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Expert: the PSA regime benefits both the government and the investor

06 November 2020

When developing production sharing agreements, concrete conditions at national level must be taken into account

In the Ukrainian legislative framework, the Production Sharing Agreement (PSA) regime offers a number of significant advantages, and not only to the state but to investors as well. At the same time, these advantages will largely depend on the effectiveness of the parties negotiating a PSA, Harry Sullivan, Executive Professor of Law at Texas A&M University School of Law, said during the seminar “Oversight of operating activities and the performance of PSAs in the extractive sector”.

“Under a production sharing agreement, one party (Ukraine) commissions the other party (investor) for a specified period to survey, explore and extract raw materials within a specified extraction site and conduct agreement-related works, and the investor agrees to perform the commissioned work at their own risk and expense with the subsequent reimbursement of expenses and payment of a fee (remuneration) in the form of a portion of profit resource,” Professor Sullivan said.

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Almost one hundred private companies operate in the oil and gas production sector of Ukraine, but historically, the main legal model of the government-investor relationship has been the one based on a Joint Operation Agreement (JOA).

“The use of joint operation agreements (JOAs) in Ukraine’s hydrocarbon production sector seems somewhat artificial. The JOA regime does not contain sufficient guarantees for the parties to the public-private partnership, but instead, has the space for abuse. Unlike in Ukraine, the use of joint operation agreements is commonplace in the global practice, but in terms of content, these agreements are much closer to production sharing agreements (PSAs),” Professor Sullivan said.

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In the case of PSA, on the other hand, there is an extensive list of essential terms offering a more thorough protection to interests of the parties and reflecting interests of the society.

“It is worth noting, in particular, that a production sharing agreement contains a list of the investor’s activities and an obligatory work program, specifying the deadlines, amount and types of financing; a land re-cultivation project; a list, scope and deadlines for works required under agreement; requirements to the quality of work performed under agreement; a procedure of approving budgets and work programs by the parties; a procedure of appraising the value of extracted raw materials, including the currency of appraisal, for agreements with foreign investors; the composition of expenses reimbursable with compensation resource. The procedure and timeframe of handing over to the state the portion of the profit resource due to it must also be stipulated,” Professor Sullivan pointed out.

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A production sharing agreement can be bilateral or multilateral, which means that several investors can be the parties to it, subject to the condition that they bear joint liability under obligations set forth in the said agreement. The parties to a PSA are investors and the Cabinet of Ministers of Ukraine or the body of local self-government in whose territory the extraction site provided for use under the terms of production sharing agreement is located; the parties can enter into agreement after it was endorsed by the permanent interagency commission.

The PSA regime also has a stabilization clause. In particular, the government guarantees that for the duration of agreement the investor’s rights and obligations defined in PSA will be governed by legislation that was in effect at the time when the agreement entered into force. At the same time, the stabilization clause does not apply to legislative changes concerning defense, national security, public order and environmental protection.

Harry Sullivan stressed upon the importance of making information about contracts available to the public at large. Open contracts are considered a normal practice in the world, and particularly at the companies with which he worked. It indicates to investors and companies that the government is a reliable and predictable partner.

This seminar was organized as part of USAID’s Energy Sector Transparency project implemented by DiXi Group, and with the support from International Senior Lawyers Project (ISLP).

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