Kinstellar Energy Digest: Ukraine March 2018 in Review
April 2018 –
OIL AND GAS: President signed an advanced law on deregulation
On 29 March 2018, the President of Ukraine signed the Law of Ukraine “On Amending Certain Legislative Acts of Ukraine Concerning Deregulation in the Oil and Gas Industry ” No. 2314-VIII, adopted by the Ukraine`s parliament on 1 March 2018. The Law will come into force on the day following its publication.
The Law of Ukraine No. 2314-VIII cancels a requirement to obtain a number of permits, simplifies the procedure for acquiring rights over the land for placement of oil and gas production facilities, and changes the procedure for the use of geological information. More details can be found in the February issue of Kinstellar’s Energy Digest.
It is expected that the newly-introduced changes will attract investors by removing administrative barriers and reducing red tape, while the overall shortening the duration of permitting procedures, which, according to the market players, shall result in an increase in natural gas production for one extra billion cubic meters of gas per annum.
ENERGY MARKET: Regulator approves codes and market rules
On 14 March 2018, Ukraine’s National Energy and Utilities Regulatory Commission (the “Regulator”) approved six by-laws that are vital for launching a new energy market from 1 July 2019, namely:
- Transmission System Code;
- Distribution System Code;
- Commercial Metering Code;
- Rules of the Market;
- Day-ahead and Intraday Market Rules;
- Retail Market Rules.
TRANSPARENCY: Ukraine’s parliament adopts bill on transparency in the extractive industries
On 1 March 2018, Ukraine’s parliament adopted in the first reading the draft law “On Ensuring Transparency in Extractive Industries” No. 6229 (the “Draft Law”), which introduces the obligation to disclose and provide free access to data related to the extractive industry and transportation of hydrocarbon resources. The Draft Law requires disclosures of information related to payments, the ultimate beneficial owners of mining companies, and material terms of agreements relating to the extractive industry and transportation of hydrocarbon resources.
The Draft Law introduces a standard for disclosure — the Extractive Industries Transparency Initiative (the "EITI") — and establishes liability for breach of the disclosure requirements.
EITI Implementation
The EITI requires disclosures of information on revenue allocations related to a “project activity”, which includes the exploration and production of a natural resource of national importance, performing works envisaged under a production sharing agreement, and the transportation of hydrocarbon resources based on a contract.
According to the publicly available version of the Draft Law, a special multi-stakeholder group on EITI implementation under the leadership of the Minister of Energy and Coal Mining of Ukraine will oversee the disclosure of information in accordance with EITI requirements. The group will be made up of representatives from government, extractive companies and civil society organisations.
Apart from a supervising function, the multi-stakeholder group on EITI implementation will approve an independent administrator (a legal entity that will analyse the reports), establish a threshold amount for identifying whether the payment should be disclosed or not, give its approval to the EITI report etc.
EITI Reports
The EITI report is a result of an analysis of individual reports from mining companies and payment recipients. The independent administrator will prepare the EITI report, which will be published by the Ministry of Energy and Coal Mining of Ukraine and will remain freely accessible for at least 10 years. During the same 10 years, access to material terms of agreements relating to the extractive industry and transportation of hydrocarbon resources will be granted as well.
The EITI report will aggregate information on payments (such as taxes, other than VAT and PITs, any payment under agreements relating to the extractive industry and transportation of hydrocarbon resources, etc.) and data on:
- beneficial ownership of the company;
- material terms of agreements attached to the project activity, including on the rights and obligations of the parties pertaining to the usage of natural resources;
- information on stabilisation clauses;
- work programs and other operational covenants;
- environmental measures;
- worker health and safety, social obligations (including infrastructure, social spending and local content requirements).
Obligations of mining companies
Mining companies will prepare and publish on their websites (if available):
- a production and payments report (a consolidated report for a local parent company);
- electronic copies of mining licences; and
- information on material terms of agreements on exploitation of oil, gas, minerals and the transportation of hydrocarbon resources with appropriate extracts.
A mining company will have to submit the above-mentioned documents (the "Report") to the Ministry of Energy and Coal Mining of Ukraine and/or to the independent administrator annually by 1 September and will be able to amend the Report in line with the comments provided within the terms stipulated below:
- 30 days is reserved for the examination of a Report, which may result in either accepting the Report or providing comments to the mining company;
- The mining company has 10 business days to correct the Report;
- 30 November of the year following the reporting year is the deadline for Report publication.
Liability of mining companies
A breach of the disclosure requirements will result in administrative and commercial fines for the mining company, imposed by a decision of the Ministry of Energy and Coal Mining of Ukraine not later than within a year from the day of the breach. The materials for imposing the fines will be prepared by the multi-stakeholder group on EITI implementation.
Mining companies may incur fines in the amounts and for the breaches specified below:
i. for missing a deadline for disclosure, a company may face a fine amounting to approximately EUR 2,650 (UAH 85,000);
ii. for disclosing a Report with inaccurate or partial information or for a breach of established procedures for disclosures (other than missing a deadline), the amount of the fine will be doubled to approximately EUR 5,300 (UAH 170,000);
iii. for non-rectification of the above-mentioned violations within 30 days from the day of publication of the decision on imposition of a fine, a company may face a tenfold increase of the fine, which would amount to approximately EUR 53,000 (UAH 1,700,000).
For the first year of disclosure (2017, according to the current wording of the Draft Law), a “grace period” will be applied: fines will not be imposed but the materials relating to the breach will still be prepared. The Draft Law does not allow initiating the application of fines, unless the mining company is given an opportunity to eliminate the report`s deficiencies within 10 days.
It should be recalled that the EITI standard has already been implemented in part and the EITI reports partially cover the period of 2013 (1st EITI Report) and 2014-2015 (2nd EITI Report). According to the EITI Ukraine, the 2016 report will be completed soon.
RENEWABLE ENERGY: Amendments to the PPA and hearings on auctions implementation
On 7 March 2018, the changes to a model power purchase agreement for electricity from renewable energy sources (described in our January Energy Digest) came into effect.
In March this year, the Regulator and the parliamentary committee discussed the introduction of competitive models for future medium- to large-scale solar or wind power projects. The introduction of auctions could solve the problem with the limited throughput of the Ukrainian electricity grid. According to the preliminary conclusions of the state company that operates and controls the Integrated Power System (NPC “Ukrenergo”), the maximum installed capacity for wind and solar power stations that will not affect the network is 3000 MW, while technical conditions have been issued for about 7500 MW.
STRATEGIC ENVIRONMENTAL ASSESSMENT: Environmental impact to be assessed in context
On 20 March 2018, Ukraine’s parliament supported the draft law "On Strategic Environmental Impact Assessment" No. 6106 (the “Law"). As of March 30 of this year, President of Ukraine has not yet signed the Law.
In a previous review, we analysed the Law of Ukraine "On Environmental Impact Assessment" that enables a decision-maker to access an adequate environmental assessment on a planned activity on a project-by-project basis. A strategic environmental assessment, on the other hand, is carried out in relation to larger-scale documents such as the land management schemes and land feasibility studies of administrative and territorial units and town-planning documentation, etc. Both pieces of legislation may affect the realisation of projects that have a negative impact on the environment.
The Law on Strategic Environmental Assessment will be in focus of the April issue of Kinstellar’s Energy Digest.
For further information please contact: Olena Kuchynska, Partner, at , Viktoriia Pysmenna, Associate, at , Mariana Antonovych, Associate, at ,