New Recommendations Spell Out Steps to Better Extractives Management in Ukraine

Along with diverse mineral resources, Ukraine has approximately 900 billion cubic meters of proven reserves of natural gas. And over the past years, the country has made important strides in extractive industries governance.

It has made moves toward implementing modern accounting and financial reporting standards in line with EU directives.

Ukraine has also passed important laws covering partly decentralized resource rents (meaning companies make direct royalty payments of 5 percent to regional and regional subdivision budgets budgets as of January 2018); mandating beneficial ownership disclosure; and stipulating environmental impact assessment requirements.

Legislators have also focused on revamping the oil and gas industry’s fiscal regime, which might impact extractive sector development by creating a five-year stabilization clause for the new royalties. During this time, the industry’s tax regime will remain unchanged. Production-sharing agreements (PSAs) will be used to attract large-scale foreign investment.

But important work remains. New policy recommendations developed by Ukraine civil society organization Dixi Group endorse enhancing transparency and disclosures; sharpening licensing and related matters of regulation; improving understanding of and focus on local impacts; and incorporating local community interests.

For 11 categories of particular reforms—including transparency and access to information, business deregulation tasks and involvement of local community interests—Dixi’s Road Map for Resource Governance Policy Reform outlines decisions a variety of government authorities make. The prescriptions include an explanation of benefits and potential risks associated with a proposed decision, and a tentative timeline with specific steps to be implemented.

For example, under the licensing transparency and disclosing beneficial ownership policy area, Dixi recommends expanding requirements relating to disclosure of the actual owners of companies seeking to develop mineral resources under all licensing procedures granting subsoil use rights, including bidding rounds and production sharing agreements. Dixi notes this will result in increased transparency in licensing procedures and open a channel to mandatory disclosure of beneficial ownership.

Dixi’s report was debated at a NRGI-supported roundtable discussion in October 2017 geared toward extractive industries investors in Ukraine’s parliament. One of the focuses of the October event was determining how to incorporate the recommendations into an official government concept note outlining Ukraine’s development of gas production through 2020.

At the report launch, parliament Energy Committee head Oleksandr Dobmrovky said the body will back all draft laws aimed at increasing gas production. The meeting also featured engaged discussion with regional stakeholders on how to improve dialogue with corporates, ensure strict deadlines for meeting reform benchmarks, and support all institutional improvements in natural resource governance.

One significant element of the Road Map action plan focuses on licensing and subsoil user rights. Currently, the Ukrainian system for granting land use permits for extraction is lengthy and not well adapted to investment. Obtaining necessary documents for putting a new field into industrial operation takes 42 months and an obtained licence does not always allow for a lasting and unconditional right to exercise titles.

The action plan aims to support amendments to the budget and tax codes, the extractive industries transparency law and a procedure on issuing special permits and auctioning those permits off, among other things.

The important steps embraced in the action plan were submitted and stimulated another wave of discussion last month in Ukraine. One of the action plan’s goals is seeing tangible progress: on 1 March, the Law on Ensuring Transparency in Extractive Sector passed its first reading in parliament.

NRGI and Dixi Group will continue to advocate for the passage of this important extractive sector transparency law.

Nasima Nazrieva is a consultant with NRGI in Ukraine.