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