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24 February 2012

Dreams of Liberalized Subsoil Use Market


Author: Armen Khachaturyan, Yaroslav Petrov
Source: KyivPost. – 2012. – No.8

On 19 December 2011 MP Valeriy Kharlim, Party of Regions, registered in the Parliament the draft Law No. 9539-1 on amendment of certain laws of Ukraine related to subsoil use (the "Draft"), aiming to revolutionize the overall framework of subsoil use in Ukraine, in particular by means of its liberalization.

In an interview Armen Khachaturyan, senior partner at Asters, and Yaroslav Petrov, associate at Asters, secretary of the Fuel & Energy Committee of the American Chamber of Commerce, will briefly elaborate on the changes suggested by the Draft.

How will the Draft influence the subsoil use market?

Contrary to the effective legislation, which prohibits transfer of subsoil use rights to third parties in form of a gift, sale or alienation of such rights in any other manner, including as a contribution to a charter capital of the company established with participation of the subsoil user or as a contribution to joint activity (a non-incorporated joint venture), the Draft lifts these restrictions. Moreover, the Draft suggests that subsoil use rights can be used as collateral by banks to secure obligations under loan agreements.

Does the Draft envisage any limitations to the transfer of subsoil use rights?

Indeed, the Draft provides that any transfers or pledge of subsoil use rights are subject to approval by the State Service for Geology and Mineral Resources of Ukraine ("Derzhgeonadra"). Moreover, aiming to secure interests of the state, the Draft envisages a preemptive right for the state to buy subsoil rights, which are considered for alienation. According to the Draft the state will purchase subsoil rights through a business company 100 percent owned by the Cabinet of Ministers of Ukraine, subject to approval of Derzhgeonadra. Agreements on alienations of subsoil use rights executed without approvals and neglecting the preemptive right of the state will result that such agreements will be considered as null and void.

The Draft suggests that in cases of transfer of subsoil use rights, land use rights are automatically transferred to a new subsoil user. Land lease agreement shall have a mandatory provision on transfer of land lease rights to a new subsoil user. It is worthy to note that such mechanism of automatic transfer of land use rights is conflicting with the Law of Ukraine "On Land Lease". Article 81 of the law says that land lease rights for land plots of state or municipal property cannot be alienated by lessees to other persons, contributed to charter capitals, used as collateral. In practice, the majority of land plots used for subsoil use belong to state or municipal property. Said that provisions of the Draft conflicts with mandatory provisions of the Law of Ukraine "On Land Lease".

What are the other significant changes suggested by the Draft?

There is a rather significant amendment suggested by the Draft with respect to documents, which grant subsoil use rights. Currently, such rights are granted based on special permits for subsoil use (the "special permit"). Special permits are issued by Derzhgeonadra. A special permit grants a right to its holder, a legal or natural person, to use subsoil within period, territory, terms specified in the special permit. Special permits are issued to winners of auctions or following a non-auction procedure in cases determined in legislation. Holders of special permits sign an agreement on terms of subsoil use (the "subsoil use agreement"), which is an addendum to and an integral part of the special permit. Contrary to the effective regulatory framework, the Draft suggests quite opposite, in particular the document confirming subsoil use rights is the subsoil use agreement and special permit is addendum to it. The subsoil use agreement is executed between Derzhgeonadra and a subsoil user. Such agreements shall include provisions on technical, organizational, economical, social, environmental obligations of parties, a possibility to transfer subsoil use rights, terms for distribution of production. Special permits to be issued as currently provided, i.e. through auction and non-auction procedure.

Generally, the Draft envisages changes to the following legislative acts: Subsoil Code of Ukraine, Law of Ukraine "On Land Lease", Mining Law of Ukraine, Law of Ukraine "On Oil and Gas", Land Code of Ukraine, Law of Ukraine "On Mortgage", and Law of Ukraine "On coal bed gas (methane)".

What is the reaction of foreign investors with respect to this Draft?

Generally, negative. Of course, taking into consideration the current strictly regulated subsoil use mechanism, foreign investors welcome any initiatives of Ukrainian MPs on liberalization of the subsoil market. However, the suggested Draft, despite its declared aims, if adopted, will not influence significantly the liberalization of the subsoil use market because of the provisions of the Draft related to approval of any alienations by Derzhgeonadra and a requirement to respect a preemptive right of the state to purchase subsoil sue rights to be alienated. The later and the former neglect the overall concept of liberalized subsoil use market.

What are the chances of the Draft law to be adopted?

We would say that chances are quite high taking into consideration that the Draft was initiated by the MP from Party of Region and the overall support by Derzhgeonadra. However, opposition against the Draft has already started to grow; in particular on 24 January 2012 the Main scientific and expert division of the Parliament in its report emphasized on numerous conflicting provisions of the Draft and suggested that it should be significantly drafted. Moreover, on 8 February 2012 the Parliament Committee on issues of environmental policy, subsoil use and liquidation of consequences of Chernobyl catastrophe in its report emphasized that the Draft should be withdrawn. Further, on 13 February 2012 MP Anatoly Seminoga, Block of Yulia Timoshenko, registered draft Resolution on withdrawal of the Draft.



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