On 18 June 2013 the Ukrainian Parliament adopted Law No. 331-VII “On Amending the Law of Ukraine ‘On Production-Sharing Agreements’ with Respect to the State Regulation of the Execution and Performance of the Agreements” (hereinafter – “Law No. 331-VII”), which came into effect on 21 July 2013. 

Under Ukrainian law a production-sharing agreement (PSA) is a type of contract which allows the state (as the administrator of subsoil resources on behalf of the Ukrainian people) to hire an investor to conduct exploration and production of mineral resources (typically fossil fuels) within a certain agreed subsoil area. The resources produced are later shared between the state and the investor on the terms agreed in the PSA. The Law “On PSA” regulates relations between the state and a PSA investor.

Law No. 331-VII basically re-introduces the provisions of the Law “On PSA” relating to the establishment of, and delegating authority to, the Inter-Agency Commission (IAC) on Organising the Execution and Performance of PSAs – a consultative and advisory body of Cabinet of Ministers of Ukraine (CMU).

During December 2012 – July 2013, most of the functions relating to the execution and performance of PSAs were performed by the State Service for Geology and Subsoil of Ukraine (SSGS). However, this set-up was not effective, so it was decided to re-establish the IAC.  

  • Among other things, Law No. 331-VII provides that:

The CMU is now authorised to establish the IAC comprised of representatives of governmental bodies, local authorities and members of the Parliament. The IAC will carry out the main functions with respect to the execution and performance of PSAs. In addition, the CMU has also been authorised to approve the Regulation on the IAC and to appoint a central body of the executive power to provide technical, informational and organisational support to the IAC’s activities (hereinafter the “IAC working body”)

  • The IAC’s main functions will be as follows:

(a) advising the CMU on the possibility to convert a special permit for subsoil use into a PSA when such conversion is requested by the holder of the special permit;

(b) organising and holding PSA tenders;

(c) registering (performed by the IAC working body) and reviewing PSA tender bids;

(d) providing recommendations to the CMU with respect to the winning PSA tender bid;

(e) coordinating the review and negotiation of the PSA drafts;

(f) registering the first draft and final versions of the PSA (performed by the IAC working body).

The new IAC, i.e., the IAC introduced by Law No. 331-VII is not an exact copy of the IAC that existed before December 2012 (“old IAC”), although their names are the same.

Upon careful review of the new version of the Law “On PSA”, it will be clear that the new IAC has different competences. In addition, regulations on the old IAC should have been repealed within three months of the abolition of the old IAC. Law No. 331-VII, in turn, requires the CMU to adopt a new set of regulations determining the scope of the IAC’s authority, composition, procedural rules, etc. Under Law No. 331-VII, the CMU has three months to bring its resolutions (i.e. amend or cancel the existing resolutions and/or adopt new ones) into compliance with Law No. 331-VII.

Law No. 331-VII has also revived provisions that allow (i) the CMU to delegate its authority related to the performance of PSAs to a central executive power body (hereinafter – the “Authorised Government Agency”); and (ii) the parties to the PSA to establish a steering committee to ensure efficient coordination between investors and the State and resolve other important matters during a PSA’s lifetime.

The Authorised Government Agency can also be authorised by the CMU to exercise State control over the investor’s activities under the PSA and will take part in a comprehensive five-yearly inspection of the investor’s performance of the PSA.

Although Law No. 331-VII does not provide for a clear division of power and authority between the IAC (its working body) and the Authorised Government Agency, we expect that the IAC will be responsible mostly for the pre-PSA performance stage (i.e. holding tenders, development and execution of PSA, registration functions), while the Authorised Government Agency will represent the CMU directly at the performance stage of the PSA (including PSA administration, decision-making and control functions). This may become clearer once the CMU adopts the necessary resolutions and regulations explaining the legal status of IAC.

Finally, another amendment introduced by Law No. 331-VII to the Law “On PSA” concerns the governing language of bilingual PSAs. Previously the Law “On PSA” allowed the parties to the PSA to agree on the prevailing language version in case of any discrepancy between the Ukrainian and English texts. With the adoption of Law No. 331-VII the Ukrainian text will have prevailing force in the case of discrepancies in new PSAs. However, the parties to a PSA may still agree on which language version will be used for dispute resolution purposes, unless the dispute relates to the interpretation of the PSA’s provisions.

LAW: Law of Ukraine No. 331-VII “On Amending the Law of Ukraine “On Production Sharing Agreements” with Respect to the State Regulation of the Execution and Performance of the Agreements” dated 18 June 2013