Tenders for product distribution agreements. The first stage has been completed
Tenders for product distribution agreements. The first stage has been completed
JSC "Ukrgazvydobuvannya" became the champion in terms of the number of applications (9 applications). However, the biggest surprise was the practice of joint partnership participation in production sharing agreement tenders of Ukrainian companies with international ones. Observers have already called this fact an unprecedented practice for Ukraine.
The official start of tenders for the conclusion of production sharing agreements (PSA) took place on December 18, 2018, when the Cabinet of Ministers of Ukraine adopted decisions, which entered into force on January 5, 2019, to hold 12 tenders for the conclusion of PSAs for oil and gas production in the Zinkivska, Ugnivska, Buzivska, Berestyanska, Okhtyrska, Sofiivska, Rusanivska, Balakliiska, Ichnyanska, Ivanivska, Varvynska, Hrunivska areas. Deposits are located in Ivano-Frankivsk, Lviv, Poltava, Chernihiv, Sumy, and Kharkiv regions.
On February 28, 2019, the decision of the Government, which is fixed by resolutions No. 1179, 1180, 1182, 1183, 1184, 1186, 1187, 1188, and 1189, on the start of 9 tenders for the conclusion of URP, was published in the "Government Courier".
This list did not include three areas: Okhtyrska, Ichnyanska, and Hrunivska, which were reported earlier.
The deadline for tender applications for these 9 plots ended on May 28, 2019. During the meeting of the Interdepartmental Commission for the organization of the conclusion and implementation of the PSA in the presence of representatives of the participants, the list of applicants was announced and envelopes with applications for participation in the PSA competition were opened.
According to the results of the opening of tenders, 13 companies submitted 22 applications for 9 plots.
In particular, the Canadian public company Vermilion Energy, which applied for 4 plots in partnership with the state-owned Ukrgazvydobuvannya, the American private fund SigmaBleyzer in partnership with the Texas firm Aspect Energy, as well as the Central European holding EPH with the Slovak operator Nafta, showed interest.
The greatest excitement was caused by the Sofiivskyi block, which collected five applications, Zinkivska square - four applications, Rusanivskyi - three companies, and the rest - two applications each.
Among the Ukrainian producers that also submitted applications are: Ukrnaftoburinnia, Ukrnafta, DTEK Naftogaz, Zahidnadroservis, Geo Alliance, Navigator Komplekt, Eurogaz Ukraine, and Gaz-group. The winners of the plots will be announced in a month, on June 28, 2019.
Key terms of the PSA competition:
The total duration of the PSA is 50 years.
The fee for participation in each separate competition is 300,000 UAH (about 9,800 euros) and is non-refundable.
The minimum amount of investments to be made during the first stage of geological exploration works (5 years) is from 450 million to 1 billion UAH.
During the five-year exploration period, a minimum program of works must be completed, which includes a geological study of the subsoil on the site, including the drilling of at least two exploratory wells and the implementation of a three-dimensional seismic survey, for the Varvinska and Sofiivska sites, the obligation is a minimum of 500 square meters. km of 3D seismic and drilling of three exploratory wells.
The maximum part of compensatory products, at the expense of which the investor will be compensated for his expenses, is 70% of the total volume of produced products until full reimbursement of the investor's expenses.
The state's share in profitable products should be at least 11% of the total volume of such products.
The rent for oil and condensate within the PSA is 2%, and for natural gas - 1.25%.
According to the Law on PSA, the investor is obliged to pay all taxes and fees stipulated by the Tax Code of Ukraine. The general corporate income tax rate is currently 18%.
Investors have access to the main protection mechanisms, which are inserted for PSA:
- legal stability – no future legislative changes will apply to investors (except legislative changes related to issues of defense, national security, public order, and environmental protection);
- fiscal stability – tax increases will not apply to investors;
- international arbitration - a dispute resolution mechanism.
Evaluation of applications
Submitted applications will be reviewed and evaluated by each member of the PSA Interdepartmental Commission according to the following criteria:
Work program (80 points);
Experience in exploration and extraction of hydrocarbons, in particular from unconventional sources (45);
The share of the state in profitable products (30);
The volume of investments (35);
The level of financial support of the work program in the subsoil area (30);
Use of goods works, and services of Ukrainian origin (20);
Rational use of natural resources (15);
Environmental protection measures (15).
In parallel with the decision on 9 PSA tenders on land, the Cabinet of Ministers at its meeting on March 6, 2019, at the proposal of the American company Frontera, decided to hold a tender for the conclusion of PSA for the development of hydrocarbons on the Black Sea shelf within the "Dolphin" area, which "connects three deposits.
On April 11, 2019, the resolution of Ukrainian Cabinet of Ministers No. 271 published in the newspaper "Uryadovy Kuryer" regarding this area entered into force.
The area of the site located on the northwestern part of the continental shelf of the Black Sea is 9,772 thousand square kilometers. The minimum amount of investment should be UAH 1.5 billion.
The amount of total investment required to ensure industrial development will be determined by the results of the competition, but the winner will have to provide a geological study of the subsoil on the site, including the drilling of at least five wells during the first five-year phase of geological exploration.
The share of the state in profitable production should be at least 11% of its total volume, and the maximum share of the investor is 70% of the total volume of production. The term of validity of URP is 50 years.
According to the terms of the competition, on June 12, 2019, envelopes with submitted applications for participation in the development of hydrocarbons on the Black Sea shelf within the "Dolphin" site should be opened.
However, it should be noted that after the publication of the resolution, comments from the professional community of specialists were heard regarding the reduction of the deadline for submitting applications for participation in this competition from 90 to 60 days.
The two months stipulated by the resolution are absolutely not enough for a qualified analysis and decision-making, and therefore for the submission of applications by interested investors.
In addition, the expert opinion of February 28, 2019, of the responsible ministries to the resolution of the Ukrainian Cabinet of Ministers "On conducting a competition..." states a number of unresolved issues, in particular, the boundaries of the location of the site, which overlap the territory of the "botanical reserve" and threaten the preservation of natural complexes.
The Ministry of Finance commented on the need to increase the state's share in profitable products, as well as a number of comments by the Ministry of Justice.
Minimization of organizational risks
Production sharing agreements are one of the world's best tools for establishing close cooperation between the state and investors in the implementation of large-scale hydrocarbon production projects.
The PSA mechanism provides promising conditions for the investor - as a rule, a large part of the production (up to 90%) goes to his benefit during mining.
He is also exempt from taxes, and receives priority - his expenses for searching, creating infrastructure, and extracting minerals are initially compensated.
That is, first, all the funds received from the sale of products go to compensate for investments, and then the distribution of products begins. That is why large investors are interested in PSA. However, it carries serious risks.
This is a commitment for 50 years, and large amounts of investment, as well as the fact that the probability of success of this project does not exceed 60%. The risk is quite high, but the one who is ready to risk such money, in case of success, will receive the biggest bonus.
In case of failure, the losses will also be colossal.
The very idea of production sharing agreements entails the idea that the investor should be a global corporation or it should be powerful financial funds that will subcontract geological exploration companies that will cover the technical part.
In Ukraine, it is determined that PSA tenders are overseen by the Interdepartmental Commission for the Organization of the Conclusion and Implementation of Product Distribution Agreements, the composition of which was approved by Ukrainian Cabinet of Ministers Resolution No. 739 of October 19, 2016.
Members of the commission are representatives of the Cabinet of Ministers, the Parliament, the Ministry of Energy, Coal, and the Ministry of Ecology, as well as independent experts. The head of the commission is the Minister of Energy and Coal Industry of Ukraine.
That is, people who will be guided by their inner beliefs and experience will make decisions about the winner. And this will be a subjective assessment of each member of the commission, so it is important who is included in it. This information is not yet available in open sources.
As it became known, in order to reduce risks and improve compliance with best practices at each stage of the PSA competition, USAID "Energy Security" project experts, who held a meeting at the end of May at the Ministry, will give their recommendations to the commission.
Also, on May 28, during the meeting of the commission, the list of experts who will be involved in the evaluation of applications submitted to the competition was approved. It included Leonid Uhovskyi, Dmytro Yeger, Oleksandr Chalyi, and Olena Pavlenko.
The participants of the industry have to wait for the results of the evaluation of the submitted documentation by the Interdepartmental Commission on PSA and the announcement of the winners.
We hope that the composition of the commission, which will process the array of information from the participants, will be known in advance, and their final decisions regarding the winners will not cause doubts.