The road show of auctions in the field of subsoil use is another step towards the investor

The road show of auctions in the field of subsoil use is another step towards the investor

19/02/2019

At the end of January, the oil and gas industry of Ukraine was in the center of attention of investors in Oslo and London. During the Ukrainian-Norwegian business forum, which was held in Oslo on January 28, the Prime Minister of Ukraine Volodymyr Groysman invited Norwegian investors to participate in auctions for the sale of special permits for the use of oil and gas-bearing subsoils, which were launched in Ukraine.
 
In parallel, at the same time, the leadership of the Ukrainian Geological Survey with Ukrainian deputies during the Ukrainian forum on exploration and production of natural gas in London called on leading mining companies such as ExxonMobil, Shell, Perenco, INA, Cogent Petroleum, Sand Hill, Viking International to participate in the second round online auctions.
Active changes in the oil and gas production market: movement towards European practices in the field of subsoil use, transformation of legislation in this area, revision of the principles of state-investor cooperation, were started several years ago.
 
However, in fact, 2018 was the culmination of work and the final year in the matter of fundamental changes in the further development of the oil and gas industry in Ukraine.
 
Last year, several key laws were voted in the parliament, which fundamentally reform not only the very approaches to the field of subsoil use, but also establish clear rules of the game in this market, introduce European rules for building relations between active domestic investors and institutions responsible for the industry.
In particular, legislative changes to taxation (reduction of rent for new wells to 12%); deregulation (of the permit system and access to land), the principle of rent decentralization was introduced (5% of taxes in production regions), the implementation of the EITI transparency initiative (from this year reporting is mandatory for oil and gas producers), established competitive tariffs for natural gas transportation services for entry points and exit points in the GTS.
 
At the same time, the services of the Ukrainian Geological Survey were reformed, the approaches to issuing special permits for subsoil extraction were reformatted, the procedure for issuing them was changed, a large number of undeveloped areas with deposits of oil, gas and other minerals were returned to the state and sent to repeated auctions.
 
The way to online auctions
The impetus for the process of introducing transparent auctions for the sale of special permits, which simplify the access of investors to the extractive industry, was a number of government resolutions that were adopted in the same year 2018.
 
In particular, the Cabinet of Ministers Resolution No. 423 simplified investors' access to geological information. According to Geoinform, almost 170,000 paper media will be digitized.
 
It is assumed that new digital arrays of Ukrainian geological information will be included in the global electronic map of minerals.
 
The government decided to create a register of geological information and a state repository of geological information and stone material in 2019.
 
In 2018, changes were made to the procedures approved by Resolutions No. 615 and No. 594 of 2011.
Key changes that have been made include:
 
from January 1, 2019, all subsoil plots will be transferred to investors only through the online trading system "ProZorro";
establishment of a transition period for subsurface users when carrying out the environmental impact assessment (EIA) procedure;
tenders will be offered for sites with approved reserves of minerals, for which the Ukrainian Geological Survey has received approval from the local authorities;
the requirement for ineligibility to participate in the tender for companies with tax debt has been cancelled;
in 2018, a rule was adopted that eliminates coordination with local authorities for the development of deposits (relating to the sea shelf);
companies are allowed to transfer mining rights to their subsidiaries — effectively introducing a secondary market rights for mineral in the country.
Already in October 2018, the Government by its resolution allowed the Ukrainian Geological Survey to conduct an experimental project on the introduction of auctions for the sale of special permits for the use of subsoil through electronic bidding.
 
In the same month, the Ukrainian Geological Survey presented for the first time in Brussels at a meeting of the Raw Materials Group under the European Commission the project of electronic auctions in subsoil use.
 
It should be noted that open auctions for the sale of special permits for subsoil use started in October, but they were still conducted under the old system.
 
At these tenders, the price was determined in accordance with the decision of the Cabinet of Ministers on the value of the auction lot.
Moving towards investors through ProZorro
 
The first 10 permits for oil and gas plots in the ProZorro system were put up for sale at the beginning of December. Resources in the proposed areas amount to 86 billion cubic meters of gas and 16 million tons of oil.
 
Already in March, the winners of the auctions will receive mining rights.
 
The reaction of investors did not take long. In mid-December, it became known about the meeting of the management of the Ukrainian Geological Survey with the top managers of two American oil and gas companies VALKOR and Petrotech.
 
During the meeting, American investors are invited to participate in the auction for the sale of special permits for the use of oil and gas-bearing subsoils, which will take place on March 6, 2019.
A kind of road show of the second round of online auctions took place on January 29 in London, within the framework of the Ukrainian Forum on Exploration and Production of Natural Gas.
 
The event was attended by both Ukrainian and international mining companies such as: Shell, ExxonMobil, INA, Arawak, Erenco, MOL, Sand Hill, Trident Acquisitions. As well as service companies Baker Hughes, Halliburton, Schlumberger, Viking International and SOCAR AQS.
 
Through the ProZorro system, it will be possible to purchase 7 plots, which are located in five regions. The territory with deposits is more than 2 thousand square kilometers, and the projected resources are more than 2 billion cubic meters of gas. The initial price of 7 special permits is almost $2 million.
 
In total, in 2019, the State Geological Survey plans to put up 30 oil and gas plots with an initial price of $50 million and projected resources of 130 billion cubic meters of gas and an area of 5,000 square kilometers.
PSA contests and potential investors
 
In its desire to expand interaction with investors in the field of subsoil use, Ukraine has decided to return to the practice of open tenders for the conclusion of production sharing agreements (PSA) for the development of hydrocarbon deposits.
 
Work on the preparation and development of the mechanism lasted more than a year with various market stakeholders and investment funds. This is one of the most widespread and understandable for international investors instruments of cooperation with the state.
 
PSAs, as a rule, are applied to unexplored deposits, the prospects and potential of which are still unknown neither to the state nor to the investor at the stage of concluding the agreement.
 
The essence of such cooperation is that the state retains ownership of the subsoil, but creates a sufficient incentive to attract investment in exploration and production in order to interest business to take significant risks.
Between 2013 and 2017, PSAs were concluded for 8 subsoil areas, but hydrocarbon extraction never started on any of them.
 
It will be recalled that Ukraine had the practice of applying PSAs with the companies Chevron and Shell on the Oleska and Yuzivska Squares and a pool of companies - ExxonMobil, Shell, Petron and JSC "Nadra Ukraine" on the Scythian section of the Black Sea shelf.
 
However, cooperation on PSA in Ukraine was not positive, the companies closed down their activities in Ukraine.
 
The official start of twelve tenders for the conclusion of PSA watook place at the beginning of 2019 with the publication of the resolution of the Ukrainian Cabinet of Ministers.
 
According to the conditions, it is assumed that the state's share in profitable production should be at least 11% of its total volume, the maximum share of the investor is 70% of the total volume of production (until the investor's expenses are fully reimbursed).
The period of validity of the PSA is 50 years. Applications for participation in competitions are accepted within three months from the date of publication of the announcement about their holding.
 
As it was announced, the initiative to hold tenders for the first ten sections belongs to the American-Ukrainian Business Council (USUBC) and the investment company SigmaBleyzer, and for the others - to the Ukrainian "Navigator Kompekt" LLC.
 
Back in the summer of 2018, SigmaBleyzer announced its readiness to invest $100 million in the production of hydrocarbons in Ukraine as part of production sharing agreements, and this is just the beginning.
 
In mid-September 2018, SigmaBleyzer announced the creation of a new $250 million International Fund for Ukrainian Energy LP (IFUEL), which will focus on investments in the energy sector of Ukraine.