Crux (#10 October 2012)

Sensitive but Strategic Issue

Ahead of the cold season one remembers that natural resources are exhaustible. Humanity invents new ways to heat and alternative energy sources are becoming more and more popular. Hence, insufficient resources are still in demand as never before. This month, the Crux column is dedicated to the energy law, in particular, electrical power and mining.

Alexander Burtovoy, partner, ANTIKA

Alexander Burtovoy, partner, ANTIKA

What are the initiatives and program documents of the President and the Cabinet of Ministers of Ukraine that are aimed at reducing the state’s dependence on import of natural gas, in particular, by reducing its consumption?

The Reform Program of the President of Ukraine is among the program documents that should be mentioned, as a separate part of it is devoted to the reform in the energy field with the main objective to increase energy efficiency and to reduce dependence on imported energy resources, in particular, natural gas. The Energy Strategy of Ukraine is among a number of other documents.

An important step to reduce the energy dependency of Ukraine is to attract major foreign investors in the exploration and development of unconventional (shale) gas, including signing of production sharing agreements.

The tenders for exploration and development of Yuzovsky deposit in Donetsk Region (won by Shell), Olessky deposit in Lvov Region (Chevron), as well as Scythian deposit of the Black sea shelf (ExxonMobil) have been held. Negotiations on production sharing agreements are holding. One should not forget that one of the world leaders in the raw material exploration and production of hydrocarbons, the company ENI, signed a share purchase agreement with NJSC Nadra Ukrayny to acquire a participating share in Westgazinvest LLC, which owns special permits for exploration and development of shale gas in western Ukraine.

The closure of the deal and the launch of the exploration and mining program are planned for the start of October 2012. According to the terms of agreement, more than USD 50 million will be spent on financing the exploration program.

Volodymyr Yakubovskyy, senior associate, AstapovLawyers

Volodymyr Yakubovskyy, senior associate, AstapovLawyers

A consortium consisting of ExxonMobil, Shell, Romanian Petrom, and NJSC Nadra Ukrayny became the winner of a competition and was awarded an agreement on production sharing concerning the Scythian hydrocarbon deposit that borders Zmeiny Island. The winner is to sign a production sharing agreement for a period of 50 years with Ukraine. The investor will be entitled to compensate its expenses with 70% of total production. What provisions to protect the rights of investors would you include in the agreement, taking into account the recent controversy between Ukraine and Romania over Zmeiny island?

First of all, it is advisable for investors to ask for the agreement to be subject to the law of a foreign jurisdiction and arbitration proceedings to ensure unbiased resolution of any potential dispute between the investors and the state of Ukraine. This is normal practice for this type of agreement. The common place for arbitration of energy related cases is Stockholm Arbitration. In case a product sharing agreement is subject to English law, investors may ask for either of the following two things or both:

— Warranty. The state of Ukraine would warrant that it does not possess any information or knowledge of any other potential territorial claims from third-party states. Should this statement turn out to be untrue then the investors would have the right to compensate any damages that may have occurred as a result of such breach of warranty.

— Indemnity. If a specific indemnity is included in the agreement, the state of Ukraine would in this case indemnify the investors from any loss or expenses in relation to a third party state’s claims based on territorial disputes.

But these provisions are subject to negotiations between the parties. Ukraine may be very reluctant to give any warranty and bear the risk of compensating investors with their investment as regarding its boarders.

Sergiy Danylenko, counsel, ENGARDE Attorneys at Law

Sergiy Danylenko, counsel, ENGARDE Attorneys at Law

Are there currently any standard terms of cooperation between private Ukrainian electricity traders and their foreign counterparts? If so, what are they? If not, what terms should be introduced?

Cooperation between private traders and foreign counterparts in the sphere of electricity supplies takes place on the basis of foreign economic agreements. The question about such cooperation is primarily connected with the export of electricity as Ukraine is an exporter of electricity and the country is as good as not engaged in the import of electricity.

A foreign company entering into contracts with private traders must be aware of the Ukrainian procedure for export of electricity and of the status of supplier of energy (trader).

Under the On Electric Power Engineering Act of Ukraine of 16 October 1997, No.575/97-VR in order to carry out the export of electricity, suppliers of energy (traders) shall purchase necessary supplies of electricity on the wholesale electric energy market in Ukraine at wholesale market prices.

Access to throughput of inter-state electric networks of Ukraine with the purpose of exporting electric energy is granted on conditions of public sale. A public sale of access to the throughput of inter-state electric networks of Ukraine for a period not exceeding one month is performed by the subject of the electricity system, which performs transfer of electric energy by the inter-state electricity networks of Ukraine. Participation in a public sale is open to subjects of the electric power industry (traders), which possess a license for supplying electricity, are members of the wholesale electricity market in Ukraine and do not have any arrears for electricity purchased on the wholesale electricity market of Ukraine. Public sales are to be held at least once a month on condition that there is spare throughput available with the inter-state electric networks of Ukraine. The winner of the public sale is a subject of the electricity industry, which has offered the highest price. Transfer of electricity for export shall be performed on the basis of an agreement concluded with the subject of the electric engineering system of Ukraine, which carries out transfer of electricity by inter-state electric networks of Ukraine. The mentioned subject of the electric engineering system enters into an agreement with the winner of the public sale of access to the throughput of the inter-state electricity networks of Ukraine, including the technical specifications for ensuring export of electricity. A model agreement on access to the throughput of the inter-state electricity networks of Ukraine is approved by the national commission entrusted with state regulation of the energy industry.

Oksana Kyrychenko, lawyer,  Salkom

Oksana Kyrychenko, lawyer, Salkom

Is the standard agreement of the European Federation of Energy Traders (EFET) currently used in Ukraine? For example, in relations with foreign traders on foreign contracts? Please, specify features of that agreement, its advantages and disadvantages, in particular, for Ukraine.

EFET has developed several standardized documents intended to facilitate the trading of energy. The General Agreement Concerning the Delivery and Acceptance of Electricity is one of these documents and an industry standard for European trading in electric power. Its current Ukrainian version, which is available on the EFET website, is a dual-language document with no significant deviations from the official text. In addition to the main body, an election sheet (for customizing or excluding specific provisions and stipulating additional provisions), annexes for confirming individual contracts, and ancillary documents (such as a collateralization annex) are among the components of the document. The agreement has not been adapted to Ukrainian law, or officially endorsed by the government. Ukrainian entities wishing to use this document as a template for negotiating cross-border contracts in electricity transactions with foreign partners should ensure that the provisions of such contracts are valid and enforceable under Ukrainian law (which, depending on the circumstances, may be applicable in whole or in part).

Standardized documents are developed by EFET to optimize the benefits of a liberalized energy industry. It is likely that the harmonization of energy contracts used by Ukrainian entities with the EFET documents may only be possible after the Ukrainian wholesale electricity market is transformed into a competitive one operating through a system of bilateral contracts between producers, suppliers and consumers of electricity (as envisaged by Draft Act No.10571).

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