Features of special permits for subsoil use in production sharing agreements

Any investor, as a party to a production sharing agreement, until the moment of signing the production sharing agreement is a regular subsoil user who has acquired the right to a subsoil use permit in a competitive or non-competitive manner.

In the event that the type of subsoil use permit is limited to geological exploration, from the moment of signing the production sharing agreement, the state, as a party to the production sharing agreement, proceeds to the registration of a special permit for mineral extraction.

At first glance, the situation with the acquisition of rights to special permits for the purposes of production sharing agreements seems logical and normal.

However, this situation does not seem so predictable in terms of the termination of the right to a special permit for both the ordinary subsoil user and the investor in particular.

Special permits for overuse in sharing agreements have a dual legal nature as a special permit for mineral extraction (as a permitting document), and as a document that gives the right to conclude a production sharing agreement (a condition of a production sharing agreement).

Let's consider an example regarding Ukraine.

Issues regarding the termination (cancellation) of a permit document are regulated by Clause 7 of Article 4-1 of the Law of Ukraine «On the Permit System in the Sphere of Economic Activity» No. 2806-IV of 06.02.2005, which states that the permitting authority revokes a permit document on the following grounds:

1) the presence in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations of information on the termination of a legal entity through merger, acquisition, division, transformation and liquidation, unless otherwise established by law;

2) the availability of information in the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations about the termination of the entrepreneurial activity of an individual entrepreneur.

The licensing authority that issued the permitting document may apply response measures regarding:

1) invalidation of a permit document in the event of establishing the fact of providing unreliable information in the application for the issuance of permit documents and the documents attached to it, except for obvious grammatical errors, typos or arithmetic errors that do not affect the content of the information provided;

2) revocation of a permit document in the event that a business entity performs certain actions related to the conduct of economic activity, in respect of which the permitting authority has issued a regulation or other regulatory document, and the business entity fails to comply with this regulation or other regulatory document within the period specified therein.

The law may provide for other grounds for terminating the validity of a permit document. Termination of a permit document for reasons not provided for by law is prohibited.

Additional grounds for terminating the right to use subsoil are determined by Article 26 of the Code of Laws on Subsoil No. 132/94-ВР dated 07/27/1994.

Therefore, a systematic analysis of the above legal norms gives grounds for concluding that the termination (cancellation) of a special permit is possible if the subsoil user has ceased economic activity, it is established that the subsoil user provided false information in the application for the issuance of documents, and the violations that became the basis for the suspension of the permit have not been eliminated.

In addition, the Supreme Court, in its Resolution of November 12, 2020 in case No. 260/943/19, formulated a legal conclusion that the supervisory authority must indicate which violations that have been identified and not eliminated are grounds for terminating the right to use subsoil by canceling a special permit.

The said conclusion is aimed at protecting the interests of subsoil users to prevent restrictions on the powers of government entities, in cases specified by law, to make decisions on termination of the right to use subsoil within the framework of the administrative procedure.

The risk of any error by a public authority lies with the state itself, and errors cannot be corrected at the expense of the persons concerned (case law of the European Court of Human Rights in the cases of Pincova and Pinev. The Czech Republic, application no. 36548/97, paragraph 58, Gashiv. Croatia, application no. 32457/05, paragraph 40, Trgov. Croatia, application no. 35298/04, paragraph 67).

However, in the context of terminating a special permit for subsoil use under a production sharing agreement, the termination of a special permit has a different procedure than the termination of the right to a permit for a regular subsoil user.

In accordance with the requirements of paragraph 3 of part one of Article 17 of the Law of Ukraine «On Production Sharing Agreements», the validity of a special permit for the use of subsoil under the terms of production sharing agreements may be suspended or terminated early exclusively by the Cabinet of Ministers of Ukraine in accordance with the procedure and on the grounds provided for in part two of this article.

At the same time, the right to use subsoil during the execution of a production sharing agreement may be limited, temporarily prohibited (suspended) or terminated by the Cabinet of Ministers of Ukraine in the event of an immediate threat to the life and health of people or the environment in accordance with the procedure provided for by such agreement.

It is also worth noting that, in accordance with the requirements of part two of Article 27, the investor is not subject to the effects of regulatory legal acts of executive authorities and local self-government bodies if such acts restrict the investor's rights specified in the production sharing agreement.

Regulations of state control and supervision bodies that lead to restrictions, temporary prohibition (suspension) or termination of subsoil use are mandatory for implementation by the investor from the date of adoption of the relevant decision by the Cabinet of Ministers of Ukraine or a local government body.

That is, as we can conclude, the validity of a special permit for an ordinary subsoil user is terminated by a court decision, while the validity of a special permit for subsoil use in the aspect of production sharing agreements is terminated by a decision of the government.

We believe that the procedure for terminating a special permit for subsoil use under production sharing agreements, provided for in the legislation of Ukraine, namely exclusively by decision of the government, is a strong guarantee that investors will not lose the permit.