Ukraine Announces Two Oil and Gas PSA Tenders

• Mezhyhirska block – pursuant to CMU Resolution No. 975
• Svichanska block – pursuant to CMU Resolution No. 982

Key information – Mezhyhirska Block

• Area: 1,515.61 square kilometers
• Depth limit: 10 kilometers
• Structure: 6 sections
• Location: within the Stryi, Sambir, Lviv, Yavoriv, and Sheptytskyi districts of Lviv region; Kalush, Ivano-Frankivsk, Nadvirna and Kosiv districts of Ivano-Frankivsk region; Vyzhnytsia district of Chernivtsi region
• Estimated resource base: approx. 21.9 million tons of hydrocarbons

Key information – Svichanska Block

• Area: 872.64 square kilometers
• Depth limit: 10 kilometers
• Structure: 7 sections
• Location: within the Drohobych, Stryi and Sambir districts of Lviv region; Verkhovyna, Kalush, Ivano-Frankivsk and Nadvirna districts of Ivano-Frankivsk region; Vyzhnytsia district of Chernivtsi region
• Estimated resource base: approximately 33 million tons of hydrocarbons

Context: US–Ukraine Reconstruction Investment Fund

Both PSA tenders are held in light of the Agreement between the Government of the United States of America and the Government of Ukraine on the Establishment of a US–Ukraine Reconstruction Investment Fund, under which the Fund must be notified of PSAs and other activities related to granting subsoil use rights and enjoys a priority right to negotiate respective investment opportunities.

Key timelines for PSA tenders

• Within 2 months from the date of the Resolutions – announcements must be published in official print media and on the Ministry of Energy’s website and tender documentation must be approved
• Within 3 months from the publication date – applications will be accepted
• Within 1 month after the application deadline – winners must be chosen

Application requirements

Applications must be submitted to a specially designated authority and include the following:

• Information about the participant
• Brief information about the submitter’s experience with subsoil use, including technical and financial capacities and planned technologies, supported by documents
• The work program for the block—including key tender conditions, environmental and subsoil protection measures and a schedule for works (e.g., electrometry, gravimetry, geological exploration, environmental impact assessment)
• Amount and type of investments (minimum investment during exploration phase—UAH 1 billion per PSA—total investment amount to be determined by tender results)
• Proposals for the distribution of production
• Commitments on personnel training and use of Ukrainian-origin goods, works and services on equal terms regarding price, timing, quality and compliance with international standards
• Social development program
• Additional proposals for fulfilling tender conditions

Documents to accompany the application

• Certified copies of state registration documents and constituent documents (founding agreement, charter, etc.)
• Certified document confirming authorized capital contributions
• Information on (i) participants/shareholders and their stakes and (ii) ultimate beneficial owners
• Ownership structure, in the form required by Ukrainian AML legislation
• Documents confirming sufficient financial and technical resources for block development
• Information on main activities, number of employees and subsoil experience (exploration and/or extraction of hydrocarbons—natural gas, oil, condensate), including the names of blocks, types/results of works, technologies applied and production capacities
• Copy of the latest audit report
• Certified copy of financial statements for the past two years, signed by an authorized person

Note: The current conditions provide information on corporate documents to be submitted by Ukrainian companies and do not explicitly stipulate what corporate related documentation is to be submitted by foreign companies. Clarifications are expected in official announcements.

Tender procedure

• Non-refundable registration fee: UAH 500,000 per PSA contest
• Applications will be reviewed by a special interagency commission, which will evaluate submissions against contest criteria

Cost recovery and profit-sharing terms

• Cost-recovery production: up to 55 percent until full recovery of investor’s costs.
• Profit-production sharing:
  • If recoverable costs exceed the maximum cost-recovery production:
    • 35 percent state / 65 percent investor
  • If maximum cost-recovery production exceeds recoverable costs within a tax period:
    • 65 percent state / 35 percent investor

Key investor advantages under the PSA

• The counterparty is the CMU
• PSA term: up to 50 years, unless otherwise agreed
• Stabilization clause: protection against legislative changes (except for defense, security, public order and environmental protection)
• Special tax regime:
  • Royalty: 2 percent for oil, 1.25 percent for gas
  • Exemption from VAT and customs duties on goods and services supplied by non-residents under the PSA
  • Other tax incentives
• No restrictions on disposal/export of hydrocarbons
• Exempt from currency-control regulations

By Maksym Sysoiev, Partner, Dentons