OREANDA-NEWS. June 25, 2008. The President of Ukraine, Viktor YUSHCHENKO, has cancelled by his decree the Resolution of the Government dated May 21, 2008 No.740-r On Termination of the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on Distribution of Hydrocarbons to be Produced in the Kerch Section of the Black Sea Continental Shelf.

The text of the decree is available on the official website of the country’s leader.

The document pointed out that the Resolution had terminated the participation of the state of Ukraine in the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on distribution of hydrocarbons to be produced in the Kerch section of the Black Sea continental shelf, and had cancelled the Resolution of the Cabinet of Ministers dated October 3, 2007 No.828-r On Entering into an Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on Distribution of Hydrocarbons to be Produced in the Kerch Section of the Black Sea Continental Shelf.

The President reminded that the National Security and Defense Council of Ukraine stated that this decision by the Government had caused a very serious situation, thus complicating the development of the hydrocarbon potential in the Ukrainian part of the continental shelf, posing a threat to the energy security of Ukraine, entailing probable significant financial losses to Ukraine and damaging the image of the state as a reliable would-be partner. Furthermore, the NSDC admitted that the Governmental decision to terminate the agreement with Vanco International Limited was not in line with the national interests of Ukraine and endangered the national security of the Ukrainian economy.

This position of the National Security and Defense Council of Ukraine was based on the conclusions of a working group set up by the NSDC.

In particular, having studied the decisions and papers to prepare and hold an open tender for the right to enter into an agreement on the distribution of hydrocarbons , to execute and conclude the agreement, as well as assignment of rights and obligations under the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on distribution of hydrocarbons to be produced in the Kerch section of the Black Sea continental shelf, the Interdepartmental Working Group came to the conclusion that the termination of the Agreement by the Cabinet of Ministers would unilaterally result in a claim filed by the company against the state of Ukraine with the Arbitration Institute of the Stockholm Chamber of Commerce as stipulated in Article 47 of the Agreement (the evidence of which is also a written request sent by Vanco Prykerchenska Ltd. to the Cabinet of Ministers to establish a pre-court procedure for the resolution of the dispute, which foreruns arbitration in compliance with Article 47 of the Agreement). The consideration of such a claim by international arbitration will allow for a claimant, according to Article 49 of the Agreement, the reimbursement of not only direct but all losses without any limitations. As the Agreement provides for the production of 264m tons of standard fuel with a current value of over USD 200bn, the estimated investor’s losses would reach dozens of UAH billions, which in the case of lost arbitration Ukraine would have to pay out of the state budget or at the expense of its foreign property.

V. YUSHCHENKO also noted that the governmental decision to terminate the first agreement on the sharing of hydrocarbons may suspend potential investment projects in the Ukrainian deepwater shelf by other leading foreign oil companies, which, in its turn, would mean that quite significant revenues would not go to the state budget of Ukraine.

It should be also taken into account that entering and implementing the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on distribution of hydrocarbons could allow an increased tempo for diversifying the sources of fuel and energy resource supply to Ukraine. An estimated consequence of the Agreement’s termination is the loss of a practicable diversification of hydrocarbon provision to Ukraine due to the failure to obtain over 10m tons of hydrocarbons per year (that is almost equal to the annual oil imports to Ukraine), which is a threat to the national security of the state in the economic area.

Under such circumstances, the Resolution of the Cabinet of Ministers No.740-r makes it impossible to fully perform one of the most important state functions defined in the first part of Article 17 of the Constitution of Ukraine – to ensure economic security. Therefore, this resolution of the Cabinet of Ministers of Ukraine contradicts the first part of Article 17 of the Constitution of Ukraine, which is, in accordance with the third part of Article 8 of the Ukrainian constitutional law, a norm of direct effect.

In view of the above, the President terminated the validity of the Resolution of the Cabinet of Ministers of Ukraine dated May 21, 2008 No. 740-r On Termination of the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on Distribution of Hydrocarbons to be Produced in the Kerch Section of the Black Sea Continental Shelf.

The decree comes into effect after its publication.

Furthermore, the President sent a request to the Constitutional Court of Ukraine to consider the compliance of the Resolution of the Cabinet of Ministers of Ukraine dated May 21, 2008 No. 740-r On Termination of the Agreement between the Cabinet of Ministers of Ukraine and Vanco International Limited on Distribution of Hydrocarbons to be Produced in the Kerch Section of the Black Sea Continental Shelf with the Constitution of Ukraine, namely Article 17 thereof.

UNIAN information
In 2006, Vanсo International Ltd. won the first open tender and in October 2007 signed a Product Sharing Agreement (PSA) with the Cabinet of Ministers of Ukraine on joint distribution of products to be produced in the Kerch section of the continental shelf of the Black Sea.

Vanco International assigned all its rights and obligations concerning PSA to the company Vanco Prykerchenska.

On April 25 this year, the Ministry for Environmental Protection cancelled the license of Vanco Prykerchenska Ltd. to use sub-surface resources.

Vanco then started arbitration procedure against the government of Ukraine and stated that it considered the license’s cancellation illegal.

On May 21, the Cabinet of Ministers of Ukraine decided to unilaterally cancel the product sharing agreement with Vanco.