Outlines of the Presentation of Ms. Tamara Lukanina,

Partner of «Ukrainian Legal Group»,

at the Seminar on the Ukrainian Legislation on Production Sharing Agreements

September 14, 1998

Survey of certain provisions of the draft PSA Law

and possible amendments thereto (Т. Lukanina)

It is known that the draft Law «On Production Sharing Agreements» according to its legal foundation is a procedural law, and it should ensure regulation primarily of the procedural matters related to conclusion and performance of production sharing agreements.

Proceeding from this statement, I would like to emphasize that certain provisions of the draft Law do not stipulate clearly enough the requirements concerning the procedure for concluding the agreements, and some issues have not been legally settled by the draft Law, viz. :

(1) We believe that amendments and addenda should be introduced in Article 7 of the draft which stipulates the principal requirements concerning the procedure for holding tenders to conclude production sharing agreements, viz. :

- to our mind, Article 7 of the bill sets forth a limited stipulation of the tender procedure. However, taking into account specific features of production sharing agreements as well as long-term nature thereof, we believe it is necessary to stipulate in the bill a detailed procedure for holding the tenders, including a comprehensive list of the documents to be filed by the investor for participation in the tender;

- we suggest to reduce certain periods stipulated by the bill, in particular the period of holding the tenders (12 months pursuant to the draft Law) and the period allowed for conclusion of production sharing agreements (18 months pursuant to the draft Law);

(2) Also, Articles 11 and 12 of the bill should be improved; these Articles stipulate the procedure for registering, approving and signing of the draft agreement, in particular :

- it is expedient to oblige the Authorized body to coordinate a draft agreement with a local self-government body (clause 4 of Article 11). We believe that the Authorized body should ensure such coordination at all stages of working on the draft agreement. The procedure for performing such coordination should be determined by the Government of Ukraine.

- in addition to the aforementioned, we believe that the agreement should be concluded (signed) with the participation of a local self-government body.

(3) Certain provisions of the bill concerning multilateral production sharing agreements should also be improved.

For instance, liability and taxation of foreign investors and accounting procedures in multilateral agreements.

(4) Whereas a production sharing agreement is concluded with the State as a legal entity, the bill should stipulate more precisely the obligations of the State under the agreement and the liability associated with such obligations.

(5) The requirements to the investor stipulated by clause 2 of Article 5 of the bill should be set forth in more detail, in particular the requirements concerning economic, financial and technological capacities of the investor.

This issue requires legislative settlement to yield a clear-cut definition of the investors which can be a party to a production sharing agreement.

(6) In clause 1 of Article 15, it is expedient to envisage within the total period of an agreement (not more than 50 years) several stages of performance of works, each stage having its deadline, for instance - up to 10 years for exploration and the remaining years - for developing a mineral deposit.

(7) Article 24 should stipulate the procedure for the investor’s use of information, as this Article stipulates that such information is the property of the State.

(8) Article 25 is addressed in detail in the tax expert’s presentation. Therefore, we would only like to note that it is expedient to stipulate in this Article the possibility for the parties to independently determine and set forth in an agreement the form of tax payment - in the monetary form or in kind.

(9) As far as the terms and conditions of Article 27 are concerned, which stipulate the guarantees against legislative changes, we suggest to stipulate for the investor the possibility to make use, if the investor desires so, of the legislative changes which improve the conditions of the investor’s operation, including tax changes in favor of the investor.

(10) Article 31 of the bill should stipulate the possibility to have disputes considered by courts of justice or arbitration or arbitral tribunal, including international arbitration institutions, and should provide that the Ukrainian law should be applied in all cases to the legal relations arising out of production sharing agreements.

(11) the bill does not set forth clearly and unambiguously the issues associated with the possibility of early termination of production sharing agreements, as on the one hand this issue is subject to consideration of the parties (clause 3 of Article 15) and on the other hand the bill (clause 2 of Article 17) stipulates the possibility to terminate (prohibit) or suspend the use of subsoils during performance of a production sharing agreement.

Besides, the Land Code of Ukraine (Articles 27 - 29) stipulates the possibility to terminate the right to use land, in particular:

- in case of termination of enterprise’s operation;

- if a plot is used with the use of the methods which lead to aggravation of environment;

- if a plot is not used during 2 years.

Subject to the foregoing, it is necessary to envisage in the bill the effect of such rules of the Land Code on the validity and termination of production sharing agreements.

(12) From our point of view there is another important issue that requires legislative settlement - the principal requirements to the procedure for transferring and returning subsoil areas under production sharing agreements (periods, formalizing procedures).