A Battlefield for Investors
"The state should take a more serious approach to investors willing to operate in Ukraine, to truly make it a partnership", says Yaroslav Petrov, counsel at Asters law firm
— It is well known that shale gas production projects have failed in Ukraine. How are investor exit issues commonly regulated in agreements?
— Our firm has been involved in all projects associated with production-sharing agreements. Two of them, led by Chevron and Shell, were primarily related to shale gas extraction. Unfortunately, despite maximum efforts by all participants, the projects have not seen any major progress to date and international investors had to withdraw. Nevertheless, we remain hopeful that the projects will be resumed as new investors will show interest.
Specific exit conditions are stipulated in each particular agreement. One should make a difference between agreement termination, when all parties discontinue the partnership under the agreement, and investor exit triggered in certain conditions, while the remaining parties may continue with the project’s implementation. For instance, a company may decide to withdraw from an agreement, after the works have been commenced, due to significant change in the economic environment or negative exploration results.
Exit rules and procedures set out in the agreement determine what documents are to be signed, what happens to the rights and obligations of the withdrawing party, and what the fate of its financial liabilities will be. All the conditions are carefully discussed since a foreign investor is under considerable financial obligations, and a withdrawal results in certain financial and economic consequences.
— What were the grounds and conditions for withdrawal of foreign companies from the projects?
— For professional reasons, I cannot disclose any details. However, it is publicly known that Chevron withdrew because of the State's failure to meet one of the terms set out in the agreement. The agreement containing certain conditions subject to compliance by each of the parties for the project’s commencement was signed and came into effect. Chevron referred to the fact that the State failed to meet those conditions in due time, which became a reason for Chevron's formal exit. According to the media’s information, the exit procedure is not yet complete. The reason explained by Chevron may not be the only one, as the current geopolitical and economic environment is of great importance too. World gas and oil prices have dropped, so the company chose to play it safe and not invest big in its venture in Ukraine. Besides, Chevron's other European projects did not go that smoothly either.
Why was Chevron so interested in this project? The company was starting its operations in Poland, which is close to the Olesko field. The two fields in Poland and Ukraine were presumed to be interconnected. However, Chevron first abandoned its project in Poland and then halted its exploration in Ukraine. One may relate such actions to the company's general strategy rather than to the local situation in Ukraine.
The situation with Shell is different — the company invoked a force majeure event as grounds for withdrawal. The project is partially located in territory which was part of the region affected by the armed conflict. The Yuzivska gas field, the subject matter of the production sharing agreement (PSA), is situated in Kharkiv and Donetsk Regions. Works in the initial phase were planned to be performed particularly in Donetsk Region.
Due to the outbreak of hostilities in the region, Shell declared a force majeure event and then decided to withdraw from the project as such a force majeure event did not cease. A tender for selection of a new investor to participate in the Yuzivska PSA has been announced, which clearly shows that Shell's exit procedure is complete. Such an announcement would not be made if Shell did not comply with all of the exit-related formalities.
— Does the new tender attract any interest from investors?
— We currently observe no interest in Yuzivska field from foreign companies, at least, among our clients. But the tender has just been announced, so there is still time to apply for participation.
Large foreign companies are unlikely to manifest interest, given the risky situation with the Yuzivska field which is close to the ATO zone. So, it seems to be easier to attract an investor to the Olesko project. Taking into account the economic factor (some projects of international companies are being put on hold), it is difficult to predict whether big foreign industrial investors will be willing to get involved in the Yuzivska field project. It is rather likely that companies already present in Ukraine, both local and foreign, will participate in the project.
— Are there any good prospects for shale gas extraction in Ukraine?
— I believe there are good prospects, otherwise such major players as Shell and Chevron would not have agreed to step in. Entry into a project is usually preceded by risk analysis and assessment. The mere fact that such companies signed the PSAs demonstrates that shale gas has a future in Ukraine.
— What factors may deter investors?
— Decline in world oil and gas prices. This is a case not for Ukraine only, but for other countries as well where international companies have given up their initiatives. The ongoing conflict with the Russian Federation may also significantly influence the implementation of such projects.
— What aspects should investors and the state need to consider in the light of past experience of dealing with PSAs?
— First of all, it is important to note that we have no experience of successfully completed projects, so we may only dwell on certain problems arising during the implementation of signed agreements. Investors and the state need to establish constructive dialogue to cooperate and better understand each other's needs. For instance, investors have helped to significantly improve Ukrainian legislation regulating production-sharing agreements and bring it into line with best international practices.
We participated in the development of a number of draft laws and we know that all the investors involved in the projects have also made a strong contribution.
It is crucial for investors that the state take more seriously and favor the investors eager to operate in Ukraine. The state needs to accelerate all the licensing procedures to make interaction with investors a valuable partnership.
— Should we expect any changes in tax policy or reduction of royalty payments?
— This is a very complex issue for Ukraine. It is hard to find a balance between the interests of the state and gas companies: the state needs to replenish the budget, which is evidently complicated by the current situation. On the other hand, the state must not victimize gas companies and make them bear the burden of pumping up the budget, assuming that they have super profits. When high royalty rates were introduced for a temporary period, this was generally understandable and the investors agreed to pay. But when they became permanent this created an unsound market situation (the rates still have not been reduced, in spite of numerous requests). So, our customers sometimes find it hard to pay the royalties. This issue requires urgent action as we risk losing the Ukrainian gas industry, and it is unclear how we will then try to achieve energy independence.