Association “EnergyTransparency”

Center NOMOS

ANALYSIS of progress in transparency of hydrocarbons’ producing companies and natural monopolies responsible for pipeline transportation of hydrocarbon resources in Ukraine using adapted reporting templates of Extractive Industries Transparency Initiative.

Kyiv 2010

Expert Group: Michael Gonchar, Project Coordinator Olexandr Malynovsky Andriy Chubyk Serhii Zhuk Olena Ptashnykova

The Center “NOMOS” was established in November, 2003 in Sevastopol as a non-governmental orga- nization the goal of which is participation and support of strategic research projects in the areas of national and international security; international relations in the Caspian, South Caucasus and Black Sea regions; Ukraine's integration into the EU and the NATO. Since 2005, the Centre has published all-Ukrainian quarterly journal “The Black Sea Security”. Materials of the edition available online at www.nomos.com.ua Since 2006 the Office of Energy Programs of the Center has operated in Kiev. During this period sev- eral projects aimed at increasing transparency in the oil and gas sector of Ukraine were implemented in cooperation with the International Renaissance Foundation, Friedrich Ebert Stiftung, and Robert Schuman Foundation. In 2009, the Center “NOMOS” in partnership with other NGOs initiated the accession of Ukraine to Extractive Industries Transparency Initiative (EITI). The Center “NOMOS” together with “DiXi Group”, Association “EnergyTransparency” and Kyiv International Energy “Q-Club” supports online resource www.ua-energy.org Contacts: 24 M.Muzika St., off. 2 13 Olzhicha St., off. 22 Sevastopol, 99007 Kyiv, 04060 Ukraine Ukraine phone/fax: +38 (0692) 44 39 92 phone: +38 (044) 507 01 98 phone: + 38 (0692) 45 04 51 fax: +38 (044) 440 21 66 е-mail: [email protected] е-mail: [email protected]

Design, printed: Private company Lanovenko CONTENTS. 3

Introduction 5

І.Analysis of the hydrocarbon extraction sector’s transparency using adapted reporting templates of the Extractive Industries Transparency Initiative 7

1. Analysis of the issue of transparency in oil and gas sector in the context of sectoral legislation 8 1.1. Code of Ukraine “On mineral resources” 8 1.2. The Law of Ukraine “On Oil and Gas” ...... 8 1.3. Law of Ukraine “On Production-Sharing Agreements” ...... 10 1.4. The Law of Ukraine “On Licensing Certain Types of Business Activity” 12 1.5. General conclusions about legislative level to ensure transparency in oil and gas industry ...... 12

2. Real sector of hydrocarbons’ extraction in Ukraine 14 2.1. Licenses for deposits development and mining ...... 14 2.2. Oil production ...... 17 2.2.1. Oil deposits in Ukraine ...... 17 2.2.2. Base volumes of oil extraction ...... 18 2.2.3. Sale of equity production oil on the domestic market ...... 18 2.3. Gas production ...... 19

3. Payments to the State budget from oil and gas production 21

4. General conclusions about the level of transparency in the subsoil use and sale of extracted hydrocarbons 22

5. Testing of level of readiness by extractive sector companies to work according to EITI reporting templates 23 5.1. Reasoning: ...... 23 5.2. The testing results of Oil & Gas extracting companies 24

General conclusions 26

ІІ. Analysis of progress in transparency of natural monopolies activities responsible for pipeline transportation of hydrocarbon resources in Ukraine. Comparative analysis of respondent responses on requests to provide information, based on EITI sample form, in 2009 compared with 2007 information requests (probationary assessment of transparency of natural monopolies responsible for transit of hydrocarbons) 27

The overall conclusion 33

4

Annex 1. Resolution of the CMU on joining the Extractive Industries Transparency Initiative. Statement by the Cabinet of Ministers of Ukraine on joining the Extractive Industries Transparency Initiative ...... 39 Annex 2. Samples of reporting templates for NJSC “Naftogaz of Ukraine” example 41 INTRODUCTION. 5

Ensuring transparency in the oil and gas tion of the Resolution No. 1098 of the Gov- sector has never been a real priority of the ernment of Ukraine of September 30, 2009 state authorities of Ukraine and commer- aims to: cial entities. As a result, the operation of •• provide more rational use of natural re- the sector remains insufficiently transpar- sources; ent even to the state. Corruption in the •• create conditions for reducing corrup- state apparatus encourages preservation tion in the extractive industries; of opaque relations, which, in turn, provide •• ensure participation of civil society in life-giving medium for corruption and controlling fullness of revenues to state shadow schemes. So it is no coincidence budget from activities related to mining; that the expert group of the International Energy Agency in its work “Ukraine. Energy •• increase public confidence to public au- Policy Review. 2006” identifies three key thorities, which are managing extractive priority areas for action: energy efficiency, industries; cost-reflective pricing and transparency: •• improve investment image and attrac- “Greater transparency in energy data and tiveness of the country. market rules could boost investment and thereby enhance competition and service In addition, participation in the EITI can be quality. A second element of transpar- included in the calculation methodology of ency needed is clear market rules that sovereign credit rating of the country. are enforced uniformly. Such rules would It is obvious that the way from the declara- stimulate investment and enhance fair com- tion of intent to the practical result is con- petition in Ukraine.” siderable and may require years of efforts Ukrainian society is in need of creating and political will of both the government some monitoring mechanisms over the of Ukraine and companies operating in the activities of public authorities and com- extractive sectors. The Expert Group, which panies that use natural resources, which worked on adaptation of the EITI in Ukraine are extracted in Ukraine or transported under the auspices of the Center “NOMOS” via the territory of Ukraine and form the in the framework of the project “Creation of lion's share of social wealth. The Monitor- the case on Hydrocarbon Transit Trans- ing should cover entire technological chain parency in Ukraine (EITI methodology)”, “production - transportation – consump- which was implemented in 2009 under tion” (including processing, distribution the support of the International Renais- and sale), where major financial flows cir- sance Foundation, worked out a version of culate. However, to cover immediately the reporting templates taking into account whole chain looks rather unreal. The civil the whole technological chain. However, in society in Ukraine began testing transpar- the opinion of the Expert Group, on the cur- ency from the sphere of energy production, rent stage Ukraine should use the EITI with using Extractive Industries Transparency appropriate reporting templates only in Initiative (EITI). The EITI field is namely mining sector, as stipulated in the Resolu- mining. tion No. 1098 of the Cabinet of Ministers of Ukraine of September 30, 2009 (Annex 1). Joining the EITI that began with the adop- Only after official extension of the EITI on 6 the transportation sector it may be imple- mented on national levels. At the same time, the Expert Group tested the companies involved in production and transportation of hydrocarbon resources concerning their previous acquaintance with the EITI methodology and sensing the current (starting) level of transparency be- fore implementation of the EITI nationwide. Hereafter it is an analysis of legislative and regulatory basis concerning mining, real state of things with the production of hydrocarbon resources in Ukraine, and as- sessment of transparency levels on the basis of adapted reporting templates. PART І. 7

Analysis of the hydrocarbon extraction sector’s transparency using adapted reporting templates of the Extractive Industries Transparency Initiative. 8

1. Analysis of the issue of transparency in oil and gas sector in the context of sectoral legislation.

1.1. Code of Ukraine “On mineral re- citizens and their associations to implement sources”. similar control are formulated vaguely (it provides the right of citizens only to “help” Mineral resources, including hydrocarbons local governments and public authorities in and other demands of social production, the implementation of measures on rational protection of mineral resources, ensuring use and protection of mineral resources), safety of people, property and environment are not specified and there is no mechanism while using them, and protection of rights for their implementation. and legitimate interests of enterprises, institutions, organizations and citizens, Ensuring maintenance by all state bodies, are regulated by the Code of Ukraine “On enterprises, institutions, organizations and Mineral Resources” No. 132/94-VR of citizens of the established order of subsoil 27.07.1994. use, performing other duties for the protec- tion of natural resources, fixed by the legis- According to Article 8 of the Code of lation of Ukraine is a subject of state con- Ukraine “On mineral resources”, the state trol, which forms and types are specified control over geological survey, use and in section VII (Articles 60-63) of the Code. protection of natural resources, as well as Instead, there are no provisions for the types the creation and use of man-made depos- and forms of public control and monitor- its and mineral processing belongs to the ing of works on geological survey of mineral competence of the Cabinet of Ministers of sources, their use and protection. According Ukraine. According to Articles 9 and 10 of to Article 6 of the Law of Ukraine “On Oil the Code of Ukraine “On mineral resourc- and Gas”, the public policy in the petroleum es”, monitoring the use and protection of industry and its management in provided mineral resources belong to the jurisdiction by the Cabinet of Ministers of Ukraine and of the Supreme Council of the Republic of other authorized bodies of executive power Crimea, regional, Kyiv and Sevastopol city according to law. Councils of Deputies in their territories and to the competence of village, town and 1.2. The Law of Ukraine “On Oil and district Councils of Deputies in their ter- Gas”. ritories. Article 12 of the Code of Ukraine The main legal, economic and organization- “On Mineral Resources” envisages that al bases of Ukrainian oil and gas industry citizens and their associations contribute to functioning are determined by the Law of the local Councils of Deputies and specially Ukraine “On Oil and Gas” No. 2665-III of authorized executive bodies in the imple- July 12, 2001, which regulates the rela- mentation of measures on rational use and tions connected with the features of using protection of mineral resources. oil-and-gas bearing basins, production, Thus, the main emphasis in the Code of transportation, storage and use of oil, gas Ukraine “On Mineral Resources” is made on and their products to ensure energy secu- the state control over survey, use and pro- rity of Ukraine, development of competitive tection of mineral resources. The rights of relations in the petroleum industry, protec- 9 tion of the rights of all subjects of relations tion only about holding the competition arising in connection with geological survey with indication of the deadline for applica- of oil and gas basins, development of oil and tions, address where the documents are ac- gas fields, processing of oil and gas, storage, cepted, phone for information. At the same transportation and selling of oil, gas and time, neither the Law “On Oil and Gas”, nor their products, consumers of oil and gas as Resolution on competition do not contain well as industry employees. provisions that would establish the duty of informing the community about the winners Among the set on the state legislative level of the competitions on receiving special principles of state policy in the petroleum licenses on use of the oil and gas mineral industry and the main tasks of state regula- resources. The Resolution on competition tion of oil and gas industry is the lack of fixed a duty to inform only participants such principle of state policy as ensuring of competition about the winner. transparency of relations in oil and gas industry and such goal of state regulation as Among responsibilities of the owner the informing society about the situation in the special license on use of oil and gas mineral oil and gas sector. resources, defined by Article 20 of the Law of Ukraine “On Oil and Gas”, there is Article 11 of the Law of Ukraine “On Oil neither duty to inform the community about and Gas” provides that the use of oil and activities concerning the use of oil and gas gas mineral resources, search and survey mineral resources nor parameters of such in- of oil and gas deposits, their development, forming, notably, a list of information to be construction and operation of underground made public. Here it should be noted that storage facilities for oil and gas are permit- according to Article 20, the additional list ted only under special licenses on use of of rights and obligations of the owner of a oil and gas mineral resources, issued by special license on use of oil and gas mineral specially authorized central executive body resources is determined by the agreement of geological survey and rational use of on conditions of use of oil and gas mineral mineral resources, in terms as defined by resources. However, it seems doubtful that the law. These special licenses on use of oil an agreement on conditions of use of oil and gas mineral resources are provided on a and gas mineral resources may foresee a competitive basis in accordance with Article duty of special license owner to inform the 14 of the Law. The procedure of appropri- community about his activities. Evidence ate competition is regulated by the Law of of this is the lack of disclosure of relevant Ukraine “On Oil and Gas” and adopted for information in practice. implementation the latter the Procedure and general conditions of competition on Article 29 of the Law of Ukraine “On Oil obtaining a special license on use of oil and Gas” defines the mechanism of state and gas mineral resources, approved by the control over following the rules and regula- Resolution of the Cabinet of Ministers of tions on use of oil and gas mineral resourc- Ukraine No. 1475 of September 17, 2003 es, the conditions of special licenses on use (hereinafter – Resolution on competition). of oil and gas mineral resources and agree- ments about conditions of use of oil and It should be noted that the Resolution on gas mineral resources. One element of this competition foresees the publication in the mechanism is the responsibility of the user newspaper “Governmental Courier” informa- of oil-and-gas bearing basins to provide 10 bodies of state control (central executive party (Ukraine) grants another party (an authorities of the geological survey and the investor) for a specified period the right on rational use of mineral resources, on the survey, exploration and mining, including ecology and natural resources, supervision oil and gas in the defined area of subsoil of mining, local governments) needed for and related to the contract works, and the their work documentation and information, investor undertakes to carry out these oral or written explanation on the issues works at its own expense and at own risk within the competence of these bodies. with subsequent compensation of costs and However, the Law of Ukraine “On Oil and receipt of payment (remuneration) in the Gas” does not contain any mechanism for form of part of profitable production. public control over activities in the use of oil According to Article 5 of the Law of Ukraine and gas mineral resources. “On Production Sharing Agreements”, the Article 33 of the Law of Ukraine “On Oil issue of concluding and implementing and Gas” provides that any person or entity production sharing agreements is autho- may send a request on geological informa- rized to the Permanent Interdepartmental tion (concerning oil-and-gas content) to Commission (hereinafter - the Interdepart- the State Geological Information Fund of mental Commission), which is formed by the Ukraine. It can provide information on oil Cabinet of Ministers of Ukraine and consists and gas reserves by request of any natural of representatives of government bodies, or legal person in accordance with the leg- local governments, People’s Deputies of islation. However, this provision can hardly Ukraine. If necessary, the relevant indus- be regarded as sufficient and effective tool trial and scientific organizations, as well as for ensuring transparency in the oil and gas experts and consultants can be involved to industry, because: the work of the Interdepartmental Commis- •• first, obtaining of relevant information sion. Although in this case involvement of should be preceded by a request of an in- scientific organizations, experts and consul- terested individual or legal person, due to tants to participate in the Interdepartmental the need to follow certain bureaucratic Commission can be considered as a form of rules, and public control in the implementation of proj- •• second, only a limited segment of infor- ects on product sharing, the practical imple- mation can be provided (concerning oil- mentation of such public monitoring can be and-gas content). characterized as of low efficiency, because: •• the of scien- 1.3. Law of Ukraine “On Production- obligatory involvement tific organizations, experts and consul- Sharing Agreements”. tants to participate in the Interdepart- The Law of Ukraine “On Production Sharing mental Commission is not provided. It is Agreements” No. 1039-XIV of September 14, set up only that such involvement will be 1999 is aimed to create favourable condi- made “if necessary”, while not determined subject, which defines such a “need” and tions for investments into survey, explo- not given the criteria of the latest; ration and mining of mineral resources (including oil and gas) within the terri- •• the participation of research organi- zations, experts and consultants in the tory of Ukraine, its continental shelf and Interdepartmental Commission and the exclusive (maritime) economic zone. Under scope of their authorities are not clearly the production sharing agreement, one defined. 11

The Law of Ukraine “On Production Shar- accordance with the results of the competi- ing Agreements” involves mechanism of tion 1. Article 7 of the Law of Ukraine “On information of the public about the list of Production Sharing Agreements” pro- subsoil areas (mineral resources deposits), vides that a decision on holding a tender which may be available for development is adopted by the Cabinet of Ministers of in terms of production sharing agreements Ukraine; and the Interdepartmental Com- (hereinafter - the List). According to Article mission within two months from the date of 6 of the mentioned Law of Ukraine, the List such decision should develop and approve is to be improved by the Cabinet of Minis- bidding documents, publish an announce- ters of Ukraine on a joint submission by the ment on holding a tender in official Ukrai- Interdepartmental Commission and relevant nian issues and foreign media. The results central executive bodies with prior coordi- of the competition should be published in nation of the List with local governments official issues of Ukraine and brought to the (depending on the type and location of attention of every participant of the tender. mineral resources) and published in official In this part (regarding publication of results publications of Ukraine and foreign media. of the competition to conclude production sharing agreements) the Law of Ukraine “On However, it should be noted that regarding Production Sharing Agreements” is more oil and gas sphere, the specified mechanism progressive than the Law of Ukraine “On Oil of society informing has been used in prac- and Gas”, which does not include the duty of tice ineffectively. Thus, the List, approved official publication of the results of competi- by the Cabinet of Ministers of Ukraine on tion to obtain a special permit to use the oil March 15, 2006 under the number 308, and gas mineral resources. contains only one block of fossil fuels (oil and gas) – Scythian Platform on the con- Article 11 of the Law of Ukraine “On Pro- tinental shelf of the Black Sea. Herewith duction Sharing Agreements” provides the inclusion of the Scythian Platform into that the draft of the production sharing the List was made after a decision to carry agreement should be coordinated with local out a tender on signing a production shar- governments in whose territory the subsoil ing agreement for the hydrocarbons, to be platform is located and submitted for use produced in the Prykerchensky sector of under this agreement. the Black Sea continental shelf (Resolution Article 28 of the Law of Ukraine “On Pro- of the Cabinet of Ministers of Ukraine No. duction Sharing Agreements” establishes a 1263 of December 22, 2005). It is interest- mechanism of state control over the imple- ing to note that on September 3, 2008 with mentation of production sharing agree- its Resolution number 788 the Cabinet ments. It foresees that state control over of Ministers of Ukraine introduced a rule the implementation of production sharing whereby the Scythian Platform is to be agreements is provided by the Cabinet of placed at disposal in separate sections of no Ministers of Ukraine or on its behalf by more than 1000 square km and identified 1 Exceptions from this rule are set up by paragraph 5 of the Article 6 of the the exact coordinates of 33 such blocks. Law of Ukraine “On Production Sharing Agreements”: (i) if the mentioned agreement is conducted concerning areas with limited stocks of subsoil mineral According to Article 6 of the Law of Ukraine resources, as evidenced by the findings of relevant state authorities, or (ii) if the agreement is concluded with investor, which had on July 1, 1999 a “On Production Sharing Agreements”, pro- license for use of subsoil mineral resources and began work on the conditions stipulated by it, but later indicated willingness to sign a production-sharing duction sharing agreement is concluded in agreement. In both cases it is necessary to get the resolution of the Cabinet of Ministers of Ukraine. 12 the Interdepartmental Commission or the Article 8 of the Law of Ukraine “On Licens- appropriate body (bodies) of the central ing Certain Types Of Business Activity” executive authorities in the manner and provides that an entity should conduct conditions stipulated by the agreement and some type of licensing underlying economic Law. At least every five years, the Cabinet activity according to the licensing condi- of Ministers of Ukraine with the participa- tions set up for this type of activity. tion of the Interdepartmental Commission In this regard, the National Electricity Reg- should organize and conduct a comprehen- ulatory Commission (NERC) as the licensing sive review of conditions stipulated in the authority in oil and gas complex, developed, agreement on production sharing. If signifi- approved and published a number of Licens- cant violations of the terms of the agree- ing conditions for economic activity in oil ment by the investor will are found, the and gas complex. Cabinet of Ministers of Ukraine is obliged to cancel agreement with loss compensation. Violation of licensing conditions by the licensee (the entity that is licensed to con- At the same time, however, the Law of duct a certain type of business) could lead Ukraine “On Production Sharing Agree- to revocation of its license. ments” foresees no mechanism for public control over the implementation of pro- Given the above mentioned, we can con- duction sharing agreements, and does not clude that the Law of Ukraine “On Licensing involve the public in the implementation of Certain Types Of Business Activity” involves appropriate government control. such element of transparency in oil and gas sector as the approval by the independent

extradepartmental state body (NERC) and 1.4. The Law of Ukraine “On Licensing Cer- the publication of the licensing conditions tain Types of Business Activity”. on business activities concerning oil trans- According to Article 9 of the Law of Ukraine portation, transportation, distribution, sup- “On Licensing Certain Types Of Business Ac- ply and storage of natural gas. tivity”, following types of economic activity in oil and gas sector are to be licensed: •• survey (exploration) of mineral resourc- 1.5. General conclusions about legisla- es; tive level to ensure transparency in oil •• extraction of mineral resources from and gas industry. deposits that have national importance 1.5.1. Ensuring transparency in the oil and and are included in the State Fund of min- gas industry does not belong to the legally eral deposits; set up principles of state policy in the pe- •• transportation of oil, petroleum prod- troleum industry; and informing the society ucts via main pipelines, transportation of about the situation in the specified field natural and oil gas via pipelines and its is not mentioned among the objectives of distribution; state regulation of oil and gas relations. •• supply of natural gas according to regu- lated, unregulated tariffs; 1.5.2. The legislation of Ukraine stipulates •• storage of natural gas in quantities the mechanism of state control over eco- which exceed the level established by the nomic activities in the petroleum industry, licensing conditions. however it: 13

•• does not allow direct involvement of provide sufficient information on the situa- the society to state control; tion in the oil and gas industry, particularly •• does not establish the obligation of pub- on the volumes of extracted and transited lic authorities to inform the society about oil and gas and generated by them financial the results of state control over economic flows. activities in oil and gas industry.

1.5.3. The following elements of transpar- ency in oil and gas industry are present: •• possibility to involve industrial and sci- entific organizations, as well as experts and consultants to participate in the work of the Permanent Interdepartmental Com- mission concerning conclusion and imple- mentation of production sharing agree- ments, foreseen by the Law of Ukraine “On Production Sharing Agreements”. How- ever, the obligatory participation of these individuals and organizations in the work of the Interdepartmental Commission is not stipulated, as well as procedure of such participation and scope of authorities of given individuals and organizations. Also, today in Ukraine the development of oil and gas mineral resources on the basis of production sharing agreements is of little importance; •• opportunity for citizens and their as- sociations to participate in activities on rational use and protection of mineral re- sources (including oil and gas fields) by providing assistance to local Councils of Deputies and specially authorized bodies of executive power, provided by the Code of Ukraine “On Mineral Resources”. How- ever, the volumes of such “assistance” are not specified and there is no mechanism for its practical implementation.

1.5.4. The legislation of Ukraine does not provide a comprehensive mechanism that would determine object, subjects and mechanism of public control in the petroleum industry. Foreseen in the legis- lation of Ukraine citizens' rights in oil and gas industry are somewhat fragmented, do not create a single clear system and do not 14

2. Real sector of hydrocarbons’ extraction in Ukraine.

Since 1998, the national Joint Stock Com- “Naftogaz of Ukraine” conducted produc- pany “Naftogaz of Ukraine” (hereinafter tion of hydrocarbons at 233 oil and gas NJSC “Naftogaz of Ukraine”) plays the lead- fields, which are in research-commercial ing role in oil and gas sector of Ukraine. and commercial production, including: It is 100% state-owned company and was “Ukrgazvydobuvannya” - 133 deposits; established on the basis of the former Joint Stock Company “Ukrgazprom” and a number OJSC “Ukrnafta” - 90 deposits; of oil and gas sector enterprises. The “Naf- SJSC “Chornomornaftogaz” - 10 deposits. togaz of Ukraine” cons owns shares in the authorized capital of companies SC “Ukr- gazvydobuvannya”, OJSC “Ukrnafta”, SJSC 2.1. Licenses for deposits development “Chornomornaftogaz”, which provide oil, and mining. gas and gas condensate production. NJSC “Nadra of Ukraine” also works in oil and gas The Law of Ukraine “On Oil and Gas” stipu- sector and deals with survey and explora- lates the procedure for granting special tion of gas and oil. licenses on use of oil and gas mineral resources, the basic principles of holding Extraction of hydrocarbons is carried out tenders for sale of licenses, sets licenses mainly by companies, where “Naftogaz of validity periods and sets up demands on Ukraine” owns shares in the authorized transparency of auctions’ holding. In par- capital: subsidiary “Ukrgazvydobuvannya” ticular, the Law defines that: (71% of national production), state joint stock company “Chornomornaftogaz” (6% •• special licenses on use of oil and gas mineral resources are provided on a com- of national production), OJSC Ukrnafta petitive basis according to the proce- (16% of national production). dure set up by the Cabinet of Ministers of Besides these companies, some private com- Ukraine; panies (See List), which formally hold li- •• competition on granting a special li- censes, conduct exploration and production cense on use of oil and gas mineral re- of hydrocarbons, but their share in total oil sources is considered as completed if at- and gas production does not exceed 7%. It tended by at least two participants; means that the state represented by the •• a prerequisite of participation in the respective entities, posses the dominant competition is the delivery of full and positions in energy production. However, accurate information by the applicants about themselves according to the ap- in the oil segment the state has no control proved procedure of the tender; over OJSC Ukrtnafta, and accordingly does not control oil production. NJSC Naftogaz •• with the announcement of the compe- of Ukraine is a 50%+1 shareholder of OJSC tition specially authorized central execu- tive body of geological survey and man- Ukrnafta that under Ukrainian law does not agement of mineral resources rational use give decisive rights on enterprise manage- shall publish the following information: ment and now it is basically managed by ∙∙ validity period of a special license on private shareholders. use of oil and gas mineral resources; As of 01.01.2010, the subsidiaries of the ∙∙ detailed description necessary for 15

this type of special license on use of pulsory payments for subsoil use and their oil and gas mineral resources, on the distribution to the state budget of Ukraine. natural environment, landscape and geological structure of oil and gas Under the Law “On Oil and Gas” the Cabinet areas which are provided for use; of Ministers adopted the “the procedure ∙∙ detailed description of equipment and general conditions of competition on and facilities provided for use under obtaining a special license on use of oil and the terms of the special license on oil gas mineral resources” (Resolution No. 1475 and gas mineral resources; of 17.09.2003) and established the Inter- ∙∙ approximate volume of capital in- departmental Commission to determine the vestments to be undertaken at the winners for special permits (Resolution No. initial and subsequent stages of the 1464 of 27.09.2002). special license validity period on use of oil resources; Since 2005, the order of conducting auc- tions for the sale of special permits for sub- ∙∙ the size of the fee for obtaining a special license on use of oil and gas soil use has been adopted by the Cabinet of resources; Ministers of Ukraine annually. In 2008 and 2009 Auctions Procedures were adopted by ∙∙ in case of industrial development of oil and gas mineral resources all nec- the Resolutions of the Cabinet of Ministers essary documentation on technologi- of Ukraine No. 525 of 04.06.2008 and No. cal, chemical, geological, physical and 609 of 17.06.2009, respectively. Also the other parameters of oil and gas to be Methodology for determining the initial extracted shall be published as well; selling price on an auction of a special per- ∙∙ at the request of competition par- mit for subsoil use was adopted by the Reso- ticipants specially authorized central lution of the Cabinet of Ministers of Ukraine executive body of geological survey No. 1374 of 15.10.2004 which determines and management of mineral re- that the initial selling price of a permit is a sources provides under the current part of the cost of reserves and resources of legislation information pertaining to mineral deposits or areas of subsoil, which the areas of oil and gas mining, which is calculated according to the Methodology is provided for use; for determining the value of reserves and ∙∙ by the conclusion of agreement on resources of mineral deposits or areas of conditions of use of oil and gas min- subsoil, approved by the Resolution of the eral resources conditions, released as Cabinet of Ministers of Ukraine No. 1117 of conditions of competition, may not August 25, 2004. Not focusing on the analy- be altered. sis of objectivity of parameters, assumptions Second part of Article 16 of the Code of and estimates included in the methodical Ukraine “On Mineral Resources” also deter- documents, we can generally state that mines that special permits for subsoil use the legislation provides clear mecha- within specific areas are granted to special- nism for calculation of the initial cost ized companies, institutions and organiza- of a permit for subsoil use. Moreover, in tions, as well as citizens who are qualified, terms of creating favourable conditions have logistical and economic opportunities for development of the oil industry, fee for subsoil use. for obtaining a permit should not be an obstacle for starting oil exploration or In addition, the Code contains a list of com- 16 production, since the state and society The main shortcoming of Ukrainian legisla- get much greater economic benefits from tion in the regulation of use of mineral taxes and duties on extracted resources resources remains its frequent change. For that are paid by oil sector enterprises. example, from 2004 and to the second half of 2008 the above legislation that regulates Thus, although the legislation of Ukraine, subsoil use had not worked, since its main that regulates exploration and mining of provisions were suspended annually by the mineral resources, needs improvement, in Law of Ukraine on the State budget. general it creates necessary conditions to ensure transparent procedures for sale of The whole legislative mechanism that permits for subsoil use and equality of ac- created the conditions for transparent cess to such rights for the enterprises and and equitable access to mineral resourc- individuals through auction mechanism of es of Ukraine and thus protected the selling licenses, where the necessary condi- interests of Ukrainian citizens as owners tions for transparent implementation are of the subsoil and natural resources had met. been cancelled for 4 years, instead, the authority to determine procedures for However, at the same time it is necessary granting licenses relied on the Cabinet of to note significant gaps and contradic- Ministers of Ukraine. Thus, the transi- tions in the legislation of Ukraine, which tion from the practice of transparent does not allow considering it as an effec- legal regulation of this sphere to manual tive tool to protect the public interest, control by issuing subordinate regula- including: tions had been carried out. •• Laws of Ukraine on State Budget for 2004-2009 years provided annual provi- For instance, the Cabinet of Ministers sion, according to which the sale of special of Ukraine by the Resolution No. 480 permits to use the subsoil is carried out on of 14.03.2007 approved the Procedure auctions, except cases determined by the of granting special permits for mineral Cabinet of Ministers of Ukraine; resources. This Procedure, among others, •• Article 16 of the Code of Ukraine “On specified 13 cases of possibilities to obtain Mineral Resources” contains a provision a permit for subsoil use without an auction, providing that special permits to use the which created wide opportunities for frauds subsoil are usually granted on a competi- and prevented involvement of strategic tive basis in accordance with the proce- foreign investors in this sphere. dure, established by the Cabinet of Minis- ters of Ukraine. The situation of frequent changes of legisla- tion on subsoil use contains some dan- Thus, it is directly envisaged exceptions from gers both for augmentation of domestic a legal mechanism that creates the condi- production, and for filling the revenue of tions for transparent and equitable access to the country’s budget through payments for mineral resources of Ukraine. But the nature, special permits and payments from oil pro- scope and duration of possible exceptions duction. In the absence of a permanent and are not envisaged in the law, which allows transparent mechanism for sale of special the Cabinet of Ministers of Ukraine to regu- permits, and, respectively, for control over late subsoil use actually in manual mode by conditions of granting special permits to issuing subordinate legislation. users of mineral resources, it is impossible 17 to assess neither level of effectiveness of 2.2. Oil production. subsoil use nor effectiveness of state policy for subsoil use. 2.2.1. Oil deposits in Ukraine. In terms of strategic development of the sec- According to the Ukrainian State Geological tor, annual changes in the procedure and re- Institute (USGI), the State balance of min- quirements for granting permits for mineral eral reserves includes oil and gas condensate resources, along with complex and insuf- reservoirs in an amount of 1 643.4 million ficiently transparent mechanism for their tons. Estimation of oil reserves by Naftogaz granting are the main factors that hinder of Ukraine in accordance with the stan- the entry of foreign investments and com- dards of Society of Petroleum Engineering panies in the hydrocarbon sector of Ukraine. has shown that explored oil deposits by the Without this, domestic companies with lack state monopoly amount to only 23.47 mil- of financial capacities to implement intense lion tons. Geological data on the availability projects of exploration and extraction of oil of medium and large oil deposits in specific will not be able to fully use the potential of areas differs significantly. This shows the national mineral resources. existing zone of uncertainty in one of the most important from a strategic perspec- tive sector for state and society. Due to a number of objective and subjective reasons, adequate conditions for work in Ukraine both for domestic and foreign companies which have relevant technologies and ex- perience in exploration and development of deep and offshore hydrocarbon deposits, as well as sufficient funds for investment in production projects in Ukraine has not been created. Among the main reasons of the current situ- ation are the following: •• lack of permanent regulations on subsoil use (regulations on terms and conditions of subsoil use, as well as on amount and order of obligatory royalties for the State Budget vary significantly every year); •• imperfect and opaque mechanism of granting and obtaining licenses on explo- ration and development, which are now given in the manual mode, not on transpar- ent competitive basis; •• imperfect conditions of licensing for ob- taining grants on subsoil use, including ob- taining at the beginning a separate license for exploration, and only then, almost on equal terms with all other applicants, ob- taining a license to develop the explored 18

deposit; sometimes it happens that the In order to enforce this norm of the law, license is granted to an investor who has it is also stipulates that transfer of crude neither experience in extraction nor funds oil, gas condensate, natural gas, including to develop the deposit. oil (associated) and liquefied gas is not al- lowed under the contract with commission 2.2.2. Base volumes of oil extraction. merchant; give and take processing; other The volume of oil extraction (including gas transactions that do not involve transfer of condensate) in Ukraine has been 4.0 - 4.5 ownership on these raw materials. million tons annually in the current decade, Pricing of Ukrainian oil is not based on the while the annual demand of the Ukrainian international market principles. Based on economy, on different estimations, amounts data of the price fluctuations on the “Ukrai- to 15-17 million tons. Such an imbalance nian Interbank Currency Exchange”, prices between domestic needs and produc- for domestically produced oil during 2009 tion capacities makes Ukraine's economy ranged within $140-350 per ton (exclud- dependent on imported oil and petroleum ing VAT), while the market price of Urals oil products, which in turn imposes increasing during the year amounted to $290-545 per demands on transparency and efficiency of ton 3. functioning of this strategically important for the state sector. Moreover, in recent Of course, this estimation is significantly years a clear tendency to production de- simplified and ignores difference in the cline has been marked: from the peak level basic conditions of oil sales as well as differ- of 4.4 million tons in 2007 to 4.2 million ence in oil quality in favour of the majority tons in 2008 and 3.9 million tons in 2009. of Ukrainian oil sorts which are lighter and contain less sulphur in comparison with The main companies of oil and gas conden- Urals oil that means it is easier to produce sate extraction in Ukraine in 2009 as well as more light oil products, sale of which is the in previous years were: most profitable. Thus, even without consid- - OJSC “Ukrnafta” - 72%; ering these factors, the 1,5-2 difference in - SC “Ukrgazvydobuvannya” - 19%; oil prices is significant and demonstrates - SJSC “Chornomornaftogaz” - 1.7%. the lack of effectiveness of the internal crude oil market functioning, which does The remaining 7% of oil extraction falls on not allow adjusting the price of oil, extract- private companies, the biggest of them is ed by OJSC “Ukrnafta”, to market value. Ukrainian-British joint venture “Poltava Oil This situation leads to a shortfall in tax and Gas Company” which produces about payments to the State Budget of Ukraine 5% of Ukrainian oil. and profit margin is transferred by private 2.2.3. Sale of equity production oil on companies from oil extraction industry to the domestic market. downstream sector. Since 2006 the Laws of Ukraine “On the State budget” have determined each year 2 2 То It means companies, where state share in the authorized capital exceed 50 that the public enterprises monthly sell percent, companies, where more than 50 percent of the shares (shares, stocks) crude oil and gas condensate of equity are in the authorized capital of other companies were the state a shareholder is and controlling interest owns, and subsidiaries, representative offices and production exclusively on stock exchange branches of such companies and associations, parties of agreements of joint ac- tivities and / or the persons authorized by cooperation agreements concluded auctions on the terms prescribed by the with participation of these companies 3 http://www.kmu.gov.ua/control/uk/publish/article;jsessionid=7BF73E810A Cabinet of Ministers of Ukraine. 78291841F34549037D5A45?art_id=243298707&cat_id=35884 19

2.3. Gas production. and private companies will not compensate this decline. In case of not taken drastic While in 1991 it was extracted 24.4 bcm of measures, this trend will intensify in com- natural gas in Ukraine, during crisis 90-s ing years. the level of production fell to 18 bcm. Since 2001 there has been a trend to increase pro- New gas agreements between Ukraine and duction. In 2009 Ukraine produced 21.35 Russia on a substantial increase in pur- bcm of natural gas, in particular, enter- chases of Russian gas for Ukraine economy prises of NAK Naftogaz of Ukraine extracted will also have long term negative impact on 19.363 bcm or 90.7% of the nationwide pro- the development of domestic production, duction. Independent gas extracting com- as funds that could focus on strengthen- panies have had the highest rate of increase ing own energy independence will be spent in production from 0.6 bcm in 2000 to 1.987 on the purchase of additional volumes of bcm in 2009. But it should be noted that imported gas. these statistics may be distorted. Account- Among reasons of insufficient development ing system of gas produced in Ukraine is of domestic production there should be constructed so that there is a possibility to determined following: design gas produced by subsidiaries of the •• lack of clear state policy and practical “Naftogaz of Ukraine” as gas produced by steps to attract foreign investments in ex- private companies. They sell it further to ploration and development of new oil and industrial customers and not householders. gas deposits on the territory of Ukraine; In 2009 gas production by enterprises of •• lack of national priorities to increase NAK Naftogaz of Ukraine was: own oil and gas production volumes, in- stead strategic decisions are taken the to - SC “Ukrgazvidobuvannya” - 15.249 bcm; increase purchases of imported energy re- - OJSC “Ukrnafta” - 2.949 bcm; sources; - SJSC “Chornomornaftogaz” - 1.165 bcm. •• significant depletion (over 75%) of ex- According to the National program “Oil and tractive reserves in major oil and gas de- posits; Gas of Ukraine till 2010” adopted in 1995 and completed in 2001, national gas produc- •• insufficient growth of explored hydro- tion in 2010 would reach 24.5 bcm in the carbon reserves; base-case scenario. According to the Energy •• lack of large deposits among explored Strategy of Ukraine until 2030 national gas fields during recent years; production will reach 23.2 bcm in 2010, 26.1 •• insufficient financing of exploration bcm in 2020 and 28.5 bcm in 2030. works, including through attracting for- eign investments; However, in 2010 enterprises of NAK Naf- •• problems with the timely obtaining of togaz of Ukraine planned to extract 18.487 special permits for mineral resources and bcm, including: land allocation to exploration and drilling - SC “Ukrgazvidobuvannya” - 14.750 bcm; of wells; - OJSC “Ukrnafta” - 2.637 bcm; •• economically insupportable tariff on - SJSC “Chornomornaftogaz” - 1,1 bcm. domestic gas, which greatly reduces the effectiveness of public mining companies. Thus since 2010, Ukraine will have the trend of falling gas and oil production by As for the latter position it should be noted enterprises of NAK Naftogaz of Ukraine that in 2009 differentiated prices for natu- 20 ral gas for private households were applied. at a much higher price, which naturally can These prices were introduced on December cause social tensions. 1, 2008 by National Electricity Regulatory In recent years, subsidiaries of Naftogaz Commission’s (NERC) Decree No. 1239 of of Ukraine have also considerable prob- 25.10.08. After NERC approved such gas lems in obtaining permits for special use of prices for households, the average level of natural resources. In particular, this occurs natural gas prices was determined at 622.46 because since 2006 some provisions of the UAH per 1000 cubic meters. Actual gas State Budget of Ukraine have contradicted prices for households in January - December with the norms of the Code of Ukraine “On 2009 amounted to UAH 596.32 per 1000 cu- Subsoil Assets” and the Law of Ukraine “On bic meters ($76.5 according to average ex- Oil and Gas” which specify the procedure for change rate of the NBU for 2009 – 7.7912 granting such permits. The explorer of any UAH/USD). Effective in 2009 ceiling price hydrocarbon deposit may not get a permit to for natural gas for thermal power utilities use this deposit because an order of grant- has been unchanged from December 2008 ing such permits should be determined by and is 872.78 UAH per 1000 cubic meters the Cabinet of Ministers. These innovations (inclusive of VAT; target fee on approved tar- also affected the effectiveness of works iff for natural gas; cost for its transportation, because permits’ obtaining by enterprises of distribution and supply; and cost of its stor- Naftogaz of Ukraine has become much more age) ($112 according to average exchange difficult. The Cabinet of Ministers sometimes rate of the NBU for 2009 – 7.7912 UAH/ selectively granted special permits to state USD). But it is still unknown at what price enterprises, but it didn’t work as expected Naftogaz of Ukraine purchased gas pro- because of obstruction in allocation of duced by its affiliated companies, joint stock land by local authorities which requested companies and independent gas producers either sponsorship or other (not envis- (according to unofficial information, the aged by legislation) financial expenses. level of prices, on which gas is purchased at the SC Ukrgazvydobuvannya is $ 48 per Many private companies, which received 1000 cubic meters). At the same time, the special permits, mostly limited themselves to average price of imported gas, which varied minimal investment in field support, not to monthly during the year from $198.83 mention compliance with all requirements (September minimum) to $361.45 (March that have been put forward with granting a maximum) per 1000 cubic meters, was $260 permit. Responsible executive authorities per 1000 cubic meters. Such a difference in did not find effective methods of solving prices on domestic and imported gas does this problem. not stimulate the development of national gas production. Given the foregoing, the trend of reduc- ing domestic gas production, which has been marked since early 2010, may have a long-term nature unless social-populist ap- proach is not revised. In the future this may lead to reducing of the domestic gas supply to households and automatically result in partial filling of its deficit by imported gas 21

3. Payments to the State budget from Ministry of Economy of Ukraine for each oil and gas production. reporting (tax) period. The main tax, which has been levied among Oil extracting companies in Ukraine pay general taxes and fees on extraction com- also other taxes, fees and mandatory pay- panies in Ukraine, is a rental payment for ments to the state budget on general hydrocarbons. In the Law of Ukraine “On grounds, the main of which are VAT, income Rental Payments For Oil, Natural Gas And tax, fees for exploration works, royalty fees. Gas Condensate” it is determined that rent- In general, we can state that Ukraine has a al payments for hydrocarbons are national permanent mechanism of payments to the mandatory payments paid from the value state budget for extraction of oil and gas of the volume of oil, natural gas and gas condensate. However, regulation of this condensate extracted in Ukraine. Article type of taxation of oil extracting companies 7 also stipulates that rental payments are has been carried out manually, and not by based on: volumes of extracted oil, natural permanent legislation. Annual suspension gas and gas condensate; geological condi- of the Law of Ukraine “On The Rental Pay- tions of their extraction and sales price. The ments For Oil, Natural Gas And Gas Conden- Law envisages methodology and formula of sate” with common procedure of calculation rent calculation, however, it is suspended and payment of rental fees and establish- annually and the order of calculation and ing, instead, new rates and calculation pro- amount of rental payments has been ad- cedure of rental payments every year show opted every year by separate laws. flaws in state regulation of the oil industry From the second half of 2008 to the end taxation. In this case tax regulations has of 2009 the order and amount of rental been applied not on a permanent meth- payments was established by the Law No. odological basis but through the chaotic 309-VI “On Amendments to Some Legis- adoption of separate laws that adversely lative Acts” of 03.06.2008, according to affect the development of the oil extrac- which entities, which extract hydrocarbons tion industry because long-term (strategic) on the basis of special permits for subsoil planning of financial and business activities use, make rental payments for oil and gas or investment projects under uncertainty in condensate to the State Budget of Ukraine tax laws is impossible. (according to the procedure stipulated by Total amount of revenues in the budget of the Cabinet of Ministers of Ukraine) in the Ukraine from rental payments for extracted amount of: hydrocarbons made in 2009 for gas 856.7 1529.9 UAH (~$180) per ton of crude oil mln UAH (~$100 mln), for oil 2328.9 mln produced from fields that are fully or par- UAH (~$274 mln). tially deposited on the depth up to 5000 m; 566.1 UAH (~$65) per ton of crude oil pro- duced from fields that are fully deposited deeper than 5000 m. For rental payments for oil and gas conden- sate approved in this paragraph a corrective ratio is applied, which is calculated by the 22

4. General conclusions about the lev- 4.4. Price difference between imported gas el of transparency in the subsoil use and domestic gas is such that discriminates and sale of extracted hydrocarbons. national gas producers from public and private sectors. As a result, national produc- 4.1. Since mid-2008 in Ukraine a legal tion has been not stimulated; the trend of procedure for granting special permits (li- growth in gas production during the current censes) for subsoil use has been established, decade has been changing to decline. which creates conditions and opportuni- ties for ensuring transparent and equitable 4.5. Political and administrative restraint of access to Ukrainian mineral resources domestic gas prices leads to loss of poten- and thus protects the interests of citizens tial revenues to the budget. Low gas prices of Ukraine, as owners of the subsoil and for household consumers and thermal pow- natural resources. However, the legislation er utilities do not stimulate energy saving. provides the legal basis for exclusion from general procedure of granting permits for subsoil use which questions the validity of the existing legislative framework and retains the risk of returning to the practice of manual control by issuing additional regulations. The legislative does not envis- age a mechanism of public monitoring of the transparency level of decision-making in the field of granting permits for sub- soil use and their compliance with current legislation. 4.2. Tax regulation of oil extracting sector needs improvement to move from adoption of separate laws to calculation of rental payment for oil extraction based on perma- nent methodological basis in order to create favourable conditions for development of oil companies and attracting foreign invest- ment. 4.3. Terms of the sale of equity production oil on the domestic market are non-market because of the limited number of poten- tial buyers of this oil along with existing restrictions on domestic oil exports and impossibility for foreign companies to participate in the auctions, because during the auction any company has no guarantees to obtain a permit for following oil exports outside the territory of Ukraine and there is no mechanism in Ukrainian legislation to obtain a permit in advance to export oil. 23

5. Testing of level of readiness by ex- “On information” envisages that all citizens tractive sector companies to work ac- of Ukraine, legal persons and public bodies cording to EITI reporting templates. are entitled to have right on information that provides free opportunity to obtain, After adoption by the Government of use, store and disseminate information nec- Ukraine Resolution No. 1098 of September essary for exercising their rights, freedoms 30, 2009 and the relevant Statement on and interests, objects and functions perfor- joining the Extractive Industries Transpar- mance. Based on this, access to requested ency Initiative (EITI), the Center “NOMOS” information is necessary for citizens of within the Association “EnergyTranspar- Ukraine in order to exercise their constitu- ency”, supported by the International tional rights on information; Renaissance Foundation, implemented the project: “Transparency level determina- b) the requested information does not tion of oil and gas companies via adapted belong and can not belong to informa- EITI template in the framework of the tion, which under Article 37 of the Law Association EnergyTransparency”. One of of Ukraine “On information” can’t be the goals of this project was dissemination provided for review; of EITI international experience and testing c) the requested information is socially the readiness of extracting companies to significant in the sense of Article 30 of accept rules of transparency according to the Law of Ukraine “On information”, designed reporting template. and the public right to know this infor- Letters with appropriate explanations and mation dominates the right of the holder argumentations as well as an offer to fill in for its protection. Social significance of reporting template (according to Samples, the requested information and priority of given in the Annexes 2) were sent to cor- the public right to receive it is confirmed, responding entities. The rationale included in particular, by provisions of such regula- following statements: mineral resources of tions: Ukraine belong to the property of the soci- •• Code of Ukraine “On Mineral Resources”, ety, are in the people/state ownership and Article 4 of which states that “mineral re- of great national economic significance, and sources are the exclusive property of the in accordance with the fundamental right citizens of Ukraine”; to know (Part 2 of Article 19 of the Interna- •• Law of Ukraine “On Oil and Gas”, whose tional Covenant on Civil and Political Rights Article 10 provides that “ownership on the of 19.12.1966, Part 1 Article 10 Convention natural resources of oil and gas within the on Human Rights and Fundamental Free- territory of Ukraine and its territorial wa- ters and exclusive (maritime) economic doms of 4.11.1950). zone belong to Ukrainian people”; 5.1. Reasoning. •• The Energy Strategy of Ukraine till 2030, approved by the Decree No. 145 a) Article 34 of the Constitution of Ukraine of the Cabinet of Ministers of Ukraine of stipulates the right of everyone to freely 15.03.2006, which, inter alia, states that: collect, store, use and disseminate informa- “The purpose of the social state, which, tion orally, writing or otherwise – on one’s according to the Constitution of Ukraine, own choice. Ukraine is, should be comprehensive wel- fare of citizens. One the key element of Part 1 of the Article 9 of the Law of Ukraine 24

welfare in civilized countries is to provide Law of Ukraine “On information”, access citizens with heat and electricity. The Con- to public information is provided, among stitution of Ukraine stipulates the right others, by giving it directly to citizens of citizens to have adequate standard of interested in, public authorities and legal living and safe and healthy environment, entities, and limiting the right for obtaining which obliges a state to create appropriate open information is prohibited by the law. conditions for economic development. The realization of these objectives should be Providing with the requested information guarantied by comprehensive, reliable and will indicate that the company complies environmentally safe satisfaction of peo- in reality with European approaches in ple needs and social production in energy organizing its work on the principles of products”. The Energy Strategy also states that functioning of the fuel-and-power transparency, efficient use of resources and sector’s facilities has strategic importance countering corruption. It was noted that for the state; the reporting under EITI template will be •• The Decree of the President of Ukraine carried out annually according to appropri- of 27.12.2005 No. 1863 “On Decision of ate procedure, which will be worked out in the National Security and Defence Coun- the partnership Government - NGO Coalition cil of Ukraine of December 9, 2005” “On - entities. the state of Ukraine's energy security and the basic principles of state policy for its procurement”, whereby the inefficient use 5.2. The testing results of Oil & Gas ex- of fuel and power resources, unsatisfac- tracting companies. tory financial situation of fuel-and-power sector and shadow turnover of financial Altogether in the framework of the project resources in the energy sector are deter- 67 requests were prepared and sent to mined as the main threats to energy secu- oil and gas extracting companies, which, rity of Ukraine; according to the List, have licenses on •• Resolution of the Cabinet of Ministers of hydrocarbons extraction. Although the list Ukraine No. 1075 of 02.08.2006, according was carefully checked out, nevertheless 10 to which domestic gas is a resource, which requests were returned back by UKRPOSHTA has a determining effect on the overall because their recipients moved to other ad- level and price dynamics, as well as on dresses. As of April 30, 2010 three responses products and services that have signifi- cant social value; were received which proposed to address to their parent companies. 54 respondents Also the fact that substantial part of the ignored requests to provide informa- state budget of Ukraine, through which tion about their activities in the field of social programs and social payments are hydrocarbon extraction according to EITI funded, is composed of incomes generated methodology. During the telephone survey from activities of extraction of primary of the reasons of such neglect it was found energy resources, point out the necessity of out the following. transparency and information accessibility 1. EITI reporting template is considered by for the society. management of companies as additional to existing reporting forms, including Based on the foregoing, it can be concluded tax reports. Against the background that the requested information should be that Ukraine has one of the most cum- open. According to the Article 29 of the bersome tax reporting systems in the 25

world, introduction of another form is of information (see Annexes 2). In fact, regarded as an additional burden that the only available information is about the is unwanted. According to “Paying Tax- volume of extracted hydrocarbons. Disag- es 2010. Pricewaterhouse Coopers. The gregated information on tax payments and Global Picture”, in 2009 Ukraine occu- other obligatory payments is not public. pied 183rd place in World Ranking be- cause of a number of tax payments, the Important notice - the attitude of foreign total number of which totalled 147. (For companies operating in the mining sector comparison: Kyrgyzstan takes 178th po- to the issue of transparency in general and sition, Azerbaijan - 76th, Georgia - 59th, EITI in particular. Ukraine is not positioned USA - 30, Kazakhstan and the Nether- by investors as a state rich on raw materi- lands – 21st, Sweden – 3rd). als, but its mineral wealth is of interest to 2. The decision on Ukraine’s accession to oil and gas companies. Investors believe the the EITI was taken by the previous gov- Ukrainian market is quite promising. ernment and under another president, the position of the new government and Business in Ukraine is perceived as a game a new president is unknown. Hence, the with the minimum rules set up at the leg- reluctance of the part of businesses to islative level, which gives a high chance be proactive exists until the government of winning. Investors are ready to use any decides on this issue. possibilities provided by imperfect legisla- 3. Companies are not required to provide tion. They are looking for how to effectively information according to EITI reporting lobby own interests in state agencies and template because under current legisla- tion this is the prerogative of govern- through high-ranking officials who can ment agencies, not companies. Given the influence decision-making regulating the redundant number of different reporting conditions of business in the Ukrainian oil forms, company management is unwill- and gas extraction sector. The need for lob- ing to take on additional commitments, bying and qualitative legal services is large- especially as EITI is voluntary in nature. ly a tool to minimize the corruption burden 4. Shares of some companies are listed on in- on business. Those who can not achieve this ternational stock exchanges (including minimization leave Ukraine. At the same London), so such company meets certain time, those companies that work in Ukraine international standards of transparency are not too concerned about issues of and requires no additional ones. transparency/opacity. One of the examples 5. Requested information is available on is the company that came to Ukraine to de- companies’ websites in the annual finan- velop hydrocarbons on the Black Sea shelf. cial statements, confirmed by an audi- Despite the fact that its parent company tor. joined the EITI in West Africa, a subsidiary structure in Ukraine has not declared inten- The last reason is untrue. First, most com- tion to join the Initiative. panies from the List do not have web pages. Second, in cases the sites are available, their informative context leaves much to be desired. Third, an attempt to fill out an EITI reporting template for Naftogaz of Ukraine using only the official financial report ap- proved by the auditor, failed due to lack 26

General conclusions. The legislative imperfection, inconstant legislation in hydrocarbon and mineral resources sector, redundant number of different reporting forms, government indifference to the EITI and high level of corruption are not conducive to promot- ing the Initiative in Ukraine at the level of economic entities. The level of transparency of companies of hydrocarbon extraction sector in Ukraine is close to zero (opaque), except two compa- nies whose shares are traded on interna- tional exchanges. Ignoring perception of the EITI among entities is correlated with negative index dynamics of corruption perceptions in Ukraine. According to Ranking “Transpar- ency International 2002 – 2009”, Ukraine fell from 84th position in 2002 to 146th in 2009. Few foreign companies or joint ventures op- erating in the oil and gas sector of Ukraine are not a model of transparency and are forced to prefer the opaque rules, adapting to current realities in Ukraine in order to profit from the activity. PART ІІ. 27

Analysis of progress in transparency of natural monopolies activities responsible for pipeline transportation of hydrocarbon resources in Ukraine. 28

Given the Statement of the Government In particular, it was noted in the letters of Ukraine and the Cabinet Minister’s of request: “... We send you an adapted Resolution No. 1098 of September 30, 2009 reporting template on EITI methodology on joining of Ukraine to the Extractive with the request to complete it accord- Industries Transparency Initiative (EITI) ing to the financial report for 2008. The and signing by the Government the Brus- provided information will be used to compile sels Declaration of 23 March 2009, taking the test report with the purpose of its public into account the provisions of the Brussels presentation and sending the generalized Protocol on multilateral technical meeting analysis to the Secretariat of the Cabinet of on the gas on June 29, 2009 (“To set a clear Ministers of Ukraine (Plenipotentiary of the commitment to increase transparency in Cabinet of Ministers on Initiative implemen- the sector. Ideally, it should include an tation). This report will include generalized agreement of Ukraine to join EITI, but (summarized) information. at least it should include a commitment When considering our request for informa- to regular and timely public reporting tion (by filling in adapted reporting tem- on key financial indicators”.), Center plate on EITI methodology) please note the “NOMOS”, according to project goals, on following: December 1, 2009 sent targeted requests for information by filling in a sample form of a) Article 34 of the Constitution of Ukraine the adapted EITI reporting templates. stipulates the right of everyone to freely col- lect, store, use and disseminate information Taking into account that the mineral wealth orally, writing or otherwise – on one’s own and main pipelines (transit potential) of choice. Ukraine are weal of the whole society, are state owned and of great economic im- Part 1 of the Article 9 of the Law of Ukraine portance (Article 4 of the Code of Ukraine “On information” envisages that all citizens “On mineral wealth” and Article 7 of the of Ukraine, legal persons and public bodies Law of Ukraine “On Pipeline Transport”) are entitled to have right on information and according to the fundamental right that provides free opportunity to obtain, use, to know, displayed inter alia, in Part 2 of store and disseminate information neces- Article 19 of the International Covenant on sary for exercising their rights, freedoms and Civil and Political Rights of 19.12.1966, in interests, tasks and functions performance; part 1 of Article 10 of the Convention on Based on this, access to requested in- Human Rights and Fundamental Freedoms formation is necessary for citizens of of the 04.11.1950, the Center “Nomos”, as a Ukraine in order to exercise their consti- Project Contractor, referred to three entities tutional rights on information; responsible for pipeline transportation of energy resources (“Ukrtransgaz” - State- monopole company in gas transporting, 4 According to the Article 5 of the Law of Ukraine “On natural monopolies”, “Ukrtransnafta” - State-monopole company transportation of oil and gas via pipelines is provided by the natural monopo- in oil transporting, “Naftogaz of Ukraine” - lies, catalogue of which is being compiled and kept by the Anti-monopoly com- mittee of Ukraine. Therefore, the Anti-monopoly committee of Ukraine deter- holding company-monopoly, responsible for mined following economic entities (subjects of natural monopolies) in the oil 4 and gas complex, which enjoy monopoly on the national market (http://www. pipeline transportation of hydrocarbons) amc.gov.ua/amc/control/uk/publish/article?art_id=42754&cat_id=59366): - in the sphere of using pipelines for oil and oil products transportation – NJSC to provide basic information as regards to “Naftogaz of Ukraine” represented by JSC “Ukrtransnafta”; - in the sphere of using pipelines for gas transportation – NJSC “Naftogaz of the appropriate organization. Ukraine” represented by SC “Ukrtransgas”. 29 b) the requested information, in our opin- sector’s facilities has strategic impor- ion, does not belong and may not belong tance for the state; to information, which under the Article 37 •• the fact that substantial part of the of the Law of Ukraine “On information” state budget of Ukraine (by which social can’t be provided for review. programs are funded and social payments carried out) is formed at the expense of Furthermore, even if the requested informa- economic activities in the oil and gas in- tion is classified as restricted information, dustries of Ukraine (i.e., at the expense of the Article 30 of the Law of Ukraine “On funds generated from mining activities and information” directly implies that con- transit of primary energy sources). fidential information could be extended if the information is socially significant, Based on the foregoing, it can be concluded what means that it is either the subject of that the requested information should be public interest or the public right to know open. According to the Article 29 of the this information dominates the right of Law of Ukraine “On information”, access the holder for its protection. In this case, to public information is provided, among the social significance of the requested in- others, by giving it directly to concerned formation and priority of the public rights to citizens, public authorities and legal enti- receive it are confirmed by: ties, and limiting the right for obtaining •• provisions of such regulations: open information is prohibited by the law. In ∙∙ Law of Ukraine “On Pipeline Trans- addition, delivery of the requested informa- port”, where Article 7 states that tion by your Company will indicate that in cross-country pipelines have impor- practice it follows the European approaches tant national economic and defence in organizing its work on the principles of values; transparency, efficient use of resources and ∙∙ The Decree of the President of Ukraine countering corruption. of 27.12.2005 No. 1863 “On Decision In case you refuse to provide the requested of the National Security and Defence information (or part of it), please specify Council of Ukraine of December 9, 2005” “On the state of Ukraine's en- the reasons and cite legal grounds for such ergy security and the basic principles refusal (in particular, please indicate, what of state policy for its procurement”, is the basis for conclusion that interests for whereby the inefficient use of fuel non-disclosure of requested information and power resources, unsatisfactory dominate fixed by laws of Ukraine priority financial situation of fuel-and-power right of citizens and their associations to sector and shadow turnover of finan- receive relevant information of social signifi- cial resources in the energy sector are cance).” determined as the main threats to energy security of Ukraine; Similar requests in more general terms ∙∙ The Energy Strategy of Ukraine till were sent in October 2007 to a number of 2030, approved by the Cabinet of Min- oil and gas sector entities (NJSC “Naf- isters of Ukraine on 15.03.2006 No. togaz Ukraine”, SC “Ukrtransgaz”, JSC 145, which emphasizes the exception- “Ukrtransnafta”, SC “Ukrgazvydobuvannya”, al importance of oil and gas transit JSC “Ukrnafta”, SSC Chornomornaftogaz, facilities for Ukraine and notes that SC “Naukanaftogaz”, CJSC “UkrGazEnergo”, functioning of the fuel-and-power CJSC “RosUkrEnergo”), some of whom were 30 among the current recipients. Thus, it al- lows drawing conclusions either on respons- es or lack of them on progress / regress of transparency at the corporate level in the monopole companies. Status (progress-regress) of the information transparency was evaluated by the trans- parency index (i T) on a 5-point scale where 0 - ignoring of the request for information, 1 - rejection to provide information; 2 - for- mal (meaningless) information, 3 - partial (fragmentary) provision of information, 4 - substantial information, not executed according to the sent template, 5 - full requested information pursuant to the sent template. TABLE 1. 31

COMPARATIVE ANALYSIS OF RESPONDENT RESPONSES ON REQUESTS TO PROVIDE IN- FORMATION, BASED ON EITI SAMPLE FORM, IN 2009 COMPARED WITH 2007 INFORMA- TION REQUESTS (PROBATIONARY ASSESSMENT OF TRANSPARENCY OF NATURAL MONOPOLIES RESPONSIBLE FOR TRANSIT OF HYDROCARBONS)

Reasons used to prove Juridical analysis of used rea- Juridical analysis an- Overall conclu- rejection in providing son by Respondent in 2007 swers in 2009 sion regarding

dent an answer to requested transparency

Respon - information in 2007

і) requested information Ukrainian legislation (in par- As of January, 30, 2010, і Т2007 = 1 belongs to commercial ticular, article 36 of the Economic the official answer і Т2009 = 0 secret of the NJSC “Naf- Code of Ukraine and Article 505 on the request from togaz of Ukraine” ac- of the Civil Code of Ukraine) 01.12.2009 to provide Regress ac- cording to Order #596 on provides for very wide rights for information by filling companied by 21.10.2005. entities to classify information as the form of EITI, includ- misbalancing confidential (in particular, enti- ed in the request, was of corporate іі) according to Article ties, generally, independently absent. manage- 30 of the Law of Ukraine designate regime of access to The registry approved ment system, “On information”: con- technical, organizational, com- by phone they had got arbitrary fidential information is mercial, production and other a request, provided its interpretation data which belongs or information that they posses; registration number of existing used by any person or Ukrainian legislation doesn’t re- (№23260 on 01.12.2009) legislation, entity and can be un- quire to officially recognize that and main performer who insufficient veiled by them according information of any kind belongs was a chief of the de- competence of to their will and on their to commercial secret and doesn’t partment. performers, in- terms. require state registration of what adequate legal is commercial secret / confiden- At the same time, it background. tial information; there is no le- should be noted that gal procedure to classify any kind from NJSC “Naftogas (the letter of the Chair- of information as confidential). of Ukraine” the let- man Deputy G. Yurieva, At the same time, part 11 of Ar- ter, signed by the first № 23-427-6138 on ticle 30 of the Law of Ukraine Deputy of the Chairman 14.11.2007) “On information” stipulates that of the Board, was sent to confidential information may be another NGO which was unveiled without its owner per- very positive regarding mission if this information has the issue of transpar- social significance that means ency (№1/12-55 on this information falls under pub- 24.11.2009). In this NJSC “Naftogaz of Ukraine” lic interests and the right of the letter was noted: “We society to know this information think that partnership prevail over the owner right to between NGOs and NJSC protect it. In the request it was “Naftogas of Ukraine” provided grounds for social sig- will allow improving nificance of requested informa- transparency image tion and was explained why this of the NJSC “Naftogas information falls under public of Ukraine” for people interests. But Respondents through awareness of didn’t give any clear explana- people about produc- tions, according to which criteria tion, transportation, and they concluded that interests consuming of natural for non-disclosure of requested gas.” information (even if it is confi- dential) prevail over the high- So, we can conclude that priority right of citizens and management of oil and their associations to have access gas sector has signs of to relevant information of social disorganization. significance. JSC “UkrTransNafta” Respon- dent MOS’ isalegalentity. evi- “NO- no Centre that dences are There ііі) ties. authori- public except activities its about tities information to other en- provide to obliged not is therefore, and, bodies such of any under fall JSC Ukraine. doesn’t “UkrTransNafta” of authori- ties judiciary executive or legislative, informa- of activities about tion written or spoken provide to call a means information ten writ- or spoken provide to request a formation”, in- “On the Ukraine of of Law 32 Article of 6 4, 3, p. to According іі) but notanentity. concerns only individual 04.11.1950 on Freedoms Human Fundamental and Rights of Protection the for 16.12.1966 Convention and on Political Rights and Civil on to Covenant International according infor- on mation right The і) an answer to requested an answertorequested Reasons used to prove Reasons usedtoprove rejection in providing rejection inproviding information in 2007 information in2007 № 05-01/367/6050on Executive R.Borshch Deputy oftheChief (a letterofthe 22.11.2007). documents aboutit. additional provide information, entity, which makes a request for legal the of obligation envisage mation”, nor any other legislation Neither Law of Ukraine “On infor- № 97). 20.10.2005 on Entrepreneurship Ukraine on Regulatory Policy and of Committee State the of Decree Entre - by approved Ukraine, of preneurs Individual and Legal Entities of Register State United the from information providing for procedures on Provisions the sponding procedure envisaged by corre- (the leader its and entity legal of registration state for ly, particular- information, provides which Ukraine, of Entrepreneurs Individual and Entities Legal of Register State United the from extract provide to request with registrar state the to apply may In case of any doubts, Respondent for accesstoofficialdocuments; request information received the satisfy to entity legal a of gation obli- the for provides Ukraine of legislation the whether question the answer unambiguously to ble impossi- is it Therefore entities. legal by prepared documents as document prepared by a public authority, or a means document” “official the whether determine not does Ukraine of legislation the However, documents). of- ficial with acquainted become to possibility the demanding tion (peti- ac- documents official to cess for request information a) ments as: provides (Article 32) such instru- information” “On Ukraine of Law the unveiled, officially been not has or subject disclosure not mandatory to is that formation in- to access ensure to order In their righttoknow. bring to people in order to be satisfy would information this that request the from directly anated Center’s relevant summary materials. So, it was em- in placed be would and sector” gas and oil in project “Transparency of revenue re- the of framework was the in quested information this that mentioned was in request the In Juridical analysisofusedrea- son byRespondentin2007 he o te depart- the ment. of a chief was who performer main and 01.12.2009) on (№2084/6 registration pro- number its request, had vided a they got phone by approved registry The absent. was request, the in ed includ- EITI, of form the filling by information provide from to request answer 01.12.2009 the official on the 2010, 30, January, of As Juridical analysisan- swers in2009 background. adequate legal performers, in- competence of insufficient legislation, of existing interpretation by arbitrary companied Regress ac- і Т і Т Overall conclu- sion regarding sion regarding transparency 2009 2007 =0 =2 33

Reasons used to prove Juridical analysis of used rea- Juridical analysis an- Overall conclu- rejection in providing son by Respondent in 2007 swers in 2009 sion regarding

dent an answer to requested transparency

Respon - information in 2007

According to unofficial Ignoring of request As of January, 30, 2010, і Т2007 = 0 information, the answer the official answer і Т2009 = 0 was prepared but not on the request from sent. 01.12.2009 to provide “Information information by filling surdity and the form of EITI, includ- muteness” ed in the request, was accompanied absent. by ignoring of The registry approved existing leg- by phone they had got islation, legal a request, but had not negativism, provided its registra- incompetence SC “UkrTransGaz” tion number and name and official of main performer. Later negligence. it was informed that the request had not been charged to anybody to execute.

The overall conclusion. come more transparent. And lack of trans- parency was observed not only in relation The status of transparency in the oil and to civil society, but also in relation to state gas sector has not been improving but, in authorities. The latter was confirmed by the general, even worsening. A certain level facts of not providing (or partial providing) of information transparency in the oil and of information from the respective entities gas sector was provided in 2007 by afford- on the requests not only of NGOs but also of ing access to information from the execu- the Secretariat of the President of Ukraine tive branch, although affordable access was (2009); by public controversy between the incomplete from a number of departments. leaders of the respective entities and the For example, following the analysis of the Accounting Chamber of Ukraine (2009); by requests for information in 2007, the Minis- conflict with the State Tax Administration try of Fuel and Energy (Minister Yuri Boyko) (2008). received the results of testing і T2007 = 0, while the State Statistics Committee (Chair- The fact that simultaneously with ignor- man - O. Osaulenko) got і Т2007 = 4, and ing some requests a letter of support of the the State Tax Administration (Head - A. Br- project to improve transparency was sent ezvin) і Т2007 = 5. (Mentioned departments points out on the lack of proper interaction are positive exceptions against the other between structural units of the entity and respondents which received scores, usually coordination of their activity by the head. located in the interval 0-2.) In our opinion, lack of progress in promot- Despite the removal of non-transparent op- ing transparency of functioning of the erators from the gas system in 2008, signing entire Ukrainian oil and gas sectors as of the Brussels Declaration and expressing well as the natural monopolies of these intentions of Ukrainian accession to the sectors results in particular from: EITI in 2009, oil and gas sector has not be- 34

(1) a number of subjective factors: tion of the subject of natural monopolies •• an arbitrary interpretation of legisla- to disclose information about its activi- tion by officials of the entities, and low ties. Article 13 of this Law stipulates that legal culture and incompetence of respon- information and reports on the activities sible agents; of natural monopolies are published by the national commissions for regulations •• reluctance of the officials of the enti- of natural monopolies (in oil and gas sec- ties to provide more or less detailed in- tor – National Electricity Regulatory Com- formation about activities of their enti- mission, NERC). In other words, only in- ties (including financial aspects of such direct disclosure of relevant information activities); is envisaged without legally specified •• unreadiness (psychological and legal) amount of disclosure (announcement) of of the entities to cooperate with NGOs, relevant information; including towards establishment of an ef- •• The Law of Ukraine “On Business As- fective (not fictitious) public control over sociations” does not provide for the ob- the activities of the entities; ligation of the business associations to •• avoidance of the transparent, thorough disclose information about their activi- and open dialogue with the public by the ties. This law envisages (Article 10) that entities; information on the association activities can be provided only to association mem- (2) the imperfection of the Ukrainian bers (and only limited). Article 18 of this legislation regarding the provision of the Law provides for the mandatory audit of access to information filed in the respective annual financial statements of compa- oil and gas natural monopolies: nies with an annual economic turnover less than two hundred fifty non-taxable •• The Law of Ukraine “On informa- minimums, but stipulates that such au- tion” does not contain clear provisions that would be binding on the respective dit is conducted every three years. This business entities (legal persons) to dis- situation in the sphere of information dis- close information they possess. This law closure by economic agents – joint stock increasingly focused on state agencies but companies – was not so much improved not on corporate entities. For example, Ar- by the recently adopted Law of Ukraine ticle 32 of the Law provides the possibil- “On Joint Stock Companies”: except the ity of sending an information request for detailed procedures of providing informa- access to official documents, however, the tion on the request of a shareholder, the Law has no definition of the term “official law assigned in a very general nature the document” (in particular, it is not deter- obligation of the public joint stock com- mined whether the “official document” panies to disclose information, prescribed only means a document prepared by a in paragraph 3 of Article 78, as well as the state agency, or also a document prepared obligation of all joint stock companies to by a corporate entity). In this regard, it is disclose information in accordance with impossible to definitely answer the ques- the laws of Ukraine (paragraph 5 of Ar- tion whether the legislation of Ukraine ticle 78). envisages the obligation of a corporate It is not coincidental that there is a zero entity (economic agent) to satisfy the re- ceived information request for access to level of information transparency in such official documents; problematic area of oil and gas sector as Ukrainian GTS. It is likely that this is indi- •• The Law of Ukraine “On natural mo- nopolies” does not provide for the obliga- rect evidence of intensive degradation pro- 35 cesses in the oil and gas sector because of has the potential to give Ukraine a better fragmentation of the management, loss of negotiating position, which will attract controllability, and/or external influences more support from the West. (Ukraine. by opaque clan-oligarchic structures. Energy Policy Review. 2006, OECD/IEA, Paris, 2006. Ukraine2006-UKR.pdf, pp. 238). In general, we could say that the problem of lack of transparency in the activities of oil and gas companies lies in the sphere of In case of ignoring by the Ukrainian side threats to national (including energy) secu- requirements on ensuring appropriate rity of Ukraine. The Law of Ukraine “On the level of hydrocarbons’ sector transparency, basis of the national security of Ukraine” cooperation with the IFIs can be compli- dated June 19, 2003 stipulates that the cated. Development of partnership with main real and potential threats to national European companies seems to become more security of Ukraine in the economic sphere, problematic, in particular on background among others, are: of the government's intentions to closer •• the weakening of state regulation and integration with the outside monopolistic control system in the economy; supplier that is not a party of the Transpar- •• prevailing of personal, corporate, and ency Initiative. Opacity increases distrust regional interests over national interests in the oil and gas sector of Ukraine. Its in the activities of management struc- environment will remain nutritious for tures. corruption schemes, fraudulent transac- In the conclusion it is necessary to give a tions with flushing funds from a corporate few excerptions from the IEA review men- budget, inefficient and inappropriate use tioned at the beginning: “Transparency is of material-technical and energy resources. a key element for positioning Ukraine as By calculation of the corporate ratings by a reliable transit state. <...> the structure international rating agencies, the reluc- of Naftogaz of Ukraine is another impedi- tance of the respective entities to obey the ment to higher transparency. The company criterion of transparency (particularly EITI) produces, buys and transports gas and oil in will be considered, despite the adoption of Ukraine, and apparently covers losses from the Resolution No. 1098 of September 30, some operations by using revenues from 2009 by the Government of Ukraine and other activities. <...> Greater transparency related Statement. ANNEX 1.

CABINET OF MINISTERS OF UKRAINE RESOLUTION* on September 30, 2009 No. 1098 Kyiv On joining the Extractive Industries Transparency Initiative

In order to improve management practices in the extrac- tive industries of Ukraine, improve the investment climate in the country, strengthen the corruption combating, and ensure civil society participation in the control of the completeness of revenues to the state budget of Ukraine on activities related to mining, the Cabinet of Ministers of Ukraine decides: 1. to approve and publish the Statement of the Cabinet of Ministers of Ukraine on joining the Extractive Industries Transparency Initiative, attached. 2. to determine that: the First Deputy Prime Minister of Ukraine is ex officio Commissioner of the Government of Ukraine on implementation of the Extractive Industries Transparency Initiative (hereinafter - the Commissioner of the Cabinet of Ministers of Ukraine on Initiative imple- mentation). Priority areas for implementation of the Ini- tiative in Ukraine are the oil and gas industries. 3. to form a Working Group on implementation of the Ini- tiative (hereinafter – “Working Group”) headed by the Commissioner of the Cabinet of Ministers of Ukraine on Initiative implementation consisting of the representa- tives of the Ministry of Fuel and Energy of Ukraine, Min- istry of Coal Industry of Ukraine, Ministry of Economy of Ukraine, Ministry of Finance of Ukraine, Ministry of Justice of Ukraine, Ministry of Foreign Affairs of Ukraine, State Tax Administration of Ukraine, State Customs Service of Ukraine, State Treasury of Ukraine, the Central Control and 37

Revision Administration of Ukraine, the National Electric- ity Regulatory Commission of Ukraine, the Accounting Chamber of Ukraine (by consent). 4. Commissioner of the Cabinet of Ministers of Ukraine on Initiative implementation has: to send a copy of the Statement of the Cabinet of Ministers of Ukraine on join- ing the Initiative and this Resolution to the EITI Interna- tional Secretariat; to approve the personal structure of the Working Group; to establish a dialogue with the enter- prises of all forms of ownership, operating in mining (pri- marily oil and gas), and non-governmental organizations, interested in implementing the Initiative, or coalition of such civic organizations; to sign, where appropriate, the memorandum with enterprises and non-governmental organizations (their coalition) to implement the Initia- tive; to provide the formation of a Multilateral Group of interested persons (hereinafter – “Multilateral Group”) involving on a par public authorities, enterprises operat- ing in mining and civil society organizations interested in implementation of the Initiative; to take measures to create the permanent functioning Secretariat of the Mul- tilateral Group. 5. Working Group has: to draft a Work Plan to implement the Initiative according to its criteria, indicating there targets, schedule (timing) of implementation, evaluation of potential constraints and amount of funding; to coor- dinate the mentioned draft with the Multilateral group and to submit it for approval by the Cabinet of Ministers of Ukraine; to analyze the legislation of Ukraine in terms of necessary amendments to ensure proper implementa- tion of the Initiative in Ukraine; if necessary, to work out projects of relevant regulations for making the necessary changes and additions; to prepare proposals for funding the Initiative implementation, including an opportunity of attracting assistance of the international financial in- stitutions (in particular, through the World Bank Trust Funds) and foreign countries.

Prime Minister of Ukraine Yulia Tymoshenko 38

APPROVED by the Resolution of the Cabinet of Ministers of Ukraine No. 1098 of September 30, 2009

STATEMENT BY THE CABINET OF MUNISTERS OF UKRAINE on joining the Extractive Industries Transparency Initiative Cabinet of Ministers of Ukraine expresses its support to the imple- mentation in Ukraine of the Extractive Industries Transparency Initiative, declared in October 2002 at the World Summit on Sus- tainable Development. Cabinet of Ministers of Ukraine shares the principles of the Ex- tractive Industries Transparency Initiative, and believes that implementation of this Initiative will help to improve manage- ment methods in the extractive industries of Ukraine, improve investment climate in the country, promote more efficient use of natural resources and confirm the intentions of the Cabinet of Ministers of Ukraine to fight against corruption. Cabinet of Ministers of Ukraine separately notes that implemen- tation of the Initiative, including in the gas industry of Ukraine will become one of the element of transparency in the gas trans- portation system of Ukraine. Cabinet of Ministers of Ukraine confirms its readiness to coop- erate with civil society and the mining companies within the framework of the Initiative implementation and encourages the relevant companies and organizations to cooperate for its imple- mentation. Cabinet of Ministers of Ukraine has appointed First Deputy Prime Minister of Ukraine as its Commissioner on Extractive Industries Transparency Initiative implementation. Cabinet of Ministers of Ukraine will prepare until September 30 2010 a Work Plan on Ini- tiative implementation that will meet required criteria, and will provide its adoption after consultations with relevant companies and non-governmental organizations.

* Source: zakon.rada.gov.ua ANNEX 2 — OIL. 39

Показник Одиниця Дані Кабінету Дані нафтовидо- Різни- виміру Міністрів України / бувних /нафто- ця +/- Державної податко- транспортних вої інспекції компаній

Indicator Units of Government / Tax Oil producing / Differen- measure inspection oil transporta- ces +/- datesw tion companies dates Нафтовидобувні компанії / Oil producing companies

1. Обсяг видобутку нафти та газового конден- тис.т / Kt сату / Oil & gas condensate production

- державними компаніями або компаніями, де частка держави складає >50% / state companies 3 641,9 or companies with state share >50% в т.ч. обсяг нафти, що належить державі / inc. н.д./ n.d. state share in volumes - приватними компаніями / private companies н.д./ n.d. в т.ч. обсяг нафти, що належить державі / inc. н.д./ n.d. state share in volumes

2. Обсяг реалізації нафти та газового конденса- тис.т / Kt н.д./ n.d. ту власного видобутку / Oil & gas condensate sales

- на внутрішньому ринку / internal (national) н.д./ n.d. maket - на експорт / export н.д./ n.d.

3. Доход від продажу нафти та газового млн.грн. н.д./ n.d. конденсату власного видобутку / Oil & gas / M UAH condensate revenues

- на внутрішньому ринку / internal (national) н.д./ n.d. maket - на експорт / export н.д./ n.d.

4. Податки та збори / Taxes & fees млн.грн. н.д./ n.d. В т.ч. авансові внески / inc. pre-paid / M UAH н.д./ n.d.

- рентна плата за нафту / oil production rent н.д./ n.d. - рентна плата за газовий конденсат / gas condensate production rent н.д./ n.d. - ПДВ / VAT н.д./ n.d. - податок на прибуток / profit tax н.д./ n.d. - збір за геолого-розвідувальні роботи / geological-exploration fee н.д./ n.d. - плата за користування надрами / bowels use fee н.д./ n.d. - соціальні фонди / social funds : н.д./ n.d. пенсійний фонд / pension fund н.д./ n.d. фонд соціального страхування / social insurance fund н.д./ n.d. фонд сприяння зайнятості населення / population employment fund н.д./ n.d. фонд страхування від нещасних випадків / proffecional accident insurance fund н.д./ n.d. - дивіденди на державну частку / dividents on state share н.д./ n.d. - інші податки та збори / other taxes & fees: н.д./ n.d. плата за землю / land fee н.д./ n.d. податок з транспортних засобів / vehicle tax н.д./ n.d. за забружнення навколишнього природнього середовища /environmental polution fee н.д./ n.d. інші / others н.д./ n.d. 40

Показник Одиниця Дані Кабінету Дані нафтовидо- Різни- виміру Міністрів України / бувних /нафто- ця +/- Державної податко- транспортних вої інспекції компаній

Indicator Units of Government / Tax Oil producing / Differen- measure inspection oil transporta- ces +/- datesw tion companies dates Нафтотранспортні компанії / Oil transportation companies

1. Обсяг транспортування / Oil transportation тис.т / Kt 38 535,9 volume

в т.ч. транзит / inc. transit 29 111,6

2. Доход від транспортування / Oil transporta- млн.грн. 1 956,0 tion revenue / M UAH

в т.ч. транзит / inc. transit 1 763,9

3. Податки та збори / Тaxes & fees млн.грн. н.д./ n.d. / M UAH

в т.ч. авансові внески / inc. pre-paid

- рентна плата за транспортування нафти / oil н.д./ n.d. transportation rent - ПДВ / VAT н.д./ n.d. - податок на прибуток / profit tax н.д./ n.d. - соціальні фонди / social funds: н.д./ n.d. пенсійний фонд / pension fund н.д./ n.d. фонд соціального страхування / social н.д./ n.d. insurance fund фонд сприяння зайнятості населення / н.д./ n.d. population employment fund фонд страхування від нещасних випадків / н.д./ n.d. proffecional accident insurance fund - дивіденди на державну частку / dividents on н.д./ n.d. state share - інші податки та збори / other taxes & fees: н.д./ n.d. плата за землю / land fee н.д./ n.d. податок з транспортних засобів / vehicle tax н.д./ n.d. за забружнення навколишнього природнього н.д./ n.d. середовища / environmental polution fee інші / others н.д./ n.d. ANNEX 2 — GAS. 41

Показник Одиниця Дані Кабінету Дані газовидо- Різни- виміру Міністрів України бувних / газо- ця +/- /Державної по- транспортних даткової інспекції компаній

Indicator Units of Government / Tax Gas producing / Differen- measure inspection gas transportation ces +/- datesw companies dates Газовидобувні компанії / Gas producing companies

1. Обсяг видобутку газу / gas production млрд. 21,348 куб.м/ BCM

- державними компаніями або компаніями, де 19,36 частка держави складає >50% / state companies or companies with state share >50% в т.ч. обсяг газу, що належить державі / inc. 19,36 state share in volumes - приватними компаніями / private companies 1,987

2. Обсяг реалізації газу власного видобутку /gas млрд. 21,348 sales куб.м/ BCM

- на внутрішньому ринку / internal (national) 21,343 market - на експорт / export 0,005

3. Доход від продажу газу власного видобутку / млн.грн. немає даних/ gas revenues / M UAH no data

- на внутрішньому ринку / internal (national) н.д./ n.d. market - на експорт / export н.д./ n.d.

4. Податки та збори / Taxes & fees млн.грн. н.д./ n.d. / M UAH

В т.ч. авансові внески / inc. pre-paid н.д./ n.d. - рентна плата за газ/gas production rent н.д./ n.d. - ПДВ / VAT н.д./ n.d. - податок на прибуток / profit tax н.д./ n.d. - збір за геолого-розвідувальні роботи / н.д./ n.d. geological-exploration fee - плата за користування надрами / bowels use н.д./ n.d. fee - соціальні фонди / social funds: н.д./ n.d. пенсійний фонд / pension fund н.д./ n.d. фонд соціального страхування / social н.д./ n.d. insurance fund фонд сприяння зайнятості населення / н.д./ n.d. population employment fund фонд страхування від нещасних випадків / н.д./ n.d. proffecional accident insurance fund - дивіденди на державну частку / dividents on н.д./ n.d. state share - інші податки та збори / other taxes & fees: н.д./ n.d. плата за землю / land fee н.д./ n.d. податок з транспортних засобів / vehicle tax н.д./ n.d. за забружнення навколишнього природнього середовища /environmental polution fee н.д./ n.d. інші / others н.д./ n.d. 42

Показник Одиниця Дані Кабінету Дані газовидо- Різни- виміру Міністрів України бувних / газо- ця +/- /Державної по- транспортних даткової інспекції компаній

Indicator Units of Government / Tax Gas producing / Differen- measure inspection gas transportation ces +/- datesw companies dates Газотранспортні компанії / Gas transportation companies

1. Обсяг транспортування для внутрішніх спо- млрд. 46,119 живачів/ Gas transportation volume куб.м/ BCM

транзит / inc. transit 95,8

2. Доход від транспортування для внутрішніх спо- млн.грн. 2575 живачів/ Gas transportation revenue / M UAH

від транзиту / inc. transit $ млн / 1749 $ M

3. Податки та збори / Тaxes & fees млн.грн. н.д./ n.d. / M UAH

в т.ч. авансові внески / inc. pre-paid н.д./ n.d. - рентна плата за транспортування газу /gas transportation rent н.д./ n.d. - ПДВ / VAT н.д./ n.d. - податок на прибуток / profit tax н.д./ n.d. - соціальні фонди / social funds : н.д./ n.d. пенсійний фонд / pension fund н.д./ n.d. фонд соціального страхування / social н.д./ n.d. insurance fund фонд сприяння зайнятості населення / н.д./ n.d. population employment fund фонд страхування від нещасних випадків / н.д./ n.d. proffecional accident insurance fund - дивіденди на державну частку / dividents on н.д./ n.d. state share - інші податки та збори / other taxes & fees : н.д./ n.d. плата за землю / land fee н.д./ n.d. податок з транспортних засобів / vehicle tax н.д./ n.d. за забружнення навколишнього природнього н.д./ n.d. середовища / environmental polution fee інші / others н.д./ n.d.