Ukraine: Government announces two PSA tenders for large unconventional gas areas

The Cabinet of Ministers of Ukraine (“CMU”) will soon be holding two tenders for the exploration and extraction of hydrocarbons at the Oleska and Yuzivska areas on the terms of a production sharing agreement (“PSA”) to be concluded with the State, represented by the CMU. In this respect on 30 November 2011 the CMU adopted two resolutions, which became effective on 22 December 2011.

These resolutions contain the main conditions on which the PSA tenders for the Oleska and Yuzivska areas will be held once ultimately announced. The CMU also resolved to further develop and approve more detailed tender documentation and to publish the tender announcements in official Ukrainian publications and in foreign media by 22 February 2012.

The tender bids must be submitted within two months of the tender announcement being made, which means 22 April 2012 is the most likely deadline.

Apart from the list of documents to be submitted for participation and qualification requirements of the bidders, the aforementioned resolutions have set a number of other specific tender conditions, the most important of which are summarised below:

• An investor (winner of the PSA tender) will be granted an “all-inclusive” special permit for exploration, pilot and commercial production of the following hydrocarbons: natural gas, shale gas, tight (central basin) gas, coal bed methane, oil and condensate within the Oleska (6 324 sq. km.) or Yuzivska (7 886 sq. km) areas for the period of 50 years.

• The minimum amount of investments required: at the exploration stage – UAH 1.3 bil. (USD 163 mil) for the Oleska area and UAH 1.6 bil. (USD 200 mil) for the Yuzivska area; at the commercial production stage (if any) – UAH 25 bil. (USD 3.125 bil) for the Oleska area and UAH 30 bil. (USD 3.75 bil.) for the Yuzivska area.

• Investor will be obliged to develop a tendered subsoil area jointly with a state-owned company (i.e., to carry it through the exploration stage), which is yet to be determined by an Interagency Commission on a competitive basis. Such state-owned company will be entitled to 50% of the investors' rights and obligations (save for exclusive rights and obligations vested in the operator) and, in particular, to 50% of the investors’ share in the profit production. A joint operating agreement or other similar arrangement should be concluded within 120 days of the announcement of the winner of the tender.

• The PSA between an investor, a state-owned company and the State (represented by the CMU) shall be concluded for 50 years on the following terms: the amount of investor’s cost production shall not exceed 70%; minimum share of the State in the profit production – shall be 15% for the Oleska area and 16.5% for the Yuzivska area.

• Bidding parameters that will be considered when taking a decision on the winner of the tender: (i) efficient use of the natural resources as per the work program; (ii) efficiency of the technological solutions; (iii) efficiency of the HSE protection program; (iv) attractiveness of the investment terms; (v) financial capabilities and experience in light of the work program and investment terms of the tender; (vi) attractiveness to the State of the (cost and profit) production split suggested by the bidder; (vii) experience of the bidder in real life projects for exploration and/or production of shale gas, tight (central basin) gas, coal bed methane; (viii) involvement into development of the local production and social infrastructure; (ix) ensuring primary use of local goods, works and services of Ukrainian origin.

• Tender conditions oblige bidders to disclose certain information concerning their methods of efficient use of subsoil resources to be used in the project, specifically: Chemical composition of the fracking fluid;Technology and other solutions for protection of subsoil and surface waters from chemicals used for hydraulic fracturing, as well as to ensure maximum usage of non-potable ground waters and re-using formation waters;Measures to ensure efficient use of water resources used for hydraulic fracturing;Technology to protect the atmosphere and prevent air pollution.
• Bidders will be required to pay a participation fee in the amount of UAH 500 000 (USD 62,500) and purchase the tender documentation (comprising a cartographic layout of the area, general and geological description of the area, list of geological information that can be purchased from the State Service for Geology and Subsoil of Ukraine) amounting to UAH 100 000 (USD 12,500).

Law: Oleska area - Resolution of the Cabinet of Ministers No. 1297, dated 30 November 2011; Yuzivska area - Resolution of the Cabinet of Ministers of Ukraine No. 1298, dated 30 November 2011.