Uranium deposits

Uranium is a mineral of strategic importance, as it provides the production of more than 50 percent of the total electricity in Ukraine.

The need for Ukrainian nuclear power plants in natural uranium to reload operating power units is 2.5 thousand tons per year and, given the trends in the development of Ukraine's nuclear energy industry, may increase to 3.5 thousand tons per year.

The possibility of developing domestic uranium production is due to the presence of significant uranium ore deposits in Ukraine and the situation on the global market for natural uranium concentrate.

The main uranium deposits are concentrated within the Ukrainian Crystalline Shield, which has two main metallogenic regions - Kirovohrad (with the Central Ukrainian uranium ore region) and Prydniprovsk (with the Kryvyi Rih-Kremenchuk and West Ingulets metallogenic zones).

Within the Central Ukrainian uranium ore region, there are deposits with large reserves, the uranium ores of which are of average and poor quality.

The goal of developing uranium mining production is to fully satisfy the needs of Ukraine's nuclear power plants in natural uranium.

To this end, the following measures are envisaged to attract investments in the development of uranium mining and improve the structure of reserves:

-due to the higher uranium content - to search for rich mineralization in the Riphean structural unconformity zone and within volcano-tectonic depressions;

-due to lower production costs - to conduct searches, exploration, additional exploration and preparation for industrial development of deposits suitable for open-pit mining, underground leaching with the integration of drilling exploration of this type of deposits with experimental and industrial development;

-in order to reduce the impact on the environment, work should be carried out to improve the reagents used in leaching.

Uranium is strategically important for the state's economy, therefore, subsoil research as a means of scientific justification for the search and discovery of deposits, conducting regional research should ensure the economic and energy security of the state, the stability of the development of the national economy by attracting the necessary resources to the development of the industry, in particular by attracting the necessary resources for the operation of the state enterprise "Eastern Mining and Processing Plant", in particular, through its vertical integration with other state concerns, as well as attracting private business entities, including private investment in new projects for the extraction (industrial development) of uranium.

Strategic peat reserves in Ukraine

The largest peat resources are concentrated in Volyn, Rivne, Sumy, Chernihiv, and Zhytomyr regions, on whose territories more than 1,000 deposits have been explored.

About 500 peat deposits are classified as exploited. 80 percent of the extracted peat is used as fuel, 20 percent for the production of fertilizers.

The introduction of new peat deposits into development requires drainage and mining, which leads to the deterioration or cessation of the biospheric functions inherent in peatlands, which can negatively affect the ecological safety of the region.

As a result of drying, peatlands cease to be a carbon storage site and become a powerful source of greenhouse gas emissions, causing negative consequences on a global scale.

Peat extraction technologies cause a negative anthropogenic impact on the environment, disrupting the biodiversity of the site and surrounding areas. 

During peat extraction, there is a mechanical impact on the top layer of soil and removal of soil and vegetation cover.

The mentioned negative consequences of peat extraction requires coordination of further activities on exploration and development of new peat deposits with state climate policy and state policy in the field of environmental protection.

Brown coal assessment

Brown coal in Ukraine, like hard coal, is the only energy resource whose reserves are potentially sufficient to ensure the energy security of the state.

Brown coal mining and its deep processing into finished products can become one of the main sources of meeting Ukraine's energy needs.

Brown coal, in addition to its traditional use as an energy raw material, can be of great importance for obtaining liquid and gaseous fuels through its deep processing.

Total brown coal resources, according to the state balance of mineral reserves of Ukraine, amount to about 2.9 billion tons.

The main tasks of this direction for the period until 2030 are to reassess the existing reserve of mine construction sites with the identification of highly promising facilities for development, from the standpoint of new processing technologies, and prepare them for further investment.

Coalbed gas (methane)

This type of mineral is an important additional resource potential of hydrocarbons associated with deposits of the Donetsk and Lviv-Volyn coal basins.

According to preliminary estimates, the resource base of the Donetsk coal basin reaches 6-10 trillion cubic meters, and the Lviv-Volyn - 10 billion cubic meters.

Coal gas (methane) reserves in the state balance of mineral reserves of Ukraine amount to over 300 billion cubic meters.

To develop this area, it is necessary to complete the assessment of industrial reserves of gas (methane) in coal deposits and conduct geological exploration work to assess the reserves and resources of gas (methane) in coal deposits in individual areas.

The total reserves and resources of hard coal in Ukraine (balance, off-balance, forecast) exceed 100.0 billion tons, of which explored reserves exceed 50 billion tons.

Due to  the armed aggression of the Russian Federation against Ukraine, and the temporary occupation of Ukrainian territories, many coal mines have been decommissioned.

The expansion of the mineral and raw material base of the Lviv-Volyn coal basin is possible through the construction and operation of mining complexes.

Coal reserves and resources in the region are estimated at more than 1600.0 million tons. Coking coal reserves account for 31 percent of all coal reserves in Ukraine.

To solve the problem, it is planned to reassess the existing reserve of mine construction sites with the identification of highly promising facilities for development and their preparation for further investment, as well as the search for new facilities, in particular in regions with promising prospects for expanding industrial coal-bearing areas.,

Methane gas from gas hydrates

Gas hydrates are compounds of water and gas that are stable at low temperatures and elevated pressures.

The most common gas hydrates are methane hydrates - compounds of water and methane, the deposits of which in the bottom sediments of seas and oceans are quite significant in different parts of the world and which in the future may become an alternative source of natural gas.

Methane gas from gas hydrates is a promising component of unconventional hydrocarbons.

The presence of gas hydrate accumulations in the northwestern part of the continental shelf of Ukraine was confirmed by the results of comprehensive geophysical studies carried out by the S.I. Subbotin Institute of Geophysics of the NAS of Ukraine in 2010-2013.

According to preliminary estimates, the methane volume of this area is about 1.2 trillion cubic meters. In addition, signs of the presence of gas hydrates have been found in other areas of the Black Sea.

Exploration work to identify and assess gas hydrate accumulations should include, in particular, the development and implementation of technologies for the extraction and production of methane from gas hydrates, with further analysis and generalization of the results of domestic and foreign research and work on the search and experimental and industrial exploitation of explored gas hydrate objects.

Shale gas. Ukraine. Information on deposits for the conclusion of production sharing agreements

Shale gas (hosted by shale and mudstone) is a combustible natural gas contained in low-porosity and low – permeability gas-bearing shale formations.

In reservoir conditions, it is practically stationary and can be extracted through artificially formed permeable zones and reservoirs in the near-well space, created using hydraulic fracturing technology or other technologies for decompression of gas-bearing shale strata.

The gas-bearing rocks of shale strata are sedimentary rocks with a predominance of clay component (up to 50 percent), shale (layered) texture, enriched with dispersed organic matter (DOM) from 1 to 25 percent, which, depending on the degree of catagenetic transformations, can generate and accumulating hydrocarbon gases.

Targeted theoretical research on the possibilities of extracting natural gas from shale strata in Ukraine began a little more than ten years ago, but there is no practical use of its extraction.

In the Dnieper-Donetsk Basin, the Devonian and Carboniferous black shale strata, which lie in the peripheral parts of the basin at depths of 2,000-4,000 meters, are considered highly promising.

Among the priority objects for exploration are the Olesk subsoil area and the Silurian mudstones of Volyn-Podillia in the Western region, the Rudenkivske deposit in the Dnieper-Donetsk depression, and the Kalmius-Toretsk depression in the northwestern part of the Donetsk trough.

According to a preliminary estimate, recoverable shale gas resources in the Dnieper-Donetsk Basin reach 2.2 trillion cubic meters, in the Western region - up to 1.5 trillion cubic meters.

Investment component of production sharing agreements and methodology for its assessment

Currently, there is a lack of sufficient research on risk assessment for mineral extraction.

The lack of a unified methodology deepens theoretical contradictions regarding assessment tools and decisions made on their basis, which provide in-depth insights into investment risk in general.

Chinese scientists Yujing Xiang, Qinli Zhang, Daolin Wang, Shihai Wu published the article «Risk Assessment of Investments in the Mining Industry for Countries Along the Belt and Road Initiative» in which they proposed their approaches to assessment identifiers.

The authors propose to assess the risk of investments in oil, coal, and natural gas through an investment model based on countries such as Brazil and Kazakhstan, Singapore and New Zealand, and Uzbekistan, respectively.

Scholars have also identified oil, coal, and natural gas as energy resources, considering them as a combination of resources for assessing investment risk.

The Chinese have concluded that a combination of resources is more important than a single resource when formulating a micromineral investment strategy.

As an example, the authors analyze the investment experience of the United Arab Emirates and Pakistan.

Thus, a quantitative risk index allows decision-makers to clearly and directly understand its basis.

The one-dimensional quantitative analysis previously used has been superseded in favor of a three-dimensional quantitative analysis (3-D) risk assessment index.

For example, the International Country Risk Guide (ICRG) publishes monthly country risk assessments based on three dimensions: political, economic, and financial risk.

More recently, the 3D scoring system has gradually evolved into a multidimensional (more than three dimensions) system, such as the six-dimensional (6D) approach to risk assessment index, which demonstrates balanced risk assessment results.

The 6D approach is built on a measurement of resource potential, which is viewed in terms of total mineral resources, including ore and metal exports, ore and metal imports, proven natural gas reserves, proven crude oil reserves, proven coal reserves, and mineral resource reserves.

Let's name the main approaches of 6D in risk coordinates:

1) Political risk examines the quality and effectiveness of the country's government resources in solving national problems and maintaining political stability. Lower political risk reduces the likelihood of losing foreign investments.

2) Economic fundamentals measure the long-term stability of a country's investment environment. A country with excellent economic fundamentals has a relatively low risk of foreign investment inflows and a relatively high profitability and security of corporate income from foreign investment.

3) Social risk reflects risk factors caused by the social situation in countries where mining investments are made: the more stable the social level in the country, the more favorable the investment.

4) Resource potential is an important indicator for assessing the feasibility of investing in resource-rich countries. Countries with rich resources and excellent resource potential have extremely high investment value, which is the basis for attracting foreign investment in the mining industry.

5) Environmental risk measures a country's attention to environmental awareness, actions and policies. As for investment in the mining industry, each link in the development of the mining industry depends on environmental management and control by governments of different countries.

Bonuses and premiums from the investor in production sharing agreements

The launch of production sharing agreements is associated with the initial payment of premiums and various bonuses by the investor.

Such premiums and bonuses are either linked to a certain stage of the production sharing agreement or to the achievement of a certain level of hydrocarbon production.

Let us name the most common forms of premiums and bonuses.

Bonuses:

1) Community bonus upon reaching the base level of natural gas production.

2) Social bonus.

3) Bonus upon reaching the peak level of natural gas production.

4) Bonus upon reaching the base level of crude oil production.

5) Bonus upon reaching the peak level of crude oil production.

6) Bonus upon reaching a stable level of production.

7) Bonus-waiver of compensation.

8) Bonus for signing a production sharing agreement.

9) Bonus for the first sale of extracted hydrocarbons.

10) Second bonus for hydrocarbon production upon reaching the average daily value.

11) Bonus for the transfer of rights and obligations.

12) Production Bonus. The amount of the production bonus varies depending on the total quantities, expressed in barrels of crude oil, of hydrocarbons produced.

13) Bonus for announcing the start date of the production sharing agreement.

14) Bonus for the first gas from the first pilot-industrial development of the drilling technology project.

Types of premius include:

1) for commercial discovery;

2) for concluding an agreement.

The investor may also be subject to an additional obligation at the stage of the competition in the form of payment of a security, which confirms the investor's ability to subsequently fulfill the terms of a future production sharing agreement.

Security is usually provided at a level no lower than a bank guarantee.

Primary and secondary geological information in production sharing agreements

Information of geophysical, geochemical, hydrogeological, geodetic, aerospace, petrographic, and paleontological content constitutes primary and secondary geological information.

Primary and secondary geological information characterizes the geological structure of the subsoil, mineral deposits, the composition of raw materials and the properties of rocks, ores, minerals, hydrocarbons, groundwater, as well as other qualitative and quantitative parameters.

Primary geological information is information and/or data obtained during the use of subsoil, conducting research on geological objects in their natural occurrence, samples, tests, as well as monitoring the condition, use and protection of subsoil.

The list of primary geological information documents includes:

1) documentation of routes, objects and observation points (including mines, sections, quarries, deposits, manifestations, mining operations, wells, water bodies).

2) samples of rocks, cores, formation fluids, other natural formations and their description.

3) field logs and testing of natural geological materials, distribution of samples and tests by type of analysis.

4) reports and materials of laboratory and analytical research.

5) field graphics.

6) documentation on mining and drilling operations.

7) documentation on well research and testing.

8) documentation on monitoring the state of the subsoil.

Secondary geological information is data obtained from all types and stages of geological exploration work, information on types of subsoil uses, processing, interpretation and analysis.

Secondary geological information includes:

1) reports on exploration wells.

2) reports on the results of core processing and geological and geophysical observations, including in digital form.

3) reports on the results of scientific research and thematic works on the geological study of the subsoil.

4) maps of geological and geophysical content (including geological, mineragenic, hydrogeological, geophysical, geochemical, engineering-geological, geoecological, deposits, reserve calculations, etc.).

5) bulletins of state monitoring of the state of subsoil and groundwater regime.

6) geological databases and information arrays of geological information about the subsoil (digital and graphic files, scanned images), geoinformation projects compiled based on the results of geological study of the subsoil.

«Wasted costs» in the understanding of production sharing agreements

Lawyers from leading law firms «Herbert Freehills Kramer», «ENYOLAW», Smith Jay Leary, Mikayla Ware published articles «Contract damage principles and wasted expenditure», «Fair winds favor plaintiffs in wasted expenditure cases».

Aanalyzing the case law (cases of Cessnock City Council v 123 259 932 Pty Ltd, Robinson v Harman (1848) 1 Exch 850, Hadley v Baxendale (1854) 9 Ex 341, 354, Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] 2 All ER (Comm) 1082, the authors-practitioners created the concept of «futile expenses».

The phenomenon of this concept is that the recovery of costs is indirect.

Wasteful expenses may not be recognized as losses.

The authors highlight their point of view on the role and place of «wasteful (expenditure) expenses» in different ways, arguing that the ideological parties to the investment agreement, due to which «wasteful expenses» were incurred, always try to contradict each other.

The common point of contact is that «wasteful spending» will never be recognized as lost profit or wasted profit.

In the concept of «waste expenditure, the burden of proving that the expenses were not caused by a violation of the terms of the investment contract lies precisely with the investor (operator), as a party to the agreement.

How appropriate is it to apply the «waste costs» approach in production sharing agreements?

It is quite difficult to find an answer to this question because:

1) distribution agreements differentiate the budget at different stages of the investment contract.

2) allow the investor to exceed the costs in percentage terms.

3) do not establish an exclusive list of costs (costs are indicative).

4) there is no upper and lower limit on the cost ratio.

5) costs in oil and gas activities cannot be fixed.

6) the nature of the agreement may change in the long term

7) the impact of force majeure on the implementation of the production sharing agreement.

For production sharing agreements, it is correct to borrow the basic approaches and concepts of «wasteful costs».

For preventing appears of the «waste expenditure:

1) should evaluate costs by investment benefits.

2) should consider the factor of «reasonableness of costs.

3) under any conditions of activity, costs must be fair and justified.

Gas. Its production under the terms of a production sharing agreement

Gas is associated with low-porosity and low-permeability reservoirs that lie at great depths (5-8 kilometers) mainly in parts of the depression.

In addition to low filtration and capacity properties, gas characterized, as a rule, by low well productivity, which requires constant drilling in large quantities, the need to use stimulation (fracking) and horizontal drilling, short well life and a rapid drop in their flow rate (by half in the first year).

Search, exploration and production of gas accumulations have its own specific features, which is why it is distinguished into a separate type.

To assess the possibility of producing basin-type gas, it is necessary to:

1) conduct a modern interpretation of available geological and geophysical materials and perform a scientific justification of the most promising areas of possible accumulations of gas;

2) perform a complex of geophysical studies, including seismic 3D modeling, identify traps and locations for parametric wells.

3) to drill parametric wells with full core sampling in the promising part of the section, as well as modern comprehensive petrophysical core studies to create interpretative models.

4) conduct a geological and economic assessment of priority oil and gas prospecting objects and prepare them for use;

5) implement the necessary technical regulation and economic incentives at the national level to attract investors to search for such resources.

Full implementation of these tasks will allow us to increase the natural gas resource base.

Assessment of Ukraine's mineral and raw material base

The agreement on the establishment of a mineral recovery fund, which was signed in May 2025 between the Government of Ukraine and the Government of the United States of America, drew attention to the assessment of Ukraine's mineral resource base.

Thus, in the Eastern region, the initial total hydrocarbon resources, as of 2019, were recorded at 5,319.0 million tons of conventional fuel, including natural gas (free and soluble) - 4,545.8 billion cubic meters, oil and condensate - 773.2 million tons.

As of 2019, about 59 percent of the initial total resources by total volume of all hydrocarbons had been used.

The unexplored share of the initial total resources in quantitative terms amounted to 2,193.0 million tons of fuel equivalent.

Thus, there remains significant potential for increasing oil and gas production in the Eastern region.

The Western region also has significant prospects for increasing hydrocarbon reserves and their production.

The initial total resources of the Western region, as of 2019, are recorded at 1,440 million tons of equivalent fuel, including natural gas - 970 billion cubic meters, oil and condensate - 470 million tons. The degree of realization of the initial total hydrocarbon resources is 42 percent. The unexplored (residual) part is about 850 million tons of equivalent fuel.

In the Southern region (Black Sea region, Crimea and the continental shelf of Ukraine), only 4 percent of the initial total resources have been realized, which in total amounts to 2,100 million tons of hydrocarbons, of which gas - 1,900 billion cubic meters, oil and condensate - 200 million tons.

This region's potential for reserve growth is maximum.

Due to the temporary occupation of a significant part of the territory of the Southern region, the forecast resources of the economic zone of Ukraine are reduced by up to 270 million tons of conventional fuel, including in the Black Sea - by 160 million tons, in the Sea of Azov - by 110 million tons.

According to estimates by the Hydrocarbon Resources Management System (PRMS), as of 2018, commercially recoverable oil and gas reserves were approximately 500 million tons of oil equivalent (22 years of consumption), and resources with an uncertain probability of commercialization were 166 million tons of oil equivalent.

More than 70 percent of prospective resources, which are a priority for exploration and exploratory drilling, are concentrated at depths of more than 3 kilometers, a significant part of these resources also lie in ultra-deep horizons - more than 5 kilometers.

In addition, more than 92 percent of the fields have reserves of less than 5 billion cubic meters and 5 million tons and are considered small and very small.

Large and medium-sized deposits account for half of Ukraine's reserves and production, but they are in the final stages of development and are more than 70 percent depleted.

Therefore, about half of the available hydrocarbon resources in the oil and gas subsoil remain unexplored.

At the same time, most of them are small, deep-seated or low-profitable objects, the development of which is problematic and will not provide the necessary increase in explored reserves and its excess over the volume of oil and gas production.

A significant increase in hydrocarbon production in the future is impossible without a significant increase in the resource base and improvement of its quality through exploration and preparation of new facilities, which can be carried out at the expense of the state budget, funds from business entities of various forms of ownership, and from other sources not prohibited by law.

Mineral raw materials, the extraction of which is ensured under production sharing agreements

Mineral raw materials, the extraction of which is ensured under production sharing agreements, are not limited exclusively to unconventional hydrocarbons, which include shale gas, coalbed gas (methane), central basin gas, oil, condensate or other hydrocarbon raw materials occurring in unconventional reservoirs.

The subject of a production sharing agreement in the mining sector may also be solid deposits of minerals and their associated metallic, non-metallic, ore/non-metallic/fuel or hydromineral minerals:

1) vanadium ores (scandium ores, uranium ores).

2) lithium ores (tantalum, niobium, rubidium, cesium, beryllium, tin).

3) titanium ores (apatite, feldspar, scandium, fluorine, cement raw materials, building stone).

4) vanadium (apatite).

5) uranium ores (thorium, molybdenum, rare earth metals).

6) potassium salts.

7) magnesium salts.

The supply of minerals and useful components, like mineral raw materials and/or processed products from such mineral raw, on the global market has or may have a potentially significant gap from the forecasted demand, which is due to the duration of the implementation of new mining projects (industrial development of deposits).

The mineral resource base is a set of mineral deposits, including man-made ones, as well as waste from the extraction and processing of minerals suitable for industrial use.

The mineral resource base is formed by conducting a complex of geological survey, exploration and reconnaissance works.

According to industrial and economic significance, it is planned to divide types of minerals of national importance as a component of the mineral and raw material base into the following categories:

Category A - types of minerals that are intensively mined, characterized by significantly explored reserves, while the corresponding mineral raw materials and (or) products of its processing are used in industry or are (or may be) exported to ensure revenues to the state budget in a short time.

Category B - types of minerals that are mined in limited quantities

The cost of this category of mining provides a marginal economically advantageous level of profitability, but their development is complicated by environmental problems, the explored reserves of deposits are small or depleted, new deposits are not sufficiently studied, and at the same time, the need for such types of minerals is due to the development of industry.

The shortage of these types of minerals is covered by imports.

Currently, according to technical and economic calculations, such minerals under existing economic conditions are not competitive compared to imported ones and cannot be profitably processed at domestic enterprises using existing technologies.

Category C - types of minerals, their reserves (including significant ones) have been explored, but are mined in limited quantities or are not mind at all.

At the same time, the need for such minerals may increase due to the introduction of new enrichment technologies or preliminary processing of the relevant ores.

Category D - types of minerals whose deposits are currently not being developed and are not sufficiently studied, but in the future may become important for the national economy, considering the needs of other industries.

Structure of the oil and gas well passport

A measure of individualization of an oil or gas well is its passport.

The passport is obtained by the subsoil user, regardless of whether he acts as an investor by concluding a production sharing agreement.

The main details of the passport of oil or gas well:

1) well code in the State Register of Oil and Gas Wells.

2) well number.

3) well category code.

4) well category name.

5) location of the well (code of the codifier of administrative-territorial units in the context of district, region, territorial community).

6) geographical coordinates in the WGS 84 system with an accuracy of at least one tenth of a second in the geodetic reference coordinate system (latitude, longitude, degree, minute).

7) topographic description of the well.

8) cadastral number (if available) and information on the ownership (use) of the land plot (type of document, date of issue, issuing authority, form of ownership).

9) description of the deposit on which the well is located (recording date).

10) information about the cost of the wells (person who made the assessment, unit of measurement, value).

11) description of the condition in which the well is located (start date of insertion, end date of insertion, depth, angle of inclination).

12) well design (type of column, diameter of column, depth of descent of column, tightness certificate).

13) well test results (number, date, interval, test method, type of perforator.

14) composition of equipment at the well (cost, installation, dismantling).

15) data on geophysical surveys.

16) environmental parameters (water protection zone, risk of flooding, sanitary protection zone, zone of special land use regime).

17) the territory of the nature reserve fund.

18) the state of operation (date of experimental and industrial development, age of productive deposits, reservoir index, reservoir interval, perforation depth, fluid type, well flow rate, reservoir operation mode, reservoir pressure).

Special conditions of production sharing agreements

Production sharing agreements concluded for the search, exploration and production of hydrocarbon raw materials, as well as for the use of deposits with significant reserves of minerals, must also provide for the following essential conditions:

- annual declaration of production characteristics.

- procedure for using geological, geophysical and other information.

- procedure and features of accounting for costs for industrial and technological needs.

- the procedure and terms for assessing the level of environmental pollution around exploitation of the subsoil area (a land plot provided for needs related to the use of subsoil) at the time of conclusion of the agreement.

- the scope and terms of implementation of environmental protection measures.

- the procedure for coordinating and approving work programs, in particular oil operations programs.

- the conditions for responsible storage of the state share of extracted minerals before their transfer to the state.

- conditions for insurance of property risks, including loss of extracted minerals due to spillage, flood, fire.

- conditions of exceptional risk during the development of deposits.

If a foreign investor is a party to a production sharing agreement, he is obliged to register his representative office within three months from the date of conclusion of the production sharing agreement.

This period is optimal for the investor to start the implementation of the «start date» of the production sharing agreement.

The operator of a production sharing agreement shall organize the proper performance of the work provided for in such agreement and shall, inter alia, for this purpose:

1) carry out current operational activities stipulated by the agreement (personally or by involving contractors, subcontractors or other organizations (persons).

2) distribute compensatory and profitable products.

3) accept and use the investors' property necessary to fulfill the terms of the agreement.

4) calculate and pay taxes and fees (mandatory payments).

5) maintain separate accounting and tax records of transactions carried out under the agreement.

6) provide all parties to the agreement with sufficient access to full information regarding all activities carried out under the concluded production sharing agreement, including any confidential information of commercial value;

7) sell (realize) profitable, compensatory products of investors and the state part of the products, if this is provided for by the terms of the production sharing agreement.

A multilateral production sharing agreement must grant the operator of the agreement the right to make independent decisions regarding the ongoing activities necessary to fulfill the tasks (plans, programs, etc.) stipulated in the production sharing agreement.

Сonfidentiality disclosure terms in production sharing agreements

Most often, the issue of disclosing confidential information from production sharing agreements arises during the audit of an investor's expenses under a joint activity account.

A significant number of regulatory authorities, when carrying out measures to ensure the correctness of maintaining a joint account, familiarize themselves with the investor's accounting and warehouse documentation, describing it in reports or inspection acts.

Of course, investors are concerned about maintaining confidentiality to avoid passing information on to competitors, as authorized government agencies enjoy immunity from disclosure, as the audit of an investor's joint expense account is not publicly disclosed.

A duty of «confidentiality» is an obligation not to disclose to anyone information related to the performance of a production sharing agreement.

Such an obligation may vary in scope and consequences depending on the source and nature of the obligation.

Product sharing agreements have two confidentiality regimes:

1) complete non-disclosure of confidential information;

2) limited disclosure of confidential information.

Confidentiality is inextricably linked to the concept of transparency.

Although the duty of confidentiality creates a negative burden on the parties involved not to disclose information, it exists as an obligation on each individual party, with certain exceptions:

1) preparation of a report on the verification of the joint account;

2) familiarization of the commission members with the documents on the verification of the joint account of the investor's expenses;

3) transfer of documents on the verification of the joint account of the investor's expenses for the formation of certificates;

4) disclosure of data about the mineral deposit and its coordinates to assist authorities in obtaining a land plot for the investor, payment of premiums and bonuses by the investor, and fulfillment of other preliminary conditions of the production sharing agreement.

In any case, confidentiality is ensured through an arbitration order.

The confidentiality obligation places an obligation on the parties to a production sharing agreement to ensure that information identified under the confidentiality obligation is not made public.

Procedure for using (selling) part of the produced products that remains in the ownership of the state in accordance with the production sharing agreement

During the implementation of the production sharing agreement, issues arise regarding the accounting of produced hydrocarbon products (especially gas), which remain the property of the state.

This problem is being solved in different ways.

Looking ahead, I would like to cite Ukraine's experience in this matter, because after the signing of the Ukrainian American agreement on the creation of a special reconstruction fund, regulatory and legal acts in the field of production sharing agreements have changed dynamically.

On February 9, 2024, the Cabinet of Ministers of Ukraine adopted Resolution No. 169 «On the procedure for the use (sale) of part of the produced products that remain in the ownership of the state in accordance with the production sharing agreement (natural gas)».

The total volume of produced products and the size of the compensatory, profit share, in particular the share of produced products that will remain in the ownership of the state in kind because of distribution, are recorded in the virtual trading point of the gas transportation system of Ukraine.

The investor shall, by the 20th of the month preceding the calendar quarter, inform by letter to the official email address of the State Service of Geology and Subsoil of Ukraine about the expected volumes of production recorded by the investor, the amounts of the compensation and profit share.

The State Service of Geology and Subsoil of Ukraine, by the last day of the month preceding the calendar quarter, shall inform by letter to the official email address of the authorized person about the expected amount of the state share of the produced products that will be transferred by the investor to the authorized person in kind, for each transaction.

The authorized person accepts the state share of natural gas from the investor at the virtual trading point of the gas transportation system of Ukraine for off-balance sheet storage daily using the information platform of the gas transportation system operator of Ukraine.

If the investor does not provide information, the State Geology and Subsoil Service of Ukraine does not sign an act on the conformity of shares of produced products, and the distribution of products is considered not to have taken place.

The investor provides the expected volumes of production for the next quarter, considering the previous quarter, in which the act on the conformity of the shares of production was not signified.

The authorized person sells the state share of the produced products in accordance with the exchange trading regulations on the short-term natural gas market using the exchange trading platform.

The daily balance of the unrealized state share of the produced products constitutes the daily imbalance of the customer of transportation services and is sold.

The amount of cash equivalent from the sale of part of the produced products in profitable hydrocarbons in kind cannot be spent by the authorized person.

«Umbrella clauses» in production sharing agreements

Debevoise & Plimpton lawyers Samantha J Rowe, Svetlana Portman, published a legal article entitled «Current Trends in Umbrella Clause Claims Arising from Breach of Contractual Obligations» on the International Bar Association website on Thursday, June 3, 2021.

In the article, the authors comprehensively analyze the application of the «umbrella clause» through the prism of more than 37 arbitration awards.

Having analyzed the arbitration motivation and judicial approaches, the authors gave the following interpretation to the «umbrella provisions»:

1) the provisions of the investment treaty that do not provide for substantial contractual rights for investors;

2) the umbrella provision applies only when the respondent state has exercised sovereign power;

3) the provisions on the quality of the contractual obligation (the breach is not of a commercial nature).

A common feature in the adopted arbitration awards using «umbrella provisions» was the use of norms from interstate investment agreements on mutual cooperation and norms of international conventions.

Can umbrella clauses be applied in production sharing agreements?

The answer is probably no. Here’s why:

1) in production sharing agreements, the grounds for termination and termination are delimited with reference to the clauses and articles of these agreements;

2) production sharing agreements have an industry-specific application algorithm (failure to fulfill the following condition makes subsequent implementation impossible). For example, without geological study, industrial development of a deposit is impossible. Without drilling, geological study of areas is impossible, etc.;

3) production sharing agreements have a definition of essential conditions and non-essential ones;

4) the jurisdiction of national courts and arbitrations is delimited on issues specified in the sharing agreement.

Conditions for concluding a production sharing agreement

Production sharing agreements may be concluded for individual subsoil areas (plots) limited in space and coordinates within which deposits, parts of mineral deposits of national and local importance are located, including subsoil areas within the continental shelf and exclusive (maritime) economic zone.

At the request of the investor and in cases where the land plots necessary for the implementation of the concluded production sharing agreement are in state or municipal ownership, subsoil plots (mineral deposits) are provided together with such land plots.

In all other cases, the state ensures the provision, at the request of the investor, of land plots necessary for the implementation of the concluded production sharing agreement, in the manner specified in such agreement.

In the event that land plots necessary for the use of subsoil under production sharing agreements are owned by individuals or legal entities or are in municipal ownership, the acquisition of ownership rights to these land plots is carried out by the state in accordance with the law.

A tender for the conclusion of a production sharing agreement for a separate subsoil area is held if any of the following conditions are met:

1) unprofitability for subsoil users and the state of continuing to develop mineral deposits, which is due to objective factors, in the case when the development of such a deposit can provide a significant volume of mineral extraction, and the conservation or liquidation of the development object can lead to negative social consequences and financial (material) losses;

2) lack of state funding and technical means for the development of new large mineral deposits, the development of which ensures the level of mineral extraction, necessary for the social development and economic security of state;

3) the need to involve special high-cost technologies for the development of difficult-to-extract and significant reserves of minerals located in difficult mining and geological conditions or remaining for the fields being developed, as well as the need to prevent losses of fuel, energy and mineral raw materials in the subsoil;

4) the need to provide regions with their own fuel and energy raw materials, the creation of new jobs in areas where employment is at a low level;

5) the need to introduce the latest technologies, equipment with advanced technical developments to ensure effective search, exploration and development of promising, underexplored mineral deposits;

6) the need to develop mineral deposits, the development of which is carried out in particularly difficult conditions (subsoil areas and deposits in marine areas, deposits with difficult-to-extract and depleted reserves or in areas with undetermined oil and gas content);

7) the need for further exploration, additional or in-depth exploration of the subsoil area.

Investor's objection to the implementation of production sharing agreements. How to work with them?

During the audit of the joint accounting account for production sharing agreements, investors react sharply to the facts of untimely reflection of the costs incurred by them during the implementation of production sharing agreements, which affect the reimbursement of the state for the costs incurred by the investors in the future.

It is advisable to correspond with investors on each of their positions. Thus, from the practice of conducting production sharing agreements, the best way to «hear the voice» of the investor is to create a table for resolving disagreements.

The table for resolving discrepancies was successfully formed based on the results of the investor's processing of the joint account verification report.

In the first column of the table, we indicate the links to the conclusions of the report, the second column of the table is devoted to the comments and disagreements of investors, the third column is devoted to the arguments for the comments of investors and the justification of the provisions of the conclusions in the report on the verification of the joint accounting account in the production sharing agreement.

It is very important not to deviate from the provisions of the joint account audit report when providing arguments to the investor's comments.

After preparing the dispute resolution table, send it to the investor and invite him to a meeting.

When developing a table for resolving disagreements with investors in production sharing agreements, the advice of Michael Schneider and Kseniia Shestakova can be successfully used:

1) provide new information relevant to the objection;

2) tailor your responses to priorities, problems, and investment criteria;

3) by putting yourself in the investor’s shoes, opportunities arise to proactively solve problems;

4) avoid interrupting, arguing, or dismissing them; instead, show that you value investor feedback by acknowledging the concerns;

5) provide clear and honest answers that address the core of the issue;

6) express your appreciation for the investor's time and attention, ask the investor about the next steps in the decision-making process, and find out when they can expect a response from you.

Social investment in production sharing agreements

Any investor, considering the needs of local communities, may spend funds on social and industrial development of the region.

Financing the above-mentioned needs is considered social investment.

Social investments in production sharing agreements take the following forms:

1) a share of funds from extracted hydrocarbons.

2) co-financing of socio-economic development programs in accordance with decisions of local executive authorities and local governments.

3) financing of educational projects for geological personnel of drilling rigs (employees hired by the investor from among the residents of the country party to the production sharing agreement);

4) financing of educational projects for training and university research.

5) financing of social partnership projects.

Social investments in the form of a plan or agreed program may or may not be compensated according to the product sharing agreements.

Currently, there have been no arbitration disputes in production sharing agreements regarding investor claims or lawsuits against the state for reimbursement of costs incurred for social investments, similarly, there are no lawsuits by the state for termination or termination of production sharing agreements.

The stage-by-stage process of forming proposals for social investments looks like this.

The investor or his designated operator:

1) develop a social investment strategy (plan).

2) submits a social strategy (plan) for approval to the state party to the production sharing agreement for approval.

3) a special committee (commission) is formed from among the representatives of the investor (operator) and the state to create a list of social needs and provide consultations on the development of a strategy and social investment (strategy) plan.

4) after the development of strategies, the project is submitted for approval.

5) the investor (operator) manages the implementation of social investment activities envisaged by the social investment strategy (plan), including determining the limit of applicable funding for social investments.

Expenditures made on social investments reduce the investor's (operator's) income tax base.

Methodology for calculating the balance of interests of the state and the investor when concluding production sharing agreements

The profitability of the investor and the state when implementing a production sharing agreement is determined by the current (quarterly) distribution of hydrocarbon raw materials extracted during the period of industrial development (operation) of the deposits by ensuring the implementation of such distribution parameters, as stated in the terms of the competition or in the agreement.

The investor's profitability is calculated based on the reimbursement of costs to the investor with compensatory products, the distribution of profitable products between the state and the investor, the receipt of income tax from the investor and other taxes, fees (mandatory payments).

The maximum percentage of compensatory production cannot exceed 70 percent of the total volume (value) of hydrocarbon raw materials produced in the relevant period.

The specified amount of compensatory production is a parameter that regulates not only the speed of reimbursement of the investor's costs, but also the size of the profitable part of the extracted hydrocarbon raw materials in the corresponding distribution period.

The total profit share of hydrocarbon raw materials subject to distribution in the relevant settlement period is calculated as the difference between the total volume (value) of raw materials produced in such period and the total volume (value) of compensatory products, determined in accordance with the procedure established by the production sharing agreement.

The size of the investor's net profit is determined by the difference between the size of the profitable part of the hydrocarbon raw material as remuneration and the size of the tax liabilities of the relevant accounting period, such as:

1) fee for geological exploration works.

2) payments for the use of subsoil.

3) investor's profit tax.

4) contributions to state mandatory funds.

5) contributions to mandatory state social insurance for employees and foreign citizens hired for work.

6) levy on mandatory state pension insurance of employees and foreign citizens hired for work.

7) the amount of other costs associated with the production of hydrocarbon raw materials, which are included in gross costs, but are not reimbursed to the investor by compensatory products, including costs not reimbursed by the investor's profitable products of previous periods.

The investor's total income is determined based on the amount of compensation products and the size of the investor's net profit products.

The total income of the state is calculated considering the following indicators:

1) the cost of part of the profitable hydrocarbon raw materials.

2) the amount of agreed (paid) tax liabilities on income tax.

3) in addition, the amount of agreed (paid) tax liabilities is included in the total income of the state.

4) from the fee for geological exploration work performed at the expense of the state budget.

5) from the user fees.

6) contributions to the mandatory state social insurance of employees and foreign citizens employed.

7) levy on mandatory state pension insurance of employees а foreign citizens employed.

The economic mechanism for the distribution of hydrocarbon raw materials must ensure the interests of the state and the conditions for the investor's profitable activity.

Some aspects of understanding production sharing agreements

Under a production sharing agreement, the state instructs the investor to search for, explore, evaluate, develop, and produce hydrocarbons in the contractual area, and the investor undertakes to carry out oil and gas activities at its own risk and expense.

In the terminology dictionary of each production sharing agreement, the phrase «production sharing agreement» covers the concept of «hydrocarbon sharing agreement, including the annexes that are an integral part of it.

The appendices to the production sharing agreement mostly disclose the details.

For example, an appendix to the production sharing agreement is a five-year work program for the geological study of oil and gas subsoil, including experimental and industrial development of deposits, where the parties of the production sharing agreement considered on a certain number of work titles by type of work.

On the practice, many questions arise, especially how to correctly read production sharing agreements, if the general part of the provisions of the production sharing agreement declares the state's obligation to compensate for the cost of work under the program of geological study and experimental industrial development of deposits, but in the content of the works, a certain work is absent.

So, should we compensate for the cost of «uncoordinated» works according to the appendix or be guided by the general provisions of the production sharing agreement on the comprehensiveness of compensation for issues incurred by the investor?

We offer you our understanding of the rules of interpretation of the production sharing agreement.

The approaches and motivations for overcoming contractual conflicts are highlighted below.

Сase: Investors Compensation Scheme Ltd v West Bromwich Building Society

(1) Interpretation is the establishment of the meaning by which a document should be understood by a person who has all the prior knowledge and is understandable when the parties were at the time of the conclusion of the contract.

(2) The terms must be reasonably accessible to the parties and, with the exception mentioned below, include absolutely everything that could affect how the language of the document would be understood by a reasonable person.

(3) The law excludes from admissible grounds prior negotiations between the parties and their statements of subjective intentions. The law draws this distinction for reasons of practical policy, and only in this respect does legal interpretation differ from the way we interpret statements in ordinary life. The limits of this exception are in some respects unclear.

(4) The meaning that a document (or any other statement) conveys to a reasonable person is not the same as the meaning of its words. The meaning of words depends on dictionaries and grammar; the meaning of a document is what the parties who use those words in the appropriate context intend.

(5) The context may not only enable a reasonable person to choose between possible meanings of words that are ambiguous, but may even (as sometimes happens in ordinary life) lead to the conclusion that the parties must have used incorrect words or syntax for some reason.

Case: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 768 per Lord Steyn [Mannai v Eagle Star]

«The question is what a reasonable person would have meant in the circumstances in which the actual parties were».

Сase: Reardon Smith Line Ltd v Hansen­Tangen

«Contract interpretation requires a «purely objective assessment» of the contractual terms.

When it comes to the intention of the parties to the contract, it is objective: the parties themselves cannot provide direct evidence of what their intention was, and it is necessary to ascertain what is to be considered the intention that reasonable people would have had if they were in the parties’ place».

Сase: B&B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227, 234

«The social purpose... is to enhance certainties by maintaining the effect of the clearly expressed written word»

Сase: New Hampshire Insurance Co v MGN Ltd (15 June 1995)

«The interpretation of a written contract, except where it was known or could reasonably have been known to both parties at the time of the contract, and the court concluded from this that evidence that both parties had the same undisclosed intention as to the meaning or effect of the contract is inadmissible».

Distinguishing the categories of «start date» of a production sharing agreement from «effective date»

The basis of the disagreements between the state and the investor, regarding the reimbursement of costs, is the different applications of legal categories in the production sharing agreement, namely the «start date» and the «effective date» of the production sharing agreement.

According to the legal glossary, the «commencement date» is the date on which the investor’s obligations arise.

The commencement date of the production sharing agreement shall also be deemed to be the date specified in the notification by which the commencement conditions have been fully met by the state.

The meaning of the «commencement date» is interrelated with other sections of the production sharing agreement, under which the rights and obligations of the investor arise on the date of commencement of the production sharing agreement.

At the same time, the «effective date» of the agreement is explained in the agreement as the date of state registration after its signing.

That is, the production sharing agreement differentiates the procedure for the parties' actions based on the «start date» and «effective date», including the fulfillment of obligations under suspensive circumstances.

That is, the production sharing agreement differentiates the procedure for the parties' actions based on the «start date» and «effective date», including the fulfillment of obligations under suspensive circumstances.

The state is obliged to fulfill all the conditions of commencement as soon as it becomes practically possible after the date of entry into force, but no later than 12 months, with the possibility of extending the specified period.

The term of a production sharing agreement is the time during which the obligations of the parties arising from this agreement exist.

By concluding a production sharing agreement with a suspensive condition, its parties link the emergence of rights and obligations under such an agreement to a later date.

A suspensive circumstance may consist of actions as one of the parties to the agreement, which must cause the occurrence (change) of the relevant rights and relevant obligations for both parties to the agreement, and not just one of them.

Typically, the conditions for the commencement of a production sharing agreement for the state are associated with:

1) state registration of the investment agreement and its registration with the tax authorities.

2) granting a special permit to the investor within several months, provided that the investor pays the cost of such a permit.

3) appointment by the state of an authorized body to conduct a production sharing agreement.

4) transfer to the investor for use primary and secondary geological information owned by the state.

5) at the request of the investor, assist in obtaining rights to land plots.

From the moment the state fulfills its obligations regarding the start-up conditions, the investor acquires the ability to fulfill the obligations imposed on it.

In the future, during the execution of the production sharing agreement, the corresponding right of one party will correspond to the obligation of the other, and vice versa.

Thus, in matters of consideration and interpretation of clauses, subclauses, sections and subsections of the production sharing agreement in the part regarding compensation of costs, the investor must be guided by the «counting» of obligations precisely from the «start date» of the production sharing agreement.

Features of the conditions of the competition for the conclusion of production sharing agreements (oil and gas complex)

To ensure transparency and achieve competition between investors, the practice of organizing and conducting competitions for concluding production sharing agreements has developed the following approaches.

Thus, the announcement of a competition for the conclusion of a production sharing agreement is published in official printed publications and on the official website of the responsible state authority (future party to the agreement).

As a rule, investors, who have special permits for the use of subsoil and do not properly fulfill the duties of a subsoil user, are not allowed to participate in the competition for the conclusion of production sharing agreements.

Investors submit an application to the organizer of the competition for the conclusion of production sharing agreements (competitional tender commission), in which they indicate brief information about their experience in the field of subsoil use, as well as information about the technical and financial capabilities for performing the work and about the technologies that will be used during the use of subsoil, confirmed by documentation.

Investors also submit for consideration by a specially created competitional tender commission a program of work on the subsoil area, on fulfilling the main conditions of the tender, indicating measures aimed at protecting the subsoil and the environment, as well as the dates for the start and completion of work.

Typically, investors are asked to indicate in their application the size and types of investment, as well as proposals for the distribution of extracted products.

The investor's application, together with the documents submitted in support of it, is considered according to the following criteria:

1) mandatory components of the Work Program (the presence of 2D and 3D seismic surveys, drilling of wells in terms of the number of wells, considering their main parameters: depth, drilling trajectory, restoration of abandoned wells, the presence in the Work Program of further study of the area in parallel with the development of already discovered deposits (parallel development).

2) minimum guaranteed investment volume for the implementation of the five-year Work Program.

3) the volume of hydrocarbons produced over the last five years, seismic surveys conducted over the last ten years over 5,000 square kilometers.

4) experience drilling from two to five wells.

5) proven experience working in high pressure and high temperature conditions.

6) proven experience working with horizontal wells.

7) successful rate of drilling wells during the search for hydrocarbons (over 50 percent).

8) experience in the extraction of unconventional hydrocarbons.

9) application of modern technological solutions during extraction (coiled tubing, snubbing, etc.).

The sum of the scores for all criteria according to the specified scale constitutes the final score of the application and is the basis for determining the winner of the competition.

The described application selection system is used by governments when selecting the winner of the competition for a certain area of the field where it is planned to declare oil and gas production.

Verification of the joint account of production sharing agreements by authorities

The state, as a party to the production sharing agreement, monitors the correctness of the investor's allocation of costs to the compensation account (joint account) in terms of the investor's level of implementation of the geological study program, experimental industrial development, distribution of hydrocarbons, and production.

State control is ensured through inspections of such an account by authorized bodies responsible for monitoring and controlling the implementation of production sharing agreements.

In countries with a stable mechanism for attracting investment, there are no problems with state control, since the authorized body for support and control is one or more bodies (for support, some type of agency for attracting investment, or for the non-state sector of the economy - a gas producers' union or an association of geologists), etc.

However, in countries where production sharing agreements have just been concluded or are in the process of being implemented, the function of controlling (supervising) joint accounts under production sharing agreements is entrusted to a single government authority.

Therefore, the investor has many questions:

1) how to distinguish the function of the authorized body for monitoring and controlling production sharing agreements in terms of the correctness of the allocation of expenses to the joint account and the function of this state authority, which is vested with the authority of state control in the field of economic activity, geology, natural environment, oil and gas sector, energy efficiency, etc.?;

2) why are specialists from a significant number of state authorities involved in the verification of a joint account, if only one authority is the authorized body for monitoring and controlling production sharing agreements;

3) how to appeal the actions or inaction of officials of the authorized body for monitoring and controlling agreements? According to the law or under the regulation on production sharing agreements? We explain this as follows. Due to the fact that the joint investor account in production sharing agreements is not a regulatory, but a contractual sub-account, the provisions of the law on the procedure for conducting an inspection in the field of economic activity cannot apply to the commission of the authorized body for monitoring and control of production sharing agreements.

The subject of the audit of a joint account carries a significant ramification on the primary accounting documents, therefore the issue of the audit covers tax, environmental, mining, labor law, and labor safety and health law.

The inspection cannot take place within the approved forms of acts on departmental inspections of various authorities.

The verification of the joint account is based on the correctness of the accrual and reflection in the investor's reporting of expenses that will be reimbursed in the future, therefore the procedure and method of verification should be determined exclusively by the provisions of the production sharing agreement.

Management costs during the implementation of production sharing agreements

During hydrocarbon production, geological exploration work programs under production sharing agreements have an approved budget.

Drilling operations in oil fields are heterogeneous in their specifics, therefore an individual approach to the investor is maintained in terms of verifying the costs incurred by him.

However, having formally completed the geological study work program, the investor reflects in the submitted report the share of administrative costs, which many times exceed the drilling work performed.

Although the other party to the deal-sharing agreement cannot count on expecting results from drilling operations in the future while paying millions in employee costs for the investor.

To avoid excess administrative costs (management costs), preventing conflicts, we advise the investor to consider that:

1) management costs must be borne by a capital asset;

2) management costs must have an investment return;

3) the assessment of costs is carried out at cost in relation to investment benefits.

That is, management costs have an economic purpose.

In the history of investment activity, there have been attempts to distinguish the cost of retaining managers from the cost of management decisions made by managers.

The courts have proposed a narrow interpretation of the term «management costs».

In «Capital and National Trust Ltd v Golder» (1949) 31 TC 265 the Court of Appeal interpreted the phrase as including costs incurred in making management decisions but excluding costs incurred in carrying them out.

The interpretation was rejected by the House of Lords in «Sun Life Assurance Society v Davidson» (1958) 37 TC 330.

Quote: «I completely reject the distinction which is attempted to be drawn between management and conduct of business, confining the former to the principal management» (Lord Somerwell).

Therefore, an investor should objectively, in the context of an investment business, consider whether the costs were incurred in connection with that asset.

For these purposes, it is immaterial what form the costs took.

Investors' operating agreement under production sharing agreements

If the participants in a production sharing agreement are two or more investors, they must appoint one investor from among themselves - the operator of the agreement - to represent their interests in relations with the state.

For this purpose, investors are required to conclude an operating agreement (hereinafter referred to as the operating agreement) that regulates the relations between the operator of the transaction and other investors.

An operating agreement is not a joint venture agreement.

The purpose of an operating agreement is to create, acquire, dispose of, write off or liquidate property, conduct tender procedures, account for and distribute hydrocarbons, finance a participating interest for another investor, and finance obligations under a production sharing agreement.

The emergence of rights and obligations of the parties under operating agreements is due to the implementation of oil and gas activities.

At the same time, an operating agreement should not be considered a long-term contract.

The relationship between the parties under the operating agreement is based on a participation share in accordance with the appropriate share of produced hydrocarbons (compensatory, profitable hydrocarbons).

With the consent of the operator of the transaction (the main investor), a party to the operating agreement may transfer property, including equipment and materials, which it owns by right of ownership or other right, applied against obligations to pay payment claims or finance obligations.

Each party to the operating agreement is responsible for preparing its own accounting and tax reports (declarations) regarding activities related to production sharing agreements.

The provisions of the operating agreement do not limit the possibility of corrections, including because of audits or inventories.

In the operating agreement, the parties act at their own risk.

The operator (main investor) ensures risk management under the operating agreement.

In practice, the operator under operating agreements does not receive any remuneration, including neither profit nor loss.

Losses due to claims of third parties arising in connection with the operator's performance of obligations under the agreement are compensated by each party in a share proportional to the share of such party's participation.

In the event of failure by the investor to fulfill his obligations, the transaction operator sends a payment demand in the form of a notification of additional payments.

The parties to the operating agreement instruct the operator to sell (realize) each party's appropriate share of the produced hydrocarbons and to adjust transfer actual revenue.

The operating agreement shall be terminated in the following cases:

1) the expiration of its term.

2) if there is only one investor left under the operating agreement.

3) in the event of withdrawal from the concluded production sharing agreement.

4) unilateral termination of the production sharing agreement.