# UKRAINIAN PARLIAMENT PASSES PSA LEGISLATION

 

ByVictoria Sergeeva

 

On September 14, 1999, theParliament of Ukraine passed a long-awaited law on production sharingagreements (PSAs). The law came into effect on October 14, 1999. ThePSA law includes benefits for investors—for example, exemptions from profitrepatriation tax for PSA profit and from value-added tax (VAT) and customsduties for exported PSA product—while bringing badly needed income togovernment coffers through excise duties and through VAT on the product soldlocally. The Ukrainian Government expects the PSA law to attract strategicinvestors for the extraction of mineral resources, particularly for oiland gas resources.

 

Although Ukraine’shydrocarbon reserves do not rival those of Russia and Azerbaijan, significantopportunities exist for foreign companies in this sector. Estimates indicatethat Ukraine has about 5 percent of the world’s mineral wealth. Thestate budget, however, lacks funding for the exploitation of these deposits.Some Western companies have already expressed an interest in theexploitation of gas deposits in the Dnipro-Donetsk area. Gas deposits inthe area are estimated at 500 billion cubic meters, andunexplored gas resources are estimated at another 600 billion cubic meters.

 

Major Provisions of the PSA Law

Under thenewly adopted PSA law, a production-sharing agreement regulates therelationship between parties involved in mineral resource explorationand extraction. The law outlines the division, transportation, processing,storage, utilization, and sale of the extracted product. The stateparties to a PSA are the Cabinet of Ministers and relevant localauthorities of the region where the PSA is performed. The investor couldbe one or more Ukrainianor foreign citizens, or legal entities or corporationscarrying mutual responsibility for the assigned PSA. Investors arecommissioned by the State of Ukraine to perform all work at theirown expense and risk, and is to be compensated with the product afterit has been extracted and divided among parties. The law is believed tocorrespond to international standards for PSAs.

 

Some key features of Ukraine’s PSA law are:

¨  The list of mineraldeposits allowed for exploitation in accordance with a PSA, and theirsize, is to be approved by the Cabinet of Ministers. The investor canapply to the Cabinet or to the State Interagency Commission (SIC) toadd any new mineral deposits to the list. The Parliament has yet toapprove a list of subsoil areas prohibited from being used in PSAs.

¨  The Cabinet decides on a tender for aPSA. Within two months, SIC works out the tender documentsand announces the tender. SIC then evaluates the submitted bids, andsends recommendations to the Cabinet, which selects the winner.

¨  Investors and subcontractors are exempt from licensingand quota limitations when importing into Ukraine equipment necessary toperform work under a PSA, as well as when exporting this equipmentout of Ukraine after completion of the PSA. This equipment is notsubject to VAT and custom duties (except customs fees).  

¨  TheUkrainian state retains ownership of the product before it is distributedamong the PSA parties. At the time of production sharing, the ownershiprights for the compensation portion of the product and the profit portionof the product (determined by each specific PSA) are vested in theinvestor. The product obtained by an investor is subject to VAT whensold locally, but not subject to any tax and custom duty payments(except custom fees) when exported.

¨  TheCabinet can terminate, suspend, or restrict an investor’s right to utilizemineral resources under a PSA “in case of a direct hazard to human lifeand health or to the environment.” This right is restored as soon asthe investor remedies the factors that caused the rights restriction.

 

FurtherSteps to Be Taken

The adoption of the PSA law is expected toim-prove opportunities for foreign oil and gas extraction firmsinterested in opening or expanding operations in Ukraine. However, somesteps still need to be taken. Ukraine’s Parliament is currently consideringenabling 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 andcommittees) must approve a list of deposits that can be used for PSAs, andthe Ukrainian Government needs to delineate the investment tenderingprocedures. 

 

It is expected that oil and gas depositson the Black Sea shelf will take precedence on the list ofPSA deposits. The geology committee of Ukraine conducted aninternational tender in 1996 for oil and gas extraction on the shelf. Ageological survey was conducted by Western Geophysical (Houston, TX) andsponsored by the geology committee. Shell Oil Co. affiliate PectenInternational Company (Houston, TX) won the tender, but the joint activityagreement was not signed because the PSA law was not yet adopted atthe time. 

 

*For more information on the PSA law, visit **BISNIS Online** atwww.bisnis.doc.gov/bisnis/country/wstnis.htm#Ukraine.*

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*Interested investors are encouraged to contact their nearest ExportAssistance Center (www.ita.doc.gov/uscs/domfld.html) for detailed informationon Ukraine’s oil and gas market.*

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*Victoria Sergeeva is acommercial assistant at the U.S. Embassy in Kyiv.*