Risk factors one should consider when investing in Oil &Gas business in Ukraine
Before deciding whether to invest in any o&g project in Ukraine (“Project”),prospective investors should carefully consider the risks described below. If any of the following events actually occur,business,financial condition and the results and the scope of the operations could be materially and adversely affected. In such case,an investor may lose all or part of his or her investment.
The information set out below does not purport to be an exhaustive summary of the risks that may affect Project and additional risks and uncertainties may also have an adverse effect on the business.
Technical Risk
Return on investment is dependent upon successful oil and gas production. Company may experience a revenue decrease due to overestimation of reserves and oil or gas production profiles or higher capital costs or operating costs. Company may also suffer reduced revenues because of product transportation difficulties,or delays,neither of which can be foreseen.
The Independent Competent Person’s Reports are usually believed to represent only the most reliable estimates currently available. Estimation of reserves is inherently inexact and the accuracy of any reserve estimate is a function of the quality of available data,engineering and geological interpretation,judgment,production projections,maintenance and development capital,and other uncertainties inherent in estimating quantities of recoverable oil and gas. Thus,there can be no guarantee that estimates of quantities of oil and gas disclosed in the Independent Competent Person’s Report will be produced.
Ability to implement work programme
Under the JV and the JAA,parties must mutually agree on an annual work programme and budget for operations. Additionally,the parties must jointly agree any changes to such work programme and budget. Therefore,single party’s ability to implement the work programme outlined in any investment proposal and in the Reserve Report is conditional upon obtaining other party’s approval. Parties to the agreement may also disagree on the technical or commercial merits of the work programme and may agree to reduce,or increase,the number of new wells or workovers,the depths to which the wells will be drilled,and the timing of the drilling or workover of the wells.
One party may have internal reasons (e.g. budget,lack of finance) or there may be external reasons (such as unfavourable Ukrainian economic or political conditions) as to why each party may not approve the work programme and budget in general. In such case under the JAA,either party may propose to conduct operations that have not been approved by the other party on a ‘‘high risk’’ basis. In such event,the party proposing to conduct the high risk operation may proceed and it is entitled to recoup 200 per cent. of the costs it incurred in such operation before the other party is entitled to any of the oil and gas or profits from the well or wells drilled as a high risk operation. The JAA requires,however,that both parties consent to the high risk operation.
Market risk
The marketing of Project’s production of oil and gas may be dependent on market fluctuations and the availability of processing and refining facilities and transportation infrastructure,including access to shipping facilities,pipelines and pipeline capacity at economic tariff rates over which company may have limited or no control. Pipelines may be inadequately maintained and subject to capacity constraints and economic tariff rates may be increased with little or no notice and without taking into account producer concerns. The ability to export oil and gas may depend on obtaining licences and quotas,the granting of which may be at the discretion of the relevant regulatory authorities. There may be delays in obtaining such export licences and quotas leading to the income receivable by Project from the export of oil and gas being adversely affected,and it is possible that from time to time export licences may be refused.
Prices for oil and gas
The demand for,and price of,oil and gas is highly dependent on a variety of factors,including international supply and demand,the level of consumer demand,weather conditions,the price and availability of alternative fuels,actions taken by governments and international cartels,and global economic and political developments. International oil prices have fluctuated widely in recent years and may continue to fluctuate significantly in the future. In addition,and although not foreseen,the Ukrainian government may oblige domestic producers to sell oil or gas to the state or domestic purchasers at prices well below international levels for indeterminate periods of time.
Currency exchange risk
Domestic sales of oil and gas in Ukraine are made in local currency (hryvnyas,UAH) and then converted to US$ (US dollars). The USD:UAH exchange rate may move adversely to affect oil and gas prices. In addition,there can be no assurance that the Ukrainian authorities may not introduce price stabilisation mechanisms which adversely affect oil and gas prices in $ terms for the Group.
Economic and political risk
Risks associated with Project’s operations in Ukraine may include contract renegotiation,contract cancellation,economic,social,or political instability or change,hyperinflation,currency non-convertibility or instability and changes of laws affecting foreign ownership,government participation,taxation,working conditions,rates of exchange,exchange control,exploration licensing and petroleum export licensing and export duties as well as government control over domestic oil and gas pricing.
Legal systems
Ukraine has less developed legal systems than more established economies which could result in risks such as (i) effective legal redress in the courts of such jurisdictions,whether in respect of a breach of law,regulation or contract,or in an ownership dispute,being more difficult to obtain;(ii) a higher degree of discretion on the part of governmental authorities ;(iii) the lack of judicial or administrative guidance on interpreting applicable rules and regulations;(iv) inconsistencies or conflicts between and within various laws,regulations,decrees,orders and resolutions;or (v) relative inexperience of the judiciary and courts in such matters. In certain jurisdictions the commitment of local business people,government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain,creating particular concerns with respect to business’ licences and agreements.
These may be susceptible to revision or cancellation and legal redress may be uncertain or delayed. There can be no assurance that joint ventures,licences,licence applications or other legal arrangements will not be adversely affected by the actions of government authorities or others and the effectiveness of and enforcement of such arrangements in these jurisdictions cannot be assured.
Drilling and operating risks
Exploration,development and production activities may be delayed or adversely affected by factors outside the control of company. These include adverse climatic conditions,the performance of joint venture or farm-in partners on whom company may be or may become reliant,compliance with governmental requirements,shortage or delays in installing and commissioning plant and equipment or import or customs delays. Problems may also arise due to the quality or failure of locally obtained equipment or interruptions to services (such as power,water,fuel or transport or processing capacity) or technical support which result in failure to achieve expected target dates for exploration or production and/or result in a requirement for greater expenditure. Drilling may involve unprofitable efforts,not only with respect to dry holes and non-commercial wells,that is wells which,though yielding some oil or gas,are not sufficiently productive to justify commercial development or cover operating and other costs. Completion of a well does not ensure a profit on the investment or recovery of drilling,completion and operating costs.
Substantial operational risks are involved in the drilling for,development of and production from oil and gas fields,including blow-outs,cratering,explosions,pollution,seepage or leaks,earthquake activity,unusual or unexpected geological conditions and other hazards which may delay,or ultimately prevent,the exploitation of such fields or may result in cost overruns or substantial losses to Project due to substantial environmental pollution or damage,personal injury or loss of life,clean up responsibilities,regulatory investigation and penalties or suspension of operations. Such hazards can also severely damage or destroy equipment,surrounding areas or property of third parties. Damage or loss occurring as a result of such risks may give rise to claims against company.
Environmental Regulation
The Government of Ukraine,the Ministry of Natural Resources,and other competent agencies establish special rules,restrictions and standards for enterprises conducting activities affecting the Ukrainian environment. A principle of Ukrainian environmental law is that any environmental damage caused by an unlawful activity (i.e. activity conducted in violation of existing standards and restrictions) must be fully compensated.
