Kinstellar Energy Digest: Ukraine October 2018 in Review

November 2018 – Kinstellar Energy Digest: Ukraine, October 2018 in Review

PRIVATISATION: Sale of Centrenergo is scheduled by the end of 2018

The auction for the sale of 78.289% of the state-held shares of Public Joint-Stock Company Centrenergo”, one of the largest power generating companies in Ukraine operating three thermal power plants with total installed capacity of approximately 7,690 MW, is scheduled on 13 December 2018. The deadline for submitting supporting documents is 6 p.m. EET on Wednesday, 5 December 2018. By 6 p.m., 28 November 2018, a potential buyer shall sign a confidentiality agreement with the Ukraine`s State Property Fund to receive a set of documentation about the action.

The starting price has been determined by an independent advisor and amounts to UAH 5.984,992 billion (approximately EUR 187 million or USD 212 million).

OIL&GAS: Rights over new fields to be sold in early 2019

Ukraine’s State Geology and Subsoil Service (the “Derzhgeonadra”) has announced plans to hold two auctions for the rights to two onshore fields: the Kadobnianske field (natural gas) on 30 January 2019, and the Surmachivska acreage (natural gas, oil and condensate) on 12 February 2019. The winner of each auction will be awarded a 20-year Exploration, Pilot Production and Production Licence (“E&P Licence”).

The application deadline is 1 December 2018 for the Kadobnianske field and 2 December 2018 for the Surmachivska acreage.

The starting price for the E&P Licence for the Kadobnianske field is UAH 44.35 million (approximately EUR 1.38 million or USD 1.57 million), and for the Surmachivska acreage it is UAH 6.28 million (approximately EUR 0.196 million or USD 0.22 million).

OIL&GAS: Subsoil licences will be e-auctioned to enhance transparency

On 23 October 2018, Ukraine’s government published an updated procedure on auctions for subsoil rights, the Temporary Regulations for the Realisation of the Experimental Project on Introduction of Electronic Auctions for the Sale of Special Permits on Subsoil Use (Resolution No. 848 dated 17 October 2018, the “e-Auctions Regulations”).

The e-Auction Regulations establish a transparent, pilot e-auction system for the sale of special permits for subsoil use (the “Licence”). E-auctions will be held using ProZorroUkraine’s award-winning public e-procurement system.

This is a pilot project, and the new rules apply to auctions announced after 24 October 2018 until 1 December 2019. The government can prolong this procedure at the request of the Derzhgeonadra. Below is the summary of the new procedure.

Stage 1: Preparations for an e-auction

Any company may initiate a sale of rights over subsoil. Prior to approving the list of fields for which rights will be auctioned, the Derzhgeonadra shall arrange all necessary approvals and collect proposals from the Ministry of Ecology and Natural Resources, if any. Within 10 business days, the Derzhgeonadra shall publish a notice on the scheduled e-auction, to be held not later than 90 calendar days from the publication of the notice (or 50 days for non-hydrocarbons).

Registration

A company wishing to participate in an e-auction (the “Bidder”) must obtain an e-signature and provide all required data (company and contact information, bank account details). The Bidder then shall register with the e-system and submit an application for a specific lot. The deadline to apply and pay the guarantee payment is 6 p.m. EET of the working day preceding the day scheduled for the auction.

Payments

After registration, the e-system will generate an invoice to the Bidder for the guarantee payment (20% of the starting price for the Licence, the “Guarantee Payment”). The Bidder will not be allowed to participate in the e-auction if it fails to make this payment in a timely manner. In addition, the Bidder must acquire the auction documentation, the maximum price of which is UAH 72,550 (approximately EUR 2,300 or USD 2,600).

Stage 2: Holding the e-auction

The Bidder may offer a closed-price bid in its application.

The e-auction is a dynamic blind auction held in three-minute rounds, with each Bidder having the right to increase its bid once per round, starting from the lowest Bidder. Failure to offer a price within three minutes will be considered as offering the previous bid. Although the Bidders will not be able to identify each other, information on bids will be available.

The exact value of the bid increment depends on the starting price and is capped at UAH 500,000 (approximately EUR 15.6 thousand or USD 17.7 thousand). The highest bidder is declared the winner, provided that the price for the Licence is raised at least once.

Stage 3: Acquiring the rights to the Licence

After the signing of the auction minutes, the successful Bidder shall submit an offer to the Derzhgeonadra to enter into a Licence Purchase and Sale Agreement (the “Licence PSA”), which may oblige the Bidder to carry out an environmental impact assessment (“EIA”) prior to subsoil use.

The e-Auction Regulations specify that oil and gas Licence PSAs shall include the prohibition to produce oil and gas until the EIA is completed and any obligations as a result of the EIA are fulfilled within one year at the latest. Within 15 days from obtaining information on approving the EIA’s opinion, the Derzhgeonadra must ensure that the Licence terms are amended in accordance with the EIA’s findings. However, if the EIA opinion prohibits the planned activity, the Licence will be revoked.

The Licence and the Agreement on the Terms of Subsoil Use are issued under the terms provided by the Licence PSA within 40 business days from the application of the successful Bidder.

Payments

The successful Bidder bears the costs for the organisation of the e-auction and pays for the EIA. Auction organisation expenses are capped at 0.5% of the Licence price if it exceeds UAH 15 million (approximately EUR 0.47 million or USD 0.53 million) or 1% if the price does not reach this threshold.

The Licence price (signature bonus) less the Guarantee Payment is payable within 30 business days from the day of publishing the e-auction minutes.

CHANGE IN REGULATIONS: New laws coming into effect and new prospects for boosting gas production

In October 2018, important new laws in the energy and related sectors came into effect:

  • on 4 October 2018, the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine On the Investment Attractiveness of the Construction of Renewable Energy Facilities came into effect (reviewed here);
  • on 12 October 2018, the Law of Ukraine On Strategic Environmental Assessment (outlined here) came into effect.

Also, on 17 October 2018, the Law of Ukraine On Ensuring Transparency in Extractive Industries (the “EITI Law”) was published. The EITI Law enters into effect on 16 November 2018, and 2018 is the first year of mandatory reporting. An overview of the EITI Law can be found in the March Kinstellar Energy Digest. The latest EITI report is available here.

On a separate note, on 24 October 2018, the government of Ukraine announced changes to the Plan on Implementation of the Concept for Development of Ukraine’s Gas Production Industry by 2020 with the aim to boost the production of natural gas.

Although as of now the wording of the updated plan is not available for review, the government has stated that the next steps include preparation and adoption of a new Subsoil Code and making electronic communication available between producers and state agencies.

For further information please contact Olena Kuchynska, Partner, at

e-mail

Viktoriia Pysmenna, Associate, at .