Shale gas in Ukraine

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Delivered by Mr. Maksym Sysoiev, Counsel at Danevych law firm

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Shale gas in Ukraine

  1. 1. Legal Aspects of Development of Shale Gas in Ukrainedanevychlaw.com
  2. 2. About the firmDanevych law firm is a dynamic, enthusiastic, innovative and experienced legal team.Before September 2012 the team of Danevych law firm worked under the brand-name PARITET law firm.The firm and its team are recognized by:Danevych law firm is a member of:We speak: 2
  3. 3. Cooperation with Embassies Danevych law firm is a partner of the Norwegian-Ukrainian Chamber of Commerce The Firm is included into the list of recommended law firms of the Royal Norwegian Embassy in Ukraine The Firm is included into the list of recommended law firms of Royal Danish Embassy in Ukraine and regularly cooperates with the Trade Council at the Ministry of External Affairs of Denmark The Firm regularly cooperates with the Swedish Trade Council in Ukraine We are official legal advisors of the Embassy of Kingdom of Saudi Arabia in Ukraine Danevych law firm regularly cooperates with the Turkish Embassy in Ukraine 3
  4. 4. Our key legal practices• Agriculture • Energy• Banking and Financing • IP• Commercial • Information and• Corporate and M&A Communication Technology• Disputes • Life Sciences• Employment • Real Estate • Tax 4
  5. 5. Key ClientsThe team of Danevych law firm for many years advises global and internationalcompanies on various legal and tax matters. In the recent years the team of Danevychlaw firm advised (among others) the following Clients: Agriculture: Dan-Farm Ukraine ІТ: Consumer &health industry: Industrial products& infrastructure: Energy: 5 Financial:
  6. 6. Our legal partnersWe constantly implement joint projects with such legalpartners in foreign countries1. Global2. Denmark3. Italy Jacopo Gasperi Studio Legale4. Turkey 6
  7. 7. CONTENT Shale Gas in Ukraine – a great potential for investment opportunities The Main Parties Involved in Exploration and Extraction of Shale Gas Ways to Start Development of Shale Gas in Ukraine General Approach – State Auctions for Purchasing Special Permits on Exploration/Extraction of Mineral Resources Production Sharing Agreements: How It Works in Ukraine Other Possible Approachesdanevychlaw.com
  8. 8. SHALE GAS IN UKRAINE – A GREATPOTENTIAL FOR INVESTMENTOPPORTUNITIESdanevychlaw.com
  9. 9. Shale Gas Reserves The reserves of shale gas in the world are estimated at the level of 200 trillion cubic metersdanevychlaw.com
  10. 10. Shale Gas in Ukraine Carpathian Mountains (over 500 billion tones) – with average thickness of industrial layers – about 400 m Central part of Ukraine – Kirovogradska and Regions Cherkaska oblasts Dnieper-Donetsk Basin Crimean mountains The reserves of shale gas in Ukraine are estimated at the level of 7 trillion cubic meters by the Ukrainian government According to the US Energy Information Administration this figure is lower and constitutes 1,2 trillion cubic meters which, however, makes Ukraine 3rd in Europedanevychlaw.com
  11. 11. THE MAIN PARTIES INVOLVED INEXPLORATION AND EXTRACTION OFSHALE GAS TODAYdanevychlaw.com
  12. 12. State Authorities• Cabinet of Ministers of Ukraine – the main player on behalf of the state in the sphere of Production Sharing Agreements• State Service on Geology and Mines of Ukraine – specifically authorized state authority responsible for issuing permits for extraction of mineral resources, coordinating the conclusion of PSAs• Local authorities – Oblast councils, Kyiv and Sevastopol city councils, Verkhovna Rada of Crimea – approval of applications for transfer of subsoil into use (approval of PSAs)• Ministry of Ecology and Natural Resources – approval of applications for transfer into use of subsoil (approval of PSAs)• State Service of Mining Supervision and Industrial Safety of Ukraine – approval of provision of subsoil into use, establishing mining allotment• State Commission of Ukraine on Deposits of Mineral Resourcesdanevychlaw.com
  13. 13. Investors The two Companies have won the contests for signing the PSAs on development of Olesskyi region (Carpathian Region) – 2,98 trillion cubic meters of shale gas; and Jusovskyi region (4,054 trillion cubic meters of different types of non-traditional gases). The PSA with Shell was already signed in January 2013.In 2012 ENI has purchased a share in the subsidiary of NAC “Nadra Ukraine”which conducts geological exploration of different types of unconventional gases in Western Ukraine.danevychlaw.com
  14. 14. Future possibilities Ukraine plans to initiate PSA on the Sloboghanskyi region (rich in shale gas)danevychlaw.com
  15. 15. Other interested companiesdanevychlaw.com
  16. 16. Ways to start development of shale gas in Ukrainedanevychlaw.com
  17. 17. Possible approaches: 1. Going through the general procedure for getting the right to explore/extract mineral resources in Ukraine 2. Entering into Production Sharing Agreements with the Ukrainian Government 3. Purchase of a share in a company conducting shale gas exploration/extraction and having all the necessary permits 4. Public-private partnerships 5. Entering into agreements on joint activity with authorized entities conducting shale gas exploration/extraction and having all the necessary permitsdanevychlaw.com
  18. 18. General procedure – part 11. Purchasing special permits (licenses) via auctions:1) notice about the tender2) provision of tender information and guarantee payments;3) sale and purchase agreement4) payment for permitTERM - approximately 2-3 monthsThe cost of the auction documentation is 3,12 % of the starting price of the lot, upto EUR 7255. The guarantee fee - 20% of the starting price of the lot should becontributed by every candidate (subject to return if the candidate doesn’t win).danevychlaw.com
  19. 19. General procedure – part 22. Obtaining the mining allotment – within 21 days after the documents aresubmitted.3. Obtaining the right to use the land plot (land lease agreement or permanent use).4. Obtaining necessary licenses for construction works connected with usage ofsubsoil etc and elaboration of project documentation.danevychlaw.com
  20. 20. Production Sharing AgreementProduction Sharing Agreement (PSA) – an agreement between• the state of Ukraine and an investor which is assigned to conduct • search, • exploration and • extraction of mineral resources at the specified area of subsoil • and conduct other works related to the performance of the agreement, and• the investor undertakes to conduct the mentioned works • at its own expense and risk • with the subsequent compensation of such expenses and remuneration (payment) in the form of part of profit from the extracted resources.danevychlaw.com
  21. 21. Production Sharing Agreement Compensation – up to 70% of the resources. Around 15-20% of the rest is provided to the state while the other part remains with the investor. The state may put an obligation on the investor to sell the resources only in the territory of Ukraine. Several investors may sign the PSA with Ukraine (accepting joint obligations). The state ensures and facilitates obtaining by the investors of all necessary permits, authorizations and documents. The term of the PSA may be stipulated in the agreement but not more than 50 years.danevychlaw.com
  22. 22. PSA Procedure – part 11. Cabinet of Ministers issues the decision on competition on conclusion of PSA with detailed description of site and investments expected and the deadline for submitting the applications is at least 1 month after the competition is announced.2. The interested parties participate in competition. The payment for participation in the competition is set in the competition documentation (e.g. EUR 50 000). The competition documentation may include the requirement of bonus payment (the recent one had the requirement of bonus payment of EUR 240 000 000). It also contains the information on the minimum investments.danevychlaw.com
  23. 23. PSA Procedure – part 23. Maximum 3 months after the deadline, based on the best offer Cabinet ofMinisters issues the decree defining the winner – future signee of the PSA.4. The draft PSA is to be developed by the investor and is subject to statefinancial, legal, environmental and other expertise.5. The draft PSA is subject to approval by local authorities.6. The PSA is to be registered with the Ukrainian state authorities.7. The PSA must be signed within 12 months from the day when it wasobtained all necessary approvals.danevychlaw.com
  24. 24. Next steps upon signing PSA1. Foreign investor must register permanent representative office within three months after signing the PSA2. Obtaining special permits (licenses) for usage of subsoil, exploration, extraction3. Obtaining the mining allotment (up to 21 days)3. Obtaining the right to use the land plot (land lease agreement or permanent use)4. Obtaining necessary licenses for construction works, usage of subsoil, project documentation etc.danevychlaw.com
  25. 25. PSA GuaranteesThe investor may import equipment, materials etc. without the licensing andquota requirements as well as re-export them back outside of Ukraine.The state guarantees that the PSA shall be regulated by the legislation in forceas of the moment when it was signed except when it lowers taxes, simplifiesrequirements and procedures concerning the activities of the investor.Decisions of executive and local authorities do not apply to the investor if suchdecisions limit the rights of the investor provided by the PSA.Monetary income may freely be converted in other currencies and transferredoutside of Ukraine. Many limitations and restrictions concerning the currencyare not applied to the investor.danevychlaw.com
  26. 26. Other possible approaches Purchasing a share in a Ukrainian company - Investor has to make sure that the Ukrainian company has all the necessary permits and documents when taking the decision on purchasing - It should be kept in mind that the scope of necessary documents and approvals is very complicated and elaborated therefore the risk of certain non-compliance is quite considerable - As an example of ENI, a company established by a state enterprise may be more trustworthy, however, there is no guarantee. Thus, the respective due diligence should be conducted Concluding Agreements on Joint Activity with authorized entities conducting shale gas exploration/extraction and having all the necessary permits Public-private partnershipsdanevychlaw.com
  27. 27. Subcontracting Works and Services by Danish Companies within the PSA Agreements in Ukrainedanevychlaw.com
  28. 28. Forms of business presence in Ukraine Subcontractors may choose on of the two options: Permanent Limited Liability Representative Office Company Representative office is not an Subsidiary is an independent legal entity and independent legal therefore can conduct entity which conducts commercial activity only on activity on its own behalf of the founding company behalfdanevychlaw.com
  29. 29. RepOffice vs. LLC (1) 1. Process of establishingRegistration authority: Registration authority: stateMinistry of Economy of Ukraine administrationRegistration fee: USD 2 500 Registration fee: around USD 22Timeframe: up to 4 months Timeframe: up to 1 monthLegal services fees: USD 4 995, Legal services fees: up to USD 3 380,excluding any notarization and excluding any notarization andtranslation fees translation fees. 2. Liability Direct liability of the founding Subsidiary bears liability company independentlydanevychlaw.com
  30. 30. RepOffice vs. LLC (2) 3. Banking issuesBank account of type “P”: Standard rules for operating bank• No limitations as to transactions accounts in Ukraine in national currency• Restrictions on purchasing foreign currency• Restrictions to conducts investments in Ukraine 4. Obtaining permits and licensesNo direct restriction to obtain May obtain any permit/license uponpermits and licenses compliance with the respective- Practical problems are highly requirementspossibledanevychlaw.com
  31. 31. RepOffice vs. LLC (3) 5. Reporting on income to tax authorities• Separate accounting and Strictly separated accounting balance sheet is and balance sheet recommended No grounds for tax authorities• Often queries re possible to claim additional income additional incomes• Alternative ways for assessing taxable profit (0,3) 6. Working permits for foreign citizens Not required (as of today – Required limited number)danevychlaw.com
  32. 32. RepOffice vs. LLC (4) 7. Practical issuesPower of attorney issued by Simple delegation of powers bythe Head of the RepOffice the directorneeds to be notarized 8. Taxation Taxation regime is the same for both types of business presencedanevychlaw.com
  33. 33. Taxation of contractors DOING BUSINESS VIA SUBSIDIARY OR REPOFFICE VAT Supply of production produced under PSA is subject to VAT (20 %). Goods imported for usage within PSA are tax-free at customs (saving the excise duty). The services connected with the performance of PSA rendered by non- resident to investor are exempted from VAT. Corporate Profit Tax Tax rate of Corporate Profit Tax as for 2013 – 19 %.danevychlaw.com
  34. 34. Taxation of contractors DOING BUSINESS WITHOUT A SUBSIDIARY OR REPOFFICE VAT The same rules as mentioned in previous slide shall apply. Corporate Profit Tax • According to Double Taxation Treaty between Denmark and Ukraine doing business regarding shale gas for more than average 30 days (totally) per 12 months constitutes PE. • If related to offshore drilling, PE arises after 6 month activities. • In this case the tax rate of Corporate Profit Tax (for 2013) 19 % shall be applied. If presence in Ukraine is less than 30 days (for offshore drilling less than 6 month) All profits gained by non-resident in Ukraine are not subject to taxation in Ukraine unless there is PE in Ukrainedanevychlaw.com
  35. 35. CONTACTSt +38 044 596 46 36f +38 044 596 46 35e maksym.sysoiev@danevychlaw.com MAKSYM SYSOIEV, LL.M.,a 10 B, Vozdvyzhenska Street, Office 8, Kyiv, 04071 Attorney-at-law, Counsel ofUkraine DANEVYCH law firmwww.danevychlaw.com

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