Energy and Natural Resources Legislation Update - Oil, Gas & Electricity

Legislative Procedure For Coal Bed Methane Production

On 16 June 2009 the President of Ukraine, Viktor Yushchenko, signed the Law "On Coal Mine Gas (Methane)", which came into force on 19 June 2009.

The Law determines legal, economic, ecological and organizational fundamental principles of geological survey of coal mine gas (methane) including its commercial development, production and further usage.

The application of this law affects a number of areas: the improvement of miners' work conditions and occupational safety, geological soil research with the purpose of locating resources, further gas (methane) recovery from coal deposits that previously were not industrially exploited regardless of their further intended use, etc. It is worth mentioning that the right to gas production in the process of degassing the operating coal mines is given to the owner of a special permit for commercial coal mines development within respective mining lease and/or to other legal entities subject to prior consent of the permits owner. In other words, the Law envisages engagement of specialized organizations to produce coal mine gas (methane) that have respective permits provided for by the legislation.

According to the adopted Law the National Electricity Regulatory Commission of Ukraine shall set the limit price for coal mine gas (methane) if it is being recovered at state budget's cost. In addition, the NERCU shall set the tariff in case of coal bed methane supply or/and transportation by the Unified Gas Pipeline System of Ukraine. Otherwise, the coal mine gas (methane) shall be sold for agreed prices.

One other important stipulation of this legislative act is that the exploitation of coalmines with higher level of gas (methane) concentration is forbidden unless all necessary ventilation and degassing measures are taken.

Approval of the Procedure on Granting Special Permits for Subsoil Use in 2009

Pursuant to article 5 of the Law of Ukraine "On State Budget for 2009," special permits for subsoil use are to be sold on an auction in 2009.

On 17 June 2009, the Cabinet of Ministers of Ukraine with its Resolution No. 608 approved the Procedure for granting special permits for subsoil use within the territory of Ukraine, its continental shelf and the exclusive maritime zone in the year of 2009.

The special permits are to be issued by the Ministry for Environmental Protection of Ukraine. The Procedure envisages obtainment of separate permits for every type of subsoil use within the limits of specific subsoil block. The permit shall be issued only if the State Committee of Ukraine for Mineral Resources expertise has been carried out. The permits shall be issued for the following type of subsoil use:

geological survey, including mineral deposits research of a national value and commercial production;

extraction of mineral deposits;

oil and gas subsoil geological survey, including research and commercial production of subsoil mineral deposits with subsequent production of oil and gas;

construction and operation of subsurface facilities not related to the mineral resource extraction for the purposes of underground storage of oil and gas, other materials, waste burial and waste water disposal;

development and construction of geological territories and objects of cultural and scientific value;

meeting other requirements.

Mikhail Shchitka, Senior Associate with Vasil Kisil & Partners Law Firm, pointed out the following: "The Procedure for Issuance of Special Permits for Subsoil Use was adopted in an extremely non-transparent manner. The Cabinet of Ministers ignored all comments and suggestions, which were submitted by representatives of employers, extracting companies and lawyers in the course of public discussion of the draft Procedure. Contrary to applicable laws the adopted Procedure grants unprecedentedly vast powers to governmental bodies enabling them to intervene in the activities of subsoil users and at the same time it infringes upon private investors' rights."

New Stipulations Regarding the Electric Power Export

On March 19, 2009, Verkhovna Rada made amendments to the Law of Ukraine "On Electrical Power" defining the electrical power export characteristics.

The Law envisages for the energy suppliers to buy the definite volume of electrical power wholesale at the electric power wholesale market of Ukraine. Access to the transfer capacity of the interstate electric network of Ukraine for electric power export shall be granted through an auction.

The Auction shall be held by an electric power company transferring the electric power by the interstate electric network of Ukraine. The Auction shall be held once a month conditioned on the availability of interstate electric network of Ukraine transfers capacity. The Auction Procedure shall be adopted by the National Electricity Regulatory Commission of Ukraine.

Participation in an auction shall be granted to companies that have special license to carry out activities associated with electric supply, who are members of electric power wholesale market of Ukraine and with no past-due indebtedness for electric power bought at the wholesale market.

The winner of the auction shall be the company offering the top price for the electrical energy.

Governmental Incentives on Electric Power Production from the Alternative Energy Sources

On April 04, 2009, Verkhovna Rada passed the Law No. 1220-VI entering amendments to the Law of Ukraine "On Electric-Power Industry". The Law determines mechanism of the governmental incentives of the electric power production from the alternative energy sources.

The National Electricity Regulatory Commission of Ukraine shall determine and adopt the "green" tariff for the electric power produced by the companies which use alternative sources of energy (except blast furnace and coke gas, and if using hydropower – produced only by mini hydroelectric power station).

The value of "green" tariff shall be determined for each electric power production from the alternative energy sources company, for every type of alternative energy and for each object of electric-power industry.

For the companies producing electrical energy using alternative sources of energy the "green" tariff shall be valid till 01 January 2030.

Production and Usage of Biological Types of Fuel

The President of Ukraine, Viktor Yushchenko, signed the Law of Ukraine as of 21 May 2009 "On Amending Certain Legislative Acts regarding Encouragement of Biological Types of Fuel Production and Usage".

According to the Law the profit of the companies producing bio-fuel and/or electrical and thermal energy simultaneously using bio-fuel is tax-exempt for the next 10 years starting from 01 January 2010.

Also up until 01 January 2019, it is allowed to apply the bonus amortization to new capital funds. The Law envisages zero excise duty rates for ethanol being used for bioethanol and biodiesel production.

Criminal Liability for Anticompetitive Actions

According to the Draft Law "anticompetitive concerted actions related to the formation of sales and purchase prices of goods and services or market share, or some limitations including stopping of goods and services production shall be punishable by a fine of 1000 to 5000 tax-free minimum incomes, or restraint of liberty for a term up to five years, or imprisonment for a term up to six years, with the deprivation of the right to occupy certain positions or engage in certain activities for a term up to three years".

As of now paragraph 228 of the Criminal Code of Ukraine envisages criminal liability only for a coercion to anticompetitive concerted actions accompanied with violence, or infliction of damage, or threats of violence or damage that is forbidden by the Law of Ukraine "On the Protection of Economic Competition". Such actions shall be punishable by an imprisonment for a term of two to five years.

Thus, it is proposed to classify the anticompetitive concerted actions as grave criminal offences that will harden the liability for breach of economic competition legislation.

Ministry of Fuel and Energy to Coordinate Licensing of Oil and Gas

Pursuant to the Resolution of the Cabinet of Ministers of Ukraine No. 1123 dated 27 December 2008 "On approval of the list of goods export and import of which are subject to licensing and volume of quotas in 2009" export of crude oil and natural gas in gaseous state of Ukrainian origin is subject to licensing procedures in 2009. The licenses for abovementioned products are to be issued only with prior coordination with the Ministry of Fuel and Energy of Ukraine.

On April 23, 2009, the Ministry of Fuel and Energy with its Order No. 220 adopted the Procedure for coordination to issue licenses for export of crude oil and natural gas in gaseous state of Ukrainian origin. The Procedure applies to each company exporting named products regardless of its form of ownership pursuant to concluded international agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ukraine: Energy and Natural Resources Legislation Update