Oleg Kyryliuk:

Oleg Kyryliuk: "…Black Sea Shelf is not the only place with hydrocarbon deposits. There are other and more pro

The Acting Head of the State Service of Geology and Subsoil of Ukraine (Derzhheonadra) Mr. Oleg Kyryliuk shares with EXPRO the results of his agency’s work and its future plans

- What did Derzhheonadra achieve in the last year?

- One can outline some areas we were successful with. The key principle in the activity of the current Cabinet of Ministers of Ukraine is to ensure the energy independence of the nation. Over the last years , major developers of natural resources of Ukraine were dissatisfied with the work of Derzhheonadra. For several times we were reproached by Ukrgasvydobuvannya and Ukrnafta.

- Why did they?

- They are large companies. Altogether, they have over 200 special permits and hold over 70% of Ukrainian hydrocarbon production. Other private companies were not so loud, while complaining over the existing problems. Therefore, we have put a lot of effort to resolve all legislative gaps and discrepancies, which in the first place cause obstacles for UGV and Ukrnafta, and burden over shoulders of private companies. In particular, it relates to the process of obtaining, prolongation, re-issue, and amendments to permits for use and development of subsoils. Other concern was about the requirements of the Law ”On Assessment of Environmental Impact (EIA)”, that required assessment of environmental risks before one grants an exploration and production (E&P) permit. This EIA requirements caused delays in issuance of 60 E&P permits due to UGV and Ukrnafta.

- Do you mean the beginning of the last year when the EIA requirements came into force?

- Precisely. Starting 01 January 2018, the Law came into force, and our agency faced the problems in re-issuance of about 60 special E&P permits. Out of those suspended permits, 28 permits were pending for UGV, and 27 permits were due to Ukrnafta. All of those permits underwent further consideration, since one needed EIA conclusions on possible environmental risks. That affected 30% of oil and gas production in Ukraine, thus threatening the nation’s energy independence. So, Derzhheonadra put maximum efforts to revoke the EIA requirement until 31 December 2018. That let companies to register their applications and obtain permits based of company plans and assessments. Thus, we coped with problems related to prolongation of the 60 permits.

- Did the problem lay in procedure itself? Or did it relate to environmental risks?

- We can view it this way. There were certain aspects of procedures legislatively backuped by sub-laws. So, regardless of company's efforts to fully comply with requirements set forth by legislators, they were unable to do that. The solution was jointly elaborated by Derzhheonadra and Ministry of Ecology and Natural Resources of Ukraine. The matter was, that when receiving a permit application package, I must refuse the applicant, if one of the required agreements or conclusions is missing. That is the set procedure to comply with. The application package is submitted to Derzhheonadra, and if the package is not complete, we refuse to further process it and return it to the applicant. In case an application package is duly comprised, we submit it for consideration and approval by Ministry of Ecology and Natural Resources of Ukraine. The latter either approves or disapproves the application, but must enclose their conclusion note into the package, and return it to our agency to prepare final response to permit applicants. So every inter-agency disapproval is directed to me as the sole signatory of Derzhheonadra. So, I am forced to be the one, who absorbs on Derzhheonadra’s behalf all of rebukes from disapproved and angry applicants...

- Who might have label you and your agency as public enemy ...

- Unfortunately, that is the case. This relates to UGV and other companies. As to the case with Ukrnafta’s disapproval, the situation was even worse, since the company has been ascribed with UAH 13 billion indebtedness in royalties. The regulation clearly states that no permit is granted to those having tax debts or other state collections due…

- But how could Ukrnafta pay their debts without the extended E&P permit to keep on production and generate funds?

- They offset their debts on annual basis by paying UAH 1.2 billion for taxes and UAH 7 billion in royalties. For the last two years the company’s indebtedness to the state has been repaid in daily installments. Regardless all that, the Budget Code of Ukraine defines past debts as current and due. So, we handled Ukrnafta’s case in two ways. First of all, we proposed to postpone the EIA requirement until 01 January 2019. We also suggested changes to the edict related to payments due to the State Fiscal Service the requirement. We took the side of subsoils developers, while reasoning that permit issuance or prolongation does not affect the company or its tax obligations. Our reasoning was that in case of permit refusal, applicant company either schemes to deceive the state or completely holds on its operation. In any of the cases, state does not receive any revenues, the number of jobs decreases, the industry holds on, and the taxation base is decreasing. That is why, we suggested an option, that we consider and treat every permit application of exceptional nature, and agree such permit application with State Fiscal Service. Derzhheonadra is not in charge to recover tax debts, which are the domain of the State Fiscal Service. We issue permits to enable companies to operate, let companies handle their taxes due directly with the State Fiscal Service.

- In other words, they try to use Derzhheonadra as a tax debt collection body?

- Exactly. That is the case. Thus, our proposal of amendments enable our normal operations. Say, UGV needs 185 permits, and in the last year we satisfied more than 100 permits of the latter. In fact, we advised on amendments to 60 percent of UGV’s permit agreements in order to prolong the expired permits, granted new or re-issued the old ones. We put the UGV’s records in order, so that they comply with requirements of the legislation. Ukrnafta numbered 84 special permits to be issued or prolonged. We have considered 60 permit applications, in other words, we have perfected 70 percent of their permit applications and put them into compliance with requirements of the Ukrainian legislation. The similar situation was with private companies. Our task is to become customer-oriented, to improve the legislative base, to change attitudes and approaches, since we serve in the state agency servicing the state.

- The agency that grants access to the nation’s subsoils, isn’t it?

- Yes, that’s true. To grant access, to simplify everything within the framework of the current legislation. This is one of the aspects of the agency’s activity, and we worked in this direction over the last year. The other aspect relates to elaboration of effective regulations for open and transparent access to the nation’s subsoils. We have started a pilot project for online tenders and auctions through the ProZorro e-procurement platform. That took a year to accomplish all that. Besides introduction of open and clear procedures for new tenders, we worked hard to raise transparency of the established procedures for tender organization. As early as in October 2018, we held online the live broadcast of permit action, and those interested could see the happenings in action hall, see and hear proposals of the bidders, see the work of the auction’s panel board in moderation the action. In some cases we were fully successful, and in some could have done better. To my regret, on 25 October 2018, for the 4 gas fields being auctioned there were only 2 buyers.

- Where were the particularities? Did they relate to the lot composition? Why did some fields easily find their buyers, while the other remain of low interest?

- The particularities were that some gas fields on sale did not have any exploration and production assessment. So, such gas fields were offered for low prices, so that one could attract investment for geological study and seismic surveys. In other words, the special permit for such gas field can be offered for UAH 3 million, UAH 5 million, since its validity lasts for 5 years, and the buyer will need extra funds for geological studies before the spud-in.

- To check if availabity of the formation and its volumes, isn’t it?

- Yes, it is. Such permit costs less. But in 5 years, regardless of the results in search of the formation, the permit holder need to prolong the permit from the scratch. It implies a new bid package to be agreed with regional authorities, Ministry of Ecology and Natural Resources of Ukraine, State Fiscal Service, and be within the framework of legislation in force at the time of new application submital. In some way, the permit seems to be less expensive, but future prolongation of the permit might be more complicated.

- Are companies interested in obtaining such a permit?

- Unfortunately, no. But our bidders reason this differently. The permit is cheap currently, and nobody think about possible changes in future. Let’s grab it today for cheap, and afterwards we will see. We might be lucky to resell it to somebody. We might find an investor. Time will show. These is the reasoning of most domestic bidders. While more expensive permits, accompanied and supported by preliminary geological surveys and the right for onward exploration and production, are disregarded. Such permits are valid for 20 years! That means, that in 5 years the permit holder can make comprehensive geological study of the field, and amend the permit quickly, and shortly start production. They are guaranted with 20 years of operation in the gas acreage outlined in the permit. Though, such permits cost more.

- And how much, in particular?

- Such kind of a permit can cost starting UAH 15 million.

- One is afraid that in 20 years the rules can change for 10 times. Our state is only 28 old...

- The rules may change, but the permit will be valid for 20 years.

- So, one can sleep restlessly over the 20-year validity of the permit, can’t one?

- Precisely. If a company works transparently and complies with the legislation in force, as well as fully follows the Program of Works stipulated in the permit, the company is not concerned that the regional authorities may put its operation on hold, and that Ministry of Ecology and Natural Resources of Ukraine may revoke their authorization. The company has a 20-year permit, paid more at the beginning, and can, now and on, operate smoothly! Regardless of the existing old regulation on tenders, we made arrangements for putting some gas field to permit auctions. The first auction has held in August 2018, then followed by actions in October 2018, December 2018 under the new regulation. The forth permit auction under the old regulation should have been held outside of ProZorro e-procurement platform sometime in January 2019. The fifth permit auction is planned for February 2019. And at last, on 06 March 2019 the permit auction will be help onProZorro e-procurement platform. We will pilot the new auction system with putting 10 gas fields on sale. Altogether, we plan to put about 50 lots for sales on ProZorro e-procurement platform just in 2019. Out of these 50 lots, 30 lots will auction various gas fields. The rest of the lots will auction various mineral deposits: sands, graphite , colored metals, etc. One should note, none of Derzhheonadra will conduct of influence the upcoming ProZorro online auctions. Only in 5 days after the date of bid proposal auctioning, Derzhheonadra will see on ProZorro website the names of bidders and winners. Thus, we will stay aside possible corruption risks. One should be aware about frictions with regional authorities. Say, we prepare the gas field for sale with its geographical coordinates and all necessary data, and send the package to the due regional administration for approval. Within 45 days, the regional authorities must decide. We wait, and receive an unexpected disapproval from the regional authorities. So the gas field won’t be put on auction.

- And how do regional authorities explain such disapprovals.

- According to the Decree of the Cabinet of Ministers of Ukraine, any refusal must be duly grounded and reasoned. But in fact, most of refusals we receive are not duly reasoned. We do not strain relations with regional authorities, and in response to their refusal we revert to them with another request to provide solid reasons for their refusal. Such refusals do not relate only to hydrocarbon fields, but also to fields with other mineral resources. Regardless the difficulties and obstacles, we strive hard do that the state put on auction sale 30 gas fields by the end of this year. We want to bring home to the regional authorities, that their unmotivated refusal should be treated as a default approval.

- Can one find a common language with regional authorities?

- The regional authorities follow the assumption, that Derzhheonadra’s requests for approvals mean that we have found a client and want to push him through… The regional administration with their outdated assumptions suspect that they are deprived of their ”share” and “control” over the process. In past times, private companies, in order to influence a positive decision, concluded investment agreements with regional administration, and such practices spoiled regional officials.

- Would one rather try to speak common language with regional council deputies, who seem to be more cooperative?..

- It depends on the top officials. Nevertheless, one ought to find common interests. Either central or regional, we are united by the goal to work for the benefit of the nation, make our country economically successful and energy independent.

- Can one say that at the legislative level they accomplish everything to ease operations of national gas producers?

- I would put it this way. At the legislative level we accomplish a lot in order to simplify procedures for obtaining E&P permits, though there exist issues to be addressed by the regional councils. I think, deputies of regional councils should be more responsive to the needs of territories, where they were nominated and elected for representation. But regional councils are not responsible for social and economic development of the region. This is vested on the state regional administration. The Head of the Regional Administration presents the plan for territory development to the Regional Council’s deputies for consideration and vote approval, as well as reports to them on implementation of the suggested plan. There exist a coordination discrepancy: the subsoil permit approval is the responsibility of the Regional Council deputies, but the implementation of the plan in sustaining regional development and economy is vested on the Regional State Administration. But how can the latter fulfill the plan in case the subsoil permits are disapproved, thus depriving the region of revenues in royalties for development on hydrocarbon, sand, gravel deposits, as well as working places associated with it. I think, if there is an permit application for subsoil development, they should approve it quickly, and in less than in 45 days. This responsibility should vested on the Regional State Administration in charge of the economic development, rather than to Regional Council.

- In September 2018, at the Odesa Offshore Conference,you spoke about prospective opportunities in hydrocarbon production on the Black Sea Shelf. Could one expect the Black Sea Shelf gas fields be auctioned in this year?

- We are making all due arrangements in this regard. The final decision will be made in 1Q of 2019. If we don’t succeed with this timeframe, than the issue will suspend indefinitely, because of presidential and parliamentary election season in Ukraine. I should say, the Black Sea Shelf is not the only place with hydrocarbon deposits. There are other and more prospective fields in Eastern and Central Ukraine, as well as in the Western Ukraine, According to geologists, below the gas field under development in the Carpathian region, there exist significant hydrocarbon formations. Could it be true? Yes. According to our database on hydrocarbon fields of Ukraine, there exist huge formations but at 6,000 meter depths. The problem is that most of such formations are in wild life and landscape protection areas, and one cannot issue permits for exploration and production of hydrocarbons in such nature reserve and conservation areas.