On Friday, July 26, 2019, the Inter-Departmental Commission for the organization of conclusion and implementation of production-sharing agreements (PSA) supported the application of the company Trident Black Sea”by a majority vote and would recommend the government to recognize it as the winner in the competition for the development of the Dolphin area on the Black Sea shelf. Despite the formal recognition of the victory of Trident, the government expressed its desire to announce a new competition, because they believed that the proposal of the winner was not profitable enough for Ukraine. The company Trident Black Sea headed by an ex-deputy of the State Duma of the Russian Federation (2007-2016) has already stated: if the results of the competition are canceled, it is ready to defend its interests in court. Their competitors are, on the contrary, ready to go to court if the competition is recognized as valid. The government is in a difficult situation, the involved companies are as well, and such variability and uncertainty also harm the reputation of the country as a whole. Read the Opinion’s analysis of the first PSA competition for the development of oil and gas fields on the Black Sea shelf since 2006.
What did the companies fight for and how was the competition held?
The total area of the sea sector is 9,496 sq. m. According to one of the participants of the competition, it includes a total of geological resources that equals to 286 billion cubic meters, that is, about 40-50 billion cubic meters of gas, which theoretically can be extracted. That is, in case of successful implementation of the project and discovery of deposits, Ukraine can increase gas production by 10-15% in 5 years, and even more according to some other estimates. The minimum amount of investments to be made during the first stage of exploration is determined by the results of the competition and should not be less than 1.5 billion UAH. The winner of the competition would receive the right to conclude PSA on the Dolphin area for a period of 50 years with the possibility of extension in accordance with the Law of Ukraine “On production-sharing agreements” (more details can be found in the article “Dolphin and Blue Eternity”).
Despite the short deadline of application – namely two months from the announcement date, the Inter-Departmental Commission established for the selection of candidates received 4 applications:
– Caspian Drilling International Ltd (a subsidiary of SOCAR, Azerbaijan);
– Frontera Resources (USA), the company initiating the competition;
– Trident Black Sea (90% owned by Trident Acquisitions Corp, USA, 10% – by San Leon Energy PLC, Ireland). Ilya Ponomarev, an ex-deputy of the Russian State Duma, is a key shareholder of Trident Acquisitions Corp; 10% of shares are owned by a businessman Hennadiy Butkevych;
– PJSC Ukrnaftoburinnia (Ukraine), one of the largest private gas companies.
In accordance with the requirements of the PSA law and the relevant resolution of the CMU, the Inter-Departmental Commission was to prepare and submit the conclusions and proposals on determining the winner of the competition to the government no later than July 13, 2019. But that didn’t happen.
Before the announcement of the winner of the competitive selection, which took place not on July 12, as expected, but on July 26 (with violation of the deadline), the chairman of the Inter-Departmental Commission, the Minister of Energy of Ukraine Ihor Nasalyk said that Caspian Drilling International (which was considered the favourite of the competition) withdrew its application – according to the minister, probably because of the pressure from Russia. Although the company wrote in its press release about the violation of the order of the competition, which makes it legally vulnerable in case of appealing the results by other participants. Thus, Caspian Drilling International stopped participating in the competition. It should be noted that during the entire selection period, the company Caspian Drilling International was under constant information pressure (details of the discrediting information campaign can be found on the link), which also did not add the desire of Azerbaijanis to invest in the development of the Ukrainian shelf.
Later, Ihor Nasalyk said that the application from the American Trident Black Sea was the best from both financial and political point of view. Therefore, the question of its victory was put to the vote. Six out of eight members of the Commission voted for Trident. A representative of the Ministry of Economic Development and a deputy Nataliia Katser-Buchkovska refrained.
The company Frontera Resources (the USA, headquartered in Houston, Texas) as the initiator and a participant of the competition announced the preparation of the claim to the Inter-Departmental Commission. “In case the PSA competition for the Dolphin site is not canceled, Frontera Resources reserves the right to apply to the court. In our opinion, the process of preparation of the competition and its holding is at odds with international practice,” said Mr. Mamulaishvili, the president and founder of Frontera Resources.
On July 27, the acting Prime Minister Volodymyr Groysman said that he would support the organization of new competition because he believes that the proposals of the participating companies were not profitable enough for Ukraine. On July 28, his position was supported by the head of the NSDC Mr. Danyliuk, calling this competition “a benchmark of whether Ukraine is ready to move away from the ‘contractual’ distribution of deposits”. The Minister of Finance of Ukraine Mrs. Markarova said that “it is important that the PSA process in Ukraine is not discredited, but there is more question around the Dolphin than answers”. Thus, it can be argued that despite the decision of the Inter-Departmental Commission, the competition may not take place.
The founder of Trident Acquisitions Ilya Ponomarev has already stated that in case of the cancellation of the competition, he will have to sue the Ukrainian government. Thus, the development of this site may be postponed for two to three years. As an alternative to litigation, he proposed to involve a large international company (major) in the development of the Dolphin site with the mechanism that will suit the government. Note that “majors” are transnational vertically integrated corporations such as Shell, Chevron, Exxon Mobil, BP, etc.
Thus, we are now in a situation of “war of all against all”. In any case, there will be lawsuits and uncertainty. In addition, we should not forget about the position of Naftogaz Ukraine, which also prepares claims to the Cabinet in case the competition is recognized as valid. Let’s recall that Ukrgasvydobuvannia had its own plans for the production of hydrocarbons on the shelf. (Read more in the articles “Will Odesa become the new centre of gas production in Ukraine?” and “Ukraine’s at the early start of hydrocarbon production in the Black Sea”).
It should be noted that holding a new competition with other application deadlines, extended to up to six months, does not guarantee that large oil and gas companies will enter Ukraine. The Black Sea is now in the state of very unfavourable market conditions and low demand for the development of new sites. Shell, which develops its block in the Khan Kubrat area off the coast of Bulgaria, has not received commercially attractive production rates of hydrocarbons after drill wells, and Exxon Mobil, along with OMV Petrom, is developing a Neptun Deep block off the coast of Romania, invested $700 million, but on Friday, August 2, it announced its intention to withdraw from the project and sell its shares to everyone who is interested. And it is worth noting that no one is interested yet. Thus, the “majors” bear only losses in the Black Sea, which does not add arguments “for” to the potential large investors in the Ukrainian projects.
The situation with the PSA competition for Dolphin is not the first reputational failure in the history of our state. The last such competition for the development of offshore oil and gas sites took place in 2006, when the right to develop the Prykerchenska oil and gas site (12.96 thousand km2) was received by Vanco International, a 100 percent subsidiary of Vanco Energy Company (USA). Despite the victory at the selection stage, the company was not able to start drilling, because after a year and a half after approval, it transferred the rights and obligations under the PSA to Vanco Prykerchenska established in August 2007. And then it got a lot of political and bureaucratic problems that ended with the cancellation of the license in 2008. Further, the Arbitration Institute of the Stockholm Chamber of Commerce approved a settlement agreement between Ukraine and Vanco Prykerchenska at the end of December 2012. In January 2013, an energy holding of Rinat Akhmetov DTEK bought Vanco Ukraine (British Virgin Islands), and the Cabinet of Ministers cancelled the order to terminate the production-sharing agreement with the company Vanco International Limited in February of the same year. And then the territory of the Prykerchenska oil and gas area got under the actual control of the Russian Federation.
Anyway, “the struggle continues”, and it means we’re “standing” and following further steps of the stakeholders. As they say, no one said it would be easy.
Text by Volodymyr Dolnyk