The principal Acts governing activities in the oil and gas sector include the Oil and Gas Act adopted on 12 July 2001 (Oil and Gas Act), the Code on Natural Resources adopted on 27 July 1994 (Code), the Licensing of Certain Types of Business Activities Act of 1 June 2000, the Production Sharing Agreements Act of 14 September 1999 (PSA Act), the Pipeline Transport Act of 15 May 1996 (the Pipeline Act) and the Rental Payments for Oil, Natural Gas and Gas Condensate Act adopted on 5 February 2004.

The Oil and Gas Act governs the geological study, exploration, development, production, storage, transportation and disposal of oil and gas. It also establishes the procedure and requirements for oil and gas licensing. According to the recent amendment to the Code, in case of any discrepancies between the Code and the Oil and Gas Act, the latter has priority in application.

The PSA Act provides an alternative legal structure for oil and gas activities as provided in the Oil and Gas Act. However, as of today, this Act has not been applied in practice. It suffers from several problems and requires further clarification and implementation in order to be effective as a practical matter. It therefore will not be discussed in this article.

Under Ukrainian law, a licence is required for the exploration and production of oil and gas natural resources. The State Committee on Natural Resources (Natural Resources Committee) has been given the responsibility for issuing, as well as for suspending and terminating such licences. In general, it is supposed to issue licences based on public tenders (auctions).

The Oil and Gas Act in Article 13 and 17 distinguishes the following four types of licences depending on the proposed activities of the applicant:

1. the licence for the exploration of oil and gas resources, including to undertake pilot production, for up to 5 years on land and up to 10 years on the continental shelf;

2. the licence for the exploration of oil and gas, including to undertake pilot production of oil and gas with subsequent extraction (industrial development of the deposits), for up to 20 years on land and up to 30 years on the continental shelf;

3. the licence for the production (extraction) of oil and gas (industrial development of the deposits) for up to 20 years on land and up to 30 years on the continental shelf;

4. the licence for the construction and use of underground storage facilities not connected with the extraction of natural resources, including for the storage of oil and gas and the wastes from oil and gas exploration and production, for up to 50 years.

A condition for the receipt of a licence is that an
Agreement On the Terms for the Use of Oil and Gas Deposits
(Oil and Gas Agreement) must be concluded. The Oil and Gas Agreement becomes part of the licence as an exhibit to it. This Oil and Gas Agreement regulates technical, organizational, financial, economic, social and ecological aspects of exploration and/or production of oil and gas in the licensed field. It may also contain additional terms, such as on the rights and obligations of the licensee, and termination and dispute resolution, provided that they do not contradict Ukrainian legislation.

The Oil and Gas Act has established a number of circumstances where a licence may be either suspended for some time or permanently terminated by the state. It also provides that fines may be imposed for violations of its provisions. The termination of a licence should also result in the termination of the Oil and Gas Agreement.

An important development in licensing occurred when amendments were introduced to the Oil and Gas Act by the State Budget Act of Ukraine for 2004, based on which licences may now be issued only pursuant to a tender (action). Consequently, it became no longer possible under the Oil and Gas Act for the holders of exploration licences to receive production licences by negotiation. However, the Budget Act was amended on 17 June 2004 to permit exceptions to this new tender requirement to be created by "an executive agency specially authorized by the Cabinet of Ministers of Ukraine". There is an intention to preserve this tender requirement rule as well as the exception to it for next year, as evidenced by the Draft of the State Budget Act of Ukraine for 2005, which was recently submitted to Parliament.

After Ukraine declared independence in 1991, the transition to a market economy demanded some liberalization of the electricity industry. A World Bank study conducted in this area recommended reorganisation based around a pooling of generation, citing the practice in the UK and Argentina. On this basis, Ukraine created a new legal framework providing for (1) sales of all electricity to be made to a wholesale electricity market ("WEM"), with pooling arrangements to foster competition among electricity generating companies, (2) creation of a state licensing regulatory system and (3) partial privatisation.

The current structure of the electricity sector in Ukraine is largely based on the Electricity Act of 16 October 1997 (the Electricity Act). The WEM is established under the Agreement between the Members of the WEM. This Agreement sets out the basis on which each member sells or purchases energy. Pursuant to the Agreement, the WEM is managed by a board that is comprised of an equal number of representatives of generators and distributors (suppliers) of electricity.

The overall structure of the WEM consists of three major groups of participants. The first group is composed of electricity generating companies, including: thermal power stations, nuclear power stations, hydro power stations and other small electricity producers.

The second group consists of distributors (suppliers) of electricity. They act as intermediaries between the generating companies and consumers of electricity. This group includes (1) the company licensed to undertake the wholesale supply of electricity, which is currently performed by the State Enterprise "Energorynok" (Energomarket), and (2) the regional electricity distribution companies, commonly referred to as "Oblenergos", and the independent electricity suppliers.

The third group are the electricity transmission companies. At present, the National Electric Energy Company transmits all electricity carried by the high voltage network (220kV and above), which it owns and operates. The medium and small voltage networks are owned and operated by the Oblenergos. Independent suppliers usually conclude agreements with Oblenergos for the transmission of electricity using the networks of Oblenergos.

Generating companies sell their electricity to the WEM represented by Energomarket which, in turn, sells electricity to the Oblenergos and the independent electricity suppliers.

Energomarket determines the WEM price for generated electricity on the basis of bids for the next day's price for hourly generation submitted each day by the generators that are members of the WEM. In principle, the bidding process should work so that a priority in WEM dispatch is given to the lowest cost generators. However, in practice, a higher cost generator may be dispatched first for practical reasons, such as the availability of fuel for continuous operation, the distance to the consumer and the capacity of the relevant power transmission lines. As an exception, some of the generation facilities, like nuclear power stations belonging to Energoatom and combined heat and power plants, do not participate in this bidding process, but rather sell electricity on a priority basis to Energomarket based on special bilateral contracts.

The WEM has had problems in practice, principally because the Oblenergos have not usually been paid in cash by most of their customers (which often prefer to pay through barter). Consequently, the funds going to Energomarket were not sufficient to cover the payments due from Energomarket to the generators. To help mitigate this problem, a system of distributive accounts for payments for electricity was introduced. All payments for consumed electricity are now made to these distributive bank accounts of the Oblenergos, which are maintained separately from their current accounts. All funds accumulated in the distributive accounts of the Oblenergos are then divided, in accordance with an algorithm established monthly by the NERC, between the bank account of each particular Oblenergo and the distributive account of Energomarket for allocation among the generators.

A separate licence is issued for each type of licensed activity in the WEM. The generation of electricity without a licence is only allowed for small capacity and output (currently for capacity below 20 mW or generation below 100 million kWh per year). Any company interested in working on the Ukrainian energy market should pay special attention to the NERC's general licensing terms and conditions, as they contain a number of important restrictions. For example, under the Conditions and Rules on Conducting Business Activity for the Supply of Electric Energy on a Regulated Tariff Basis, approved by the NERC Order No.15/1 of 13 June 1996: (1) each Oblenergo with its affiliates may only operate within the territory of one region (oblast) if the volume of the electricity that it supplies exceeds 15% of the total of all electricity supplied in Ukraine; and (2) each Oblenergo with its affiliates may not own or operate more than 4% of the overall licensed capacity of electricity suppliers in Ukraine without the NERC's permission.