In Re (#06 June 2014)

The Draft Subsoil Code of Ukraine. New Possibilities

by Anzhelika I. Shtukaturova

The effective Subsoil Code of Ukraine (the Code) was approved in 1994 and has long outlived its useful life.

Therefore, the Cabinet of Ministers of Ukraine proposed (approved) a new version of the Code (the Draft) prepared by the Ministry of Ecology and Natural Resources.

The purpose of the Draft, as mentioned in the explanatory note, is to modernize and harmonize all subsoil legislation, modify the right to use subsoil, reduce the number of approvals and other bureaucratic procedures, aiming to revolutionize the overall framework of subsoil use in Ukraine, in particular by means of its liberalization. But the most expected and key words for the market are “codification” and “transparency”.

It should be noted that taking into consideration the current strictly regulated and sometimes illogical subsoil use mechanism in Ukraine, foreign investors welcome initiatives on liberalization of the subsoil market.

It should be noted that taking into consideration the current strictly regulated and sometimes illogical subsoil use mechanism in Ukraine, foreign investors welcome initiatives on liberalization of the subsoil market

It should be noted that the Draft contains provisions and changes to the following legislative acts:

1. Land Code of Ukraine of 25 October, 2001, No.2768-III;

2. Water Code of Ukraine of 6 June, 1995, No.213/95-ВР;

3. On Land Lease Act of Ukraine of 6 October 1998, No.161-XIV;

4. On Oil and Gas Act of Ukraine of 12 July 2001, No.2665-III;

5. On Basic Principles for Functioning of the Natural Gas Market Act of Ukraine of 8 July 2010, No.2467-VI;

6. On Mortgage Act of Ukraine of 5 June 2003, No.898-IV;

7. On Insurance Act of Ukraine of 7 March 1996, No.85/96-ВР;

8. On Product Sharing Agreements Act of Ukraine of 14 September 1999, No.1039-XIV;

9. On Environment Protection Act of Ukraine of 25 June 1991, No.1264-XII;

10. On Coal Bed Gas (Methane) Act of Ukraine of 21 May 2009, No.1392-VI and others.

The Draft contains new rules regarding:

1. Offshore oil and gas exploration and production

2. Underground water use

3. Simplification of the procedures for obtaining special permits

4. Simplification of the procedures for obtaining land rights for mineral resources use

5. Possibility to transfer subsoil use rights

6. New insurance regulations for oil and gas production

7. Changes in legislative and regulatory framework for production sharing agreements

8. New regulations for the tenders

We will briefly analyze all of them.

Offshore oil and gas exploration and production

Currently offshore exploration and production of minerals are regulated by:

The United Nation Convention on the Law of the Sea;

On the Exclusive (Maritime) Economic Zone of Ukraine Act of Ukraine of 16 May 1995,  No.162/95-ВР;

The Safety Rules for Performance of Exploration and Production Works at Oil and Gas Deposits in the Black and Azov Seas, Order of 14 December 2012, No.1423.

Finally, the Draft contains a number of legal norms specifically governing oil and gas production within the territorial waters. As of today, the subsoil use within the maritime (economic) zone is rather badly regulated.

Simplification of the underground water use

Most oil and gas producers have difficulties obtaining the special permits for water use. According to the Draft, the owners and, most importantly, the users of the land plots will have the right to special water use for up to 300 cubic meters per day without a permit for water use. This can be viewed as a really positive development for the market players.

Simplification of the procedures for obtaining special permits/subsoil use rights

There are rather significant amendments suggested by the Draft with respect to:

  1. Procedures;
  2. Documents and
  3. Relevant authorities dealing with the issuance of special permits/granting of subsoil use rights.

The Subsoil use agreement should contain all the provisions, including, inter alia, technical, economic, social, environmental and others, obligations of the parties, a possibility to transfer subsoil use rights, terms and conditions for subsoil production and distribution

Currently, subsoil use rights are granted based on special permits for subsoil use (the Special permit). Special permits are issued by the State Service for Geology and Mineral Resources of Ukraine (the Derzhgeonadra).

A special permit grants a right to its holder to use subsoil, subject to the conditions specified in the special permit. Special permits are issued to winners of auctions or following a non-auction procedure in cases determined by law.

In addition, the holders of the special permit are obliged to execute the agreement on subsoil use (the Subsoil use agreement), which is an integral part of the special permit.

However, the Draft proposes the opposite. According to the Draft, the Subsoil use agreement is to be a document, confirming the right, and the special permit is to be an annex to it. The Subsoil use agreement should contain all the provisions, including, inter alia, technical, economic, social, environmental and others obligations of the parties, a possibility to transfer subsoil use rights, terms and conditions for subsoil production and distribution.

Simplification of the procedures for obtaining the land rights for mineral resources use. Possibility to transfer subsoil use rights

Currently Ukrainian law allows for the pledge of minerals (including those which are to be produced by the subsoil user in the future) and does not allow subsoil use rights to be pledged or booked for accounting purposes. Furthermore, Ukrainian legislation prohibits the alienation of mineral rights, including contributions to a joint activity. Currently existing economic and social conditions of the industry demonstrate the urgent need to consider market-based mechanisms for this sector of the economy, because business entities associated with the use of mineral resources are, as a rule, resource driven.

Based on the provisions of the Draft, it will make it possible to transfer or pledge the subsoil use rights (as proprietary rights). This is really a revolutionary step for the Ukrainian market. However, any transfers or pledge of subsoil use rights are subject to approval by the Derzhgeonadra.

It should be stressed that the Draft envisages a preemptive right for the state to buy subsoil rights, which are offered for alienation.

The state will have a right to purchase subsoil use rights through a business company 100% owned by the Cabinet of Ministers of Ukraine, and such purchase is subject to approval of Derzhgeonadra. Agreements on alienations of subsoil use rights executed without approvals whilst neglecting the preemptive right of the state will result in invalidity of such agreements.

Based on the Draft, in case of subsoil use rights transfer, land use rights are to be automatically transferred to a new subsoil user. However, the legal procedures for such “automatic transfer” are yet to be drafted.

New regulations for insurance during oil and gas production

According to the Draft, the mandatory insurance of property risks in the industrial development of oil and gas deposits is to be implemented.

Changes in legislative and regulatory framework for production sharing agreements

According to the Draft, in case of technical changes as to the data (i.e. coordinates of the deposit), amendments to the special permit would not be obligatory.

In addition, the Draft proposes that the subsoil use under the product sharing agreement can be performed without execution of a Subsoil use agreement. 

New regulations on the tenders

The Draft proposes to introduce a competitive procedure for obtaining the right to exploit subsoil deposits. Winners of tenders will be selected by a special commission, which will include representatives of the central government, local government and local communities.

To summarize, the market is looking forward to the Draft and improvement proposed thereby.

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