1. Legal Aspects of Development of
Shale Gas in Ukraine
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2. About the firm
Danevych law firm is a dynamic, enthusiastic, innovative and experienced legal team.
Before September 2012 the team of Danevych law firm worked under the brand-
name PARITET law firm.
The firm and its team are recognized by:
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3. Cooperation with Embassies
Danevych law firm is a partner of the Norwegian-Ukrainian Chamber of
Commerce
The Firm is included into the list of recommended law firms of the Royal
Norwegian Embassy in Ukraine
The Firm is included into the list of recommended law firms of Royal
Danish Embassy in Ukraine and regularly cooperates with the Trade
Council at the Ministry of External Affairs of Denmark
The Firm regularly cooperates with the Swedish Trade Council in Ukraine
We are official legal advisors of the Embassy of Kingdom of Saudi Arabia
in Ukraine
Danevych law firm regularly cooperates with the Turkish Embassy in
Ukraine
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4. Our key legal practices
• Agriculture • Energy
• Banking and Financing • IP
• Commercial • Information and
• Corporate and M&A Communication Technology
• Disputes • Life Sciences
• Employment • Real Estate
• Tax
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5. Key Clients
The team of Danevych law firm for many years advises global and international
companies on various legal and tax matters. In the recent years the team of Danevych
law firm advised (among others) the following Clients:
Agriculture: Dan-Farm Ukraine
ІТ:
Consumer &
health industry:
Industrial products
& infrastructure:
Energy:
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Financial:
6. Our legal partners
We constantly implement joint projects with such legal
partners in foreign countries
1. Global
2. Denmark
3. Italy Jacopo Gasperi Studio Legale
4. Turkey
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7. CONTENT
Shale Gas in Ukraine – a great potential for investment
opportunities
The Main Parties Involved in Exploration and Extraction of Shale
Gas
Ways to Start Development of Shale Gas in Ukraine
General Approach – State Auctions for Purchasing Special Permits
on Exploration/Extraction of Mineral Resources
Production Sharing Agreements: How It Works in Ukraine
Other Possible Approaches
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8. SHALE GAS IN UKRAINE – A GREAT
POTENTIAL FOR INVESTMENT
OPPORTUNITIES
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9. Shale Gas Reserves
The reserves of shale gas in the world are estimated at the
level of 200 trillion cubic meters
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10. Shale Gas in Ukraine
Carpathian Mountains (over 500 billion tones) – with
average thickness of industrial layers – about 400 m
Central part of Ukraine – Kirovogradska and
Regions
Cherkaska oblasts
Dnieper-Donetsk Basin
Crimean mountains
The reserves of shale gas in Ukraine are estimated at the level of 7
trillion cubic meters by the Ukrainian government
According to the US Energy Information Administration this figure is
lower and constitutes 1,2 trillion cubic meters which, however, makes
Ukraine 3rd in Europe
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11. THE MAIN PARTIES INVOLVED IN
EXPLORATION AND EXTRACTION OF
SHALE GAS TODAY
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12. State Authorities
• Cabinet of Ministers of Ukraine – the main player on behalf of the state in
the sphere of Production Sharing Agreements
• State Service on Geology and Mines of Ukraine – specifically authorized
state authority responsible for issuing permits for extraction of mineral
resources, coordinating the conclusion of PSAs
• Local authorities – Oblast councils, Kyiv and Sevastopol city councils,
Verkhovna Rada of Crimea – approval of applications for transfer of
subsoil into use (approval of PSAs)
• Ministry of Ecology and Natural Resources – approval of applications for
transfer into use of subsoil (approval of PSAs)
• State Service of Mining Supervision and Industrial Safety of Ukraine –
approval of provision of subsoil into use, establishing mining allotment
• State Commission of Ukraine on Deposits of Mineral Resources
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13. Investors
The two Companies have won the contests for signing the PSAs on
development of Olesskyi region (Carpathian Region) – 2,98 trillion cubic
meters of shale gas; and Jusovskyi region (4,054 trillion cubic meters of
different types of non-traditional gases).
The PSA with Shell was already signed in January 2013.
In 2012 ENI has purchased a share in the subsidiary of NAC “Nadra Ukraine”
which conducts geological exploration of different types of unconventional
gases in Western Ukraine.
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14. Future possibilities
Ukraine plans to initiate PSA on the
Sloboghanskyi region
(rich in shale gas)
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16. Ways to start development of shale gas
in Ukraine
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17. Possible approaches:
1. Going through the general procedure for getting the right to
explore/extract mineral resources in Ukraine
2. Entering into Production Sharing Agreements with the Ukrainian
Government
3. Purchase of a share in a company conducting shale gas
exploration/extraction and having all the necessary permits
4. Public-private partnerships
5. Entering into agreements on joint activity with authorized entities
conducting shale gas exploration/extraction and having all the necessary
permits
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18. General procedure – part 1
1. Purchasing special permits (licenses) via auctions:
1) notice about the tender
2) provision of tender information and guarantee payments;
3) sale and purchase agreement
4) payment for permit
TERM - approximately 2-3 months
The cost of the auction documentation is 3,12 % of the starting price of the lot, up
to EUR 7255. The guarantee fee - 20% of the starting price of the lot should be
contributed by every candidate (subject to return if the candidate doesn’t win).
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19. General procedure – part 2
2. Obtaining the mining allotment – within 21 days after the documents are
submitted.
3. Obtaining the right to use the land plot (land lease agreement or permanent
use).
4. Obtaining necessary licenses for construction works connected with usage of
subsoil etc and elaboration of project documentation.
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20. Production Sharing
Agreement
Production Sharing Agreement (PSA) – an agreement between
• the state of Ukraine and an investor which is assigned to conduct
• search,
• exploration and
• extraction of mineral resources at the specified area of subsoil
• and conduct other works related to the performance of the agreement,
and
• the investor undertakes to conduct the mentioned works
• at its own expense and risk
• with the subsequent compensation of such expenses and remuneration
(payment) in the form of part of profit from the extracted resources.
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21. Production Sharing
Agreement
Compensation – up to 70% of the resources. Around 15-20% of the rest is
provided to the state while the other part remains with the investor.
The state may put an obligation on the investor to sell the resources only in the
territory of Ukraine.
Several investors may sign the PSA with Ukraine (accepting joint obligations).
The state ensures and facilitates obtaining by the investors of all necessary
permits, authorizations and documents.
The term of the PSA may be stipulated in the agreement but not more than 50
years.
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22. PSA Procedure – part 1
1. Cabinet of Ministers issues the decision on competition on conclusion of
PSA with detailed description of site and investments expected and the
deadline for submitting the applications is at least 1 month after the
competition is announced.
2. The interested parties participate in competition. The payment for
participation in the competition is set in the competition documentation (e.g.
EUR 50 000). The competition documentation may include the requirement
of bonus payment (the recent one had the requirement of bonus payment of
EUR 240 000 000). It also contains the information on the minimum
investments.
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23. PSA Procedure – part 2
3. Maximum 3 months after the deadline, based on the best offer Cabinet of
Ministers issues the decree defining the winner – future signee of the PSA.
4. The draft PSA is to be developed by the investor and is subject to state
financial, legal, environmental and other expertise.
5. The draft PSA is subject to approval by local authorities.
6. The PSA is to be registered with the Ukrainian state authorities.
7. The PSA must be signed within 12 months from the day when it was
obtained all necessary approvals.
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24. Next steps upon signing PSA
1. Foreign investor must register permanent representative office within three
months after signing the PSA
2. Obtaining special permits (licenses) for usage of subsoil, exploration,
extraction
3. Obtaining the mining allotment (up to 21 days)
3. Obtaining the right to use the land plot (land lease agreement or permanent
use)
4. Obtaining necessary licenses for construction works, usage of subsoil, project
documentation etc.
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25. PSA Guarantees
The investor may import equipment, materials etc. without the licensing and
quota requirements as well as re-export them back outside of Ukraine.
The state guarantees that the PSA shall be regulated by the legislation in force
as of the moment when it was signed except when it lowers taxes, simplifies
requirements and procedures concerning the activities of the investor.
Decisions of executive and local authorities do not apply to the investor if such
decisions limit the rights of the investor provided by the PSA.
Monetary income may freely be converted in other currencies and transferred
outside of Ukraine. Many limitations and restrictions concerning the currency
are not applied to the investor.
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26. Other possible approaches
Purchasing a share in a Ukrainian company
- Investor has to make sure that the Ukrainian company has all the necessary
permits and documents when taking the decision on purchasing
- It should be kept in mind that the scope of necessary documents and
approvals is very complicated and elaborated therefore the risk of certain
non-compliance is quite considerable
- As an example of ENI, a company established by a state enterprise may be
more trustworthy, however, there is no guarantee. Thus, the respective due
diligence should be conducted
Concluding Agreements on Joint Activity with authorized entities conducting
shale gas exploration/extraction and having all the necessary permits
Public-private partnerships
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27. Subcontracting Works and Services by
Danish Companies within the PSA
Agreements in Ukraine
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28. Forms of business presence
in Ukraine
Subcontractors may choose on of the two options:
Permanent Limited Liability
Representative Office Company
Representative office is not an Subsidiary is an
independent legal entity and independent legal
therefore can conduct entity which conducts
commercial activity only on activity on its own
behalf of the founding company behalf
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29. RepOffice vs. LLC (1)
1. Process of establishing
Registration authority: Registration authority: state
Ministry of Economy of Ukraine administration
Registration fee: USD 2 500 Registration fee: around USD 22
Timeframe: up to 4 months Timeframe: up to 1 month
Legal services fees: USD 4 995, Legal services fees: up to USD 3 380,
excluding any notarization and excluding any notarization and
translation fees translation fees.
2. Liability
Direct liability of the founding Subsidiary bears liability
company independently
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30. RepOffice vs. LLC (2)
3. Banking issues
Bank account of type “P”: Standard rules for operating bank
• No limitations as to transactions accounts in Ukraine
in national currency
• Restrictions on purchasing foreign
currency
• Restrictions to conducts
investments in Ukraine
4. Obtaining permits and licenses
No direct restriction to obtain May obtain any permit/license upon
permits and licenses compliance with the respective
- Practical problems are highly requirements
possible
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31. RepOffice vs. LLC (3)
5. Reporting on income to tax authorities
• Separate accounting and Strictly separated accounting
balance sheet is and balance sheet
recommended No grounds for tax authorities
• Often queries re possible to claim additional income
additional incomes
• Alternative ways for
assessing taxable profit (0,3)
6. Working permits for foreign citizens
Not required (as of today – Required
limited number)
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32. RepOffice vs. LLC (4)
7. Practical issues
Power of attorney issued by Simple delegation of powers by
the Head of the RepOffice the director
needs to be notarized
8. Taxation
Taxation regime is the same for both types of business presence
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33. Taxation of contractors
DOING BUSINESS VIA SUBSIDIARY OR REPOFFICE
VAT
Supply of production produced under PSA is subject to VAT (20 %).
Goods imported for usage within PSA are tax-free at customs (saving the
excise duty).
The services connected with the performance of PSA rendered by non-
resident to investor are exempted from VAT.
Corporate Profit Tax
Tax rate of Corporate Profit Tax as for 2013 – 19 %.
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34. Taxation of contractors
DOING BUSINESS WITHOUT A SUBSIDIARY OR REPOFFICE
VAT
The same rules as mentioned in previous slide shall apply.
Corporate Profit Tax
• According to Double Taxation Treaty between Denmark and Ukraine
doing business regarding shale gas for more than average 30 days
(totally) per 12 months constitutes PE.
• If related to offshore drilling, PE arises after 6 month activities.
• In this case the tax rate of Corporate Profit Tax (for 2013) 19 % shall be
applied.
If presence in Ukraine is less than 30 days (for offshore drilling less than
6 month)
All profits gained by non-resident in Ukraine are not subject to taxation
in Ukraine unless there is PE in Ukraine
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35. CONTACTS
t +38 044 596 46 36
f +38 044 596 46 35
e maksym.sysoiev@danevychlaw.com MAKSYM SYSOIEV, LL.M.,
a 10 B, Vozdvyzhenska Street, Office 8, Kyiv, 04071 Attorney-at-law, Counsel of
Ukraine DANEVYCH law firm
www.danevychlaw.com