes types of unconventional gas equally. The preferential tax treatment has been there since day one."
"We can start projects with the current level of legislation, but it will be necessary to change some of the old rules," he said, offering that in the PSA regime one area might be the specific stages related to unconventional gas development.
There were things that were to be changed regarding water usage, waste management, etc. (as previous regulation came from the 1970s and 80s).
"Fracking has been done, it is a reality," noted Mr. Radchenko, of its use in Ukraine.
He spoke of the current initiatives relating to unconventional gas, including a re shuffle approach to sub-soil permits making them transferable usable as collateral; also, no limitations for the size of land plots; and no limitations with respect to selective development, etc.
In terms of taxation, he said that two laws had recently been submitted to the Government: the temporary prohibition of unconventional gas exploration and production, which had been recalled in February.
As for "Backing into a PSA: Entering into a PSA Without a Tender," which was the title of a speech by Bate Toms, Managing Partner, BC Toms, he said it was not as bad as it had been portrayed. "Those of us who are here understand that," he commented.
"Technical/legal compliance is important and if you don't you leave yourself open to litigation problems, which are solely for technological non compliance," he explained, listing issues that had come up because of the poor drafting of such laws.
He said he had come up with numerous improvements for smoothing thing out. He explained; "The only way this is going to happen is for law firms to treat this as a project - helping to modify laws that have no real lobby behind them, but are just glitches."
Many of the issues, he said, applied to agriculture, that a land lease law had been amended in 2008 and thus land leases could be voided.
"Most oil and gas operations occur on agricultural land - there should be an exemption," said Mr. Toms, who noted that there were some vague criteria like "causing negative influence to the subsoil."
According to him, the conversion cost from exploration to production license in Ukraine was much too high, and needed to be corrected.
"The Government can expropriate land in a PSA zone," he explained, saying he would like that completely eliminated, as it could be used to create massive state farms, and threatened the agricultural business.
"A lot has been done to improve the PSA in the last several years, but it's no longer a level playing field - there's been some equalization from a policy standpoint, especially for exploration of shale gas."
Mr. Toms concluded, "Ukraine's legal system is adequate if you're extremely careful; we hope many will join us here."