But there is another question to consider when it comes to the production of profits. The government`s standard approach is that the investor must sell the government`s share of profits and transfer the proceeds to the specified bank account. At the same time, the investor may find that the distribution of tangible shares is the most attractive option. While such disagreement may not be as binding as other issues, it is still an important aspect of PSA that should be kept in mind. Aspect Energy is an independent energy exploration and investment company with offices in Houston, Texas, Denver, Colorado, and Budapest, Hungary. Aspect Energy is engaged in exploration, production, investment and development activities in North America and Europe. The PSA law was already passed by parliament in 1999, but barely used by the state and investors. So far, only four MESSAGES have been completed for natural gas projects in Ukraine, and hydrocarbon production in underground areas has never started. Vanco, Exxon Mobile and Eni lost projects due to the annexation of Crimea, Shell withdrew from a project due to the military conflict in eastern Ukraine, while Chevron decided to withdraw for other reasons. The amendment concerns the legislation on production sharing agreements (“PSAs”): contracts in which the state (as the owner of the subsoil) allows an investor to explore and produce minerals and/or hydrocarbons. In return, the investor shares the production with the state under the terms of the PSA.

The main law governing MESSAGES is the Law of Ukraine on Production Sharing Agreements (“PPE Law”). Under a production-sharing agreement, one party instructs Ukraine (the State), the other party, the investor to develop, explore and extract mineral resources in designated underground areas and to perform the work related to the contract for a certain period of time, while the investor undertakes to perform the assigned work at its own expense and risk. with additional reimbursement of costs and receipt of payment (remuneration) in the form of part of the production profit. Such a definition of production sharing agreements is provided for in the Law of Ukraine on Production Sharing Agreements (PSA Law). The PSA tenders carried out this year are considered by experts as an important development to increase Ukrainian natural gas production, gain energy independence and attract investment in the sector. Such government measures were long overdue. As one of the forms of cooperation in the oil and gas industry, PSAs have attracted at least two international players. Namely the Canadian Vermilion Energy (in consortium with the Ukrainian UGV) and the American Aspect Energy. However, the largest oil and gas companies remain aloof from recent investment opportunities in Ukraine. On 2 October, the Ukrainian Parliament adopted a Law (No. 5406-VI) introducing a number of important and welcome changes in the distribution of production for oil, gas and mineral exploration and production activities in Ukraine (the “Amendment”). The amendments will come into force on November 7, 2012.

The production sharing agreements have been very close to me and EY Ukraine, professionally and even personally. Having worked on PSA in Ukraine in 2006, then supported such important agreements in 2012-2014, then worked on several MESSAGESPs in 2019-2021, I am pleased that Ukraine has successfully completed this large-scale tender for production sharing agreements,” commented Albert Sych, Partner, Law. Under the PPE, the investor receives a certain portion of his costs at the predetermined rate. According to Ukrainian law, the share of production costs cannot exceed 70% of total production. In practice, this rate is usually between 60 and 70%. This is common for the production rate of industrial costs. In 2019, tenders were launched for nine hydrocarbon PSAs in Ukraine. On December 31, 2020, production sharing agreements were signed for seven blocks: Sofiivska, Uhnivska, Balakliyska, Ivanivska, Zinkivska, Buzivska, Berestyanska. Ukrainian Energy`s agreement on the Varvynska block became the eighth signed by Ukraine.

We are pleased to inform you that EY has acted as an advisor on several agreements in connection with this tender, in particular EY advised a company of the DTEK Oil & Gas group on the PSA for the Zinkivska block. The investor may also try to include a mechanism for the simultaneous execution of geological work and hydrocarbon production. There are many pitfalls that should be avoided when negotiating these conditions. For example, differentiation of production shares according to the type of work, agreement of separate work programs and specifications for different simultaneous works. Although an PSA can be closed for the exploration and production of any mineral resource, it is primarily suitable for the exploration and production of hydrocarbons. The years 2019-2020 became remarkable for the Ukrainian oil and gas industry due to 12 tenders for the implementation of production sharing agreements (“PPE”). These are the first PSA tenders selected since 2012. The key question of why the execution of public service announcements in Ukraine takes so long does not lie in the legislation. It is caused by a lack of political will, inconsistency and transparency of the State`s position in negotiations on public service obligations and, above all, by the absence of a so-called “one-stop-shop” approach to dealing with public service obligations. The lack of coordination between the state and other state and local authorities involved in the processes of execution and performance of messages makes the whole process less efficient and difficult to streamline. Nevertheless, we believe that the winners of the PSA tenders will find an amicable solution with the State on all the key conditions mentioned and will sign the agreements in due course. This will prove that PSA is a reliable and mutually beneficial instrument for the development of the oil and gas industry in Ukraine.

I am pleased with this significant U.S. private investment in Ukraine`s oil and gas sector, the first under production-sharing agreements since 2014. This should be a positive signal for similar projects in the future. Given that exploration and production activities require significant capital investment and state-of-the-art equipment and technology, one of the biggest challenges is attracting foreign investors. (c) redistribution of cost-benefit output between the parties, e.B. due to the inability of one party to finance operations; and the Ukrainian authorities have recently done a lot to change the regulatory and investment environment in the field of gas production: for the period from 1 January 2018 to 1 January 2023, a special stabilisation clause for setting incentive rents has been developed, the tax system has been improved and the approval system has been simplified. To speed up the process, the managers had the idea of designing a PSA MODEL. According to USAID, the main advantages of the PSA model are (i) the availability of the basis for negotiations between Ukraine and investors; (ii) greater transparency; and (iii) the protection of Ukraine`s interests with pre-agreed arrangements.

The big advantage is that investors may have identified legitimate expectations. On the other hand, the PSA model does not comply with the current PSA law, while each tender area is quite unique and requires different regulations in the PSA for exploration and production. .