On 6 April 2016, the Cabinet of Ministers of Ukraine (CMU) adopted a number of amendments to the Procedure for the Issuance of Special Permits for Subsoil Use (the “Procedure”), which became effective on 12 April 2016. Compared to the previous version, the Procedure appears to provide greater transparency and predictability, although certain provisions require further improvement.

The Procedure aims to remove certain discriminatory provisions against private producers, to timely and accurately inform the market of the decisions taken by the licensing authority, to prevent corruption and unfair practices by market players. On the other hand, the amended Procedure does not completely eliminate all preferences for state producers and also establishes a new payment applicable in the case of discovery of new reserves, regardless of whether such discovery has been made at the cost of the state or the private sector.

The most important changes are set out below.

Grounds for issuance of the special permits for subsoil use without auctions

  • In general, the principal rule that special permits must be awarded to the winners of auctions has not changed. However, traditionally the permitting authority – the State Service for Geology and Subsoil of Ukraine (SSGS) – had a number of grounds to issue a special permit also without an auction. The Procedure abolishes some of these grounds, in particular, making it no longer possible to receive a special permit outside the auction procedure for:
  1. production of mineral resources from deposits having insignificant reserves, as approved and determined by the State Commission on Mineral Reserves;
  2. geological survey, pilot and commercial production of mineral resources, if the applicant has already constructed and owns a mineral processing plant at the subsoil area;
  3. geological survey, including pilot and commercial production of mineral resources by commercial entities with, the state interest of at least 25%; and
  4. geological survey, including pilot and commercial production of peat, amber deposits (provided that the relevant subsoil plot is not commercially viable and its area does not exceed 1 ha).
  • The remaining grounds for issuance of special permits without an auction were also amended and are now effective with respect to:
  1. geological survey, pilot and commercial production of underground potable and technical water in volume not exceeding 300 cubic meters per day (save for production of tared drinking water);
  2. production of mineral resources, if the applicant (1) had previously conducted a geological survey at a licensed area at its own expense, (2) had performed an estimation of the reserves and obtained approval from the State Commission on Reserves of the Mineral Resources, and (3) applies for the issuance of the relevant special permit within 3 years following approval of the reserves;
  3. production of natural resources (for oil and gas deposits – geological survey, pilot and commercial production) if approbation of the deposits had been performed by the applicant at its own expense, provided that the approval from the State Commission on Reserves of the Mineral Resources is obtained by the applicant within 3 years following the issuance of the special permit for production (for the subsoil areas located on the continental shelf and within the exclusive economic zone of Ukraine – within 10 years);
  4. geological survey, including pilot and commercial production of mineral resources by (i) commercial entities fully owned by the state, and (ii) by the gas market players performing the public service obligations and fully owned by commercial entities, where the state holds 100% interest (this ground for issuance of the special permits without auction shall be in effect only until 1 April 2017).

Issuance (extension) of the special permit for subsoil use

  • A list of grounds for refusal by SSGS to issue a special permit, including extension of its term, was supplemented with the following ones:

i) local authorities and/or the Ministry of Ecology and Natural Resources have not approved the application documents;

ii) the applicant is engaged in the terrorism financing activities in Ukraine according to the information obtained from the law enforcement bodies and reporting entities;

iii) the applicant has debts for taxes and mandatory payments according to the information obtained from the tax bodies;

iv) the applicant failed to comply with terms and conditions of the special permits, work programs, licensing agreements at the subsoil plots where the applicant is performing the subsoil use activities (as may be identified by the relevant supervisory bodies).

  • Extension of exploration permits for the third time is allowed only if geological works are financed exclusively from the state budget;
  • Special permits for exploration of mineral resources of local significance may not be issued for a period exceeding 3 years and extended only once;
  • The decision on extension/non-extension of the special permits shall be taken by SSGS within 45 days (previously 60 days) following the date of submission of the documents.

Transparency

  • SSGS has been obliged to timely (usually within 3-5 days depending on the type of information) publish the following information on its official web-site:
  1. information on registration of the application for issuance of the special permit outside the auction procedure, extension or re-issuance of the special permit;
  2. information on registration of the application for bringing amendments to the special permit;
  3. a copy of the issued special permit, executed licensing agreement and work program etc.;
  4. a copy of the order for suspension, abolishment of the special permit; and
  5. a copy of the order for refusal to issue or extend the special permit.

Fees for the special permits

  • In addition to the fee that must be paid for issuance and extension of special permits, the Procedure establishes a new payment paid in the event the estimated reserves of the mineral deposit are increased. Given that such payment equals to the value of geological information (calculated as per the defined procedure), its payment by the subsoil users, which have acquired/developed the geological information at their own expense does not seem to be transparent.
  • To extend the special permit its holder must be compliant with terms and conditions of the special permit, licensing agreement, work program (as per results of the recent inspections by the supervisory bodies);

Suspension

  • The list of grounds for suspension of the subsoil use activities were narrowed down. Now SSGS may suspend the activities at its own discretion or upon request of the state supervisory bodies (including the tax authorities), only in the event of:
  1. failure of the special permit holder to comply with the terms and conditions of the special permits, licensing agreements, work programs;
  2. individuals' lives, health or the environment are under threat as a result of activities under the special permits;
  3. the special permit holder has arrears with the applicable subsoil use payments and tax indebtedness; and
  4. the special permit holder has failed to timely rectify violations of environmental or mining laws.

Other changes

  • Previously the Procedure provided that the special permit could have been amended in the name of a new holder: (i) in the event of legal succession and (ii) if an original special permit holder transferred it to its subsidiary (with at least 50% statutory interest in it) assets required by such subsidiary to continue subsoil activities and fulfill obligations under the special permit of its original holder. These grounds were basically an only instrument to transfer a special permit and have now been cancelled.

Law: Resolution No 277 of the Cabinet of Ministers of Ukraine “On Bringing Amendments to the Procedures, Approved by Resolutions No 594 and 615 of the Cabinet of Ministers of Ukraine on 30 May 2011 and Abolishment of Certain Resolutions of the Cabinet of Ministers of Ukraine” dated 6 April 2016