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Kinstellar Energy Digest: Ukraine. February 2018 in Review

March 2018 – The recently published report “BP Energy Outlook 2018” predicts a trend for a growing demand for oil and gas in the near term, after which “the most diversified fuel mix ever seen’’, as the authors describe it, is expected to follow. Will Ukraine take the opportunity to benefit from the growing demand for energy and attract investors to its oil and gas sector while demand is high? The answer to this question is subject to many assumptions and uncertainties. However, the adoption of the draft laws overviewed below may signal to investors that Ukraine is willing to put into practice its aspiration to increase gas production and to diversify its energy resources to achieve greater energy independence.

OIL AND GAS: Parliamentary committee approves Draft Law on deregulation

On 7 February 2018, a field-specific committee of the Ukrainian parliament approved a draft law No. 3096 - д (the “Draft Law”) designed to relax regulations in the oil and gas industry.

According to a publicly available version of the Draft Law, changes are expected in three key areas:

  • obtaining land rights,
  • permitting procedures, and
  • terms of use of geological information.

Obtaining land rights

Land easements

Presently, land easement (right of way or servitude) is perceived as an encumbrance that follows changes in ownership and, as a rule, cannot serve for the commencement of construction works.

The Draft Law, on the contrary, allows treating land easement as a right to the land, including for the development of oil and gas extraction facilities and field infrastructure. This option is subject to a few limitations related to:

  • scope of activities,
  • users,
  • land category.

The first limitation is the scope of activities, which is “construction, placing and operation” performed in relation to “oil and gas extraction facilities” and “field infrastructure development”. To prevent ambiguities, the drafters defined what is meant by the two latter terms.

The second limitation, the type of users, narrows the availability of easements to only oil and gas permit holders. In Ukraine, such permits are issued for (i) exploration and pilot field development; (ii) exploration, pilot field development and production; (iii) production; and (iv) construction and operation of underground structures that are not related to the extraction of minerals.

The third limitation specifies certain categories of land where such land easement is not permitted, such as (i) recreational and (ii) health-improving land, (iii) natural reserves and other environmentally protected land, (iv) historical and cultural use land, and (v) land for water usage. This means that oil and gas land easements can be potentially established over:

  • agricultural land,
  • woodlands,
  • land zoned for residential and civil buildings, and
  • land zoned for industrial, commercial, energy, defence and other usage.

To use easements, oil and gas companies are obliged to reimburse damages to the landlord and land user.

Finally, the change of a land plot’s purpose — a process known for its complexity and lengthy duration — will not be required for such easements.

Privileged period of land use after exploration

Currently, a land plot can be used for exploration works by concluding a separate agreement between an exploration company and a landlord or with the consent of the land user. Under the Draft Law, within the term necessary to obtain the documents for land use for oil and gas production, the exploration company may continue to use the land on the basis of this agreement even during production of hydrocarbons.

This novelty is expected to prevent the plugging of wells while the rights to land are being obtained.

Geological works and geological information

Under the Draft Law, the current compulsory registration of geological works and studies will be changed to voluntary registration and the transfer of geological information will be performed without the additional approvals of state or local agencies.

The Draft Law will allow other authorised bodies, in addition to the State Commission on Mineral Reserves, to examine standards for materials and evaluate resources.

Permitting procedures

The Draft Law abolishes the obligation to obtain a mining allotment for oil and gas permit holders.

For a number of development projects in the oil and gas sphere, a permit for the soil stripping will be replaced with a land survey study. The Draft Law also abolishes the requirement to obtain permits for certain land survey projects if the land plot is privately owned.

The permit holder will no longer need to obtain a decision to set a field into production; instead, a notification process will be in place.

The environmental impact assessment, introduced in December 2017, will not be required for exploration works or for the construction and operation of underground structures, but will be carried out for oil and gas production projects.

The Draft Law also excludes oil and gas wells and related objects from the category of city planning objects if they are located outside settlements; and the transfer of land for ownership or lease is allowed in the absence of a zoning plan or detailed territory plan for such projects, such as:

  • the development of transportation and energy infrastructure objects (roads, bridges, electricity lines, etc.) on land plots transferred for such purposes, and
  • drilling development and connection of oil and gas wells (if these are located outside of settlements).

However, if the said objects are located on certain categories of land, detailed territory and zoning plans will be required to obtain land rights.

Last, but not least, the grounds for revoking or suspending oil and gas permits will be revisited and the courts will be granted with discretion to revoke a permit in the majority of situations, provided that the permit holder disagrees with the decision of the State Agency of Subsoil on revocation of the permit.

Overall, the Draft Law addresses many stumbling points related to oil and gas extraction in Ukraine. Taken together with the decreased royalty rates for oil and gas production and the decentralisation of royalty payments (see our comments here), Ukraine is demonstrating its willingness to meet the expectations of oil and gas producers.

In addition to the Draft Law, other steps are envisaged in the “Plan on the Implementation of the Concept for the Development of Ukraine’s Gas Production Industry” to further streamline the procedures for oil and gas extraction projects in Ukraine. Of particular importance is the adoption of a draft law on the disclosure of information in the extracting industries as well as a new subsoil code. According to Order No. 475 of the Ministry of Environment and Minerals from 14 December 2017, the draft subsoil code is due in December 2018.

RENEWABLE ENERGY: Limiting the period of validity for technical conditions

In December 2017, parliament adopted in the first reading a draft law No. 6081 (the “Draft Law 6081”) on amendments to urban development legislation.

According to the publically available version of the Draft Law 6081, the period of validity of technical conditions issued for companies producing electric energy from renewable sources will be limited to three years. This change is designed to free up previously reserved power capacity. Currently, the technical conditions are valid until the end of construction works (until recently they were of unlimited term), and the so-called “reserved capacity” may impede access to the grid by the new producers.

It is expected that the provision on the limitation of the period of validity can be supplemented with terms on the prolongation of the duration of validity in cases where projects may not be reasonably realised within three years.

For further information please contact: Olena Kuchynska, Partner, at

e-mail

Viktoriia Pysmenna, Associate, at , or Mariana Antonovych, Associate, at .