Fuel and Energy complex

Competition in Oil and Gas industry

The Ukrainian oil and gas industry is currently dominated by public companies. However, private and foreign investors are increasingly seeking opportunities in the country and are being actively encouraged to do so by Ukrainian government as a result of its energy strategy aimed at substantially increasing domestic oil and gas production.

The National Joint Stock Company “Naftogaz of Ukraine” is the largest state-owned energy company and dominates oil and gas exploration and production, as well as main oil and gas pipelines, gas processing, the import and transit of gas, and gas distribution in Ukraine. However, as Naftogaz lacks resources to invest fully in oil and gas exploration and production, it, therefore, enters into partnerships with foreign funded companies.

Such partnerships simplify for foreign companies the process of applying for and obtaining of exploration and production licenses, which had previously been problematic.

Licensing and Regulatory Regime in Ukraine

The fuel and energy complex of Ukraine is regulated by a number of various legislative acts as there has not been adopted a unified code to regulate this field. The main laws which impose regulations in the fuel and energy sphere are as follows:
-    The Law of Ukraine “On electric energy” dated 16 October 1997 which defines legal, economic and organizational grounds for conducting the activities involving electric energy, and regulates the issues related to the production, transmission, supply and use of electric energy, ensuring the energy security of Ukraine, strengthening the competition in the electric energy market, and protecting of consumers’ rights;
-    The Law of Ukraine “On alternative sources of energy” dated 20 February 2003 according to which the renewable sources of energy (namely, solar, geothermal energy, energy of wind, waves, biogas etc.) are viewed as very prospective sources of energy, increasing use of which is strongly encouraged by the state;
-    The Law of Ukraine “On lands for the electric energy use and on legal regime of the special zones for the placement of the energy facilities” dated 09 July 2010, which defines legal and organizational grounds for provision and use of land designated for the placement of power stations, implementation and compliance with the special legal regime of the zones designated for the placement of the energy facilities so as to ensure uninterrupted operation of these facilities, rational use of land and to protect people and household objects from the negative effects of possible accidents.

The whole process of administration of the fuel and energy complex in Ukraine is carried out by a number of governmental bodies including the Ministry of Fuel and Energy of Ukraine, which is mainly responsible for such issues as electric energy strategy and regulation, and the Ministry for Environmental Protection of Ukraine and the National Electricity Regulatory Commission of Ukraine, which are responsible for issuing of exploration and development licenses and production licenses. There are also some other state authorities involved in administration of the fuel and energy complex.

Exploration and development licenses are generally granted for a period of five years. Such licenses can generally be renewed (subject to the terms and requirements of the initial license having been complied with). Such renewal would generally be for a period of five years.

Exploration and development licenses and the associated agreements contain minimum work obligations in respect of matters such as:

• undertaking seismic survey;
• exploration drilling;
• well workover;
• reserves estimation and other studies; and
• environmental impact assessment.

The Ministry for Environmental Protection of Ukraine can prescribe the special conditions for natural resources utilisation which are usually provided in the respective license and/or license agreement.

If a licensee is not able to meet its obligations under the license, license agreement or the respective work programme, then such licensee is deemed as having failed to perform its obligations. In such case the license may be canceled, unless all the obligations are performed. There is no set cure period Ukrainian legislation further provides for the suspension, annulment or re-registration of a license.

Production licenses are generally granted for a period of 20 years, subject to reserves volumes and the holder before the commencement of the production the respective gas or oil fields have to be commissioned into production by the Ministry of Fuel and Energy of Ukraine.