Business view on the state of implementation and problems of application of amendments to legislative acts in the field of subsoil use
On December 19, 2023, a meeting of the Verkhovna Rada Committee on Environmental Policy and Nature Management was held to discuss problematic aspects of applying amendments to legislative acts in the field of subsoil use. The meeting was attended by EBA experts who had the opportunity to voice key issues and proposals for their solutions.
It should be reminded that in 2022, comprehensive changes were made to the main document in the field of subsoil use – the Subsoil Code of Ukraine – by adopting the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Improving Legislation in the Field of Subsoil Use” No. 2805-IX dated December 1, 2022.
According to the EBA member companies, the adopted amendments have a generally positive effect on the industry, as they contribute to the development of subsoil use in Ukraine and the European integration of the industry. The amendments made it possible to digitalize processes in the industry, introduce free circulation of special permits for subsoil use, simplify access to land plots for subsoil use, etc. In addition, the amendments to the Code have made the process of obtaining special permits for subsoil use transparent and predictable, as the rules have remained unchanged since the amendments came into force (March 28, 2023).
Despite the positive impact on the industry, the EBA experts draw attention to certain problematic aspects of the application of the relevant amendments in conjunction with the changes introduced by the Law of Ukraine “On Amendments to Certain Legislative Acts of Ukraine on Improving the Legislation on the Extraction of Amber and Other Minerals” No. 402-IX dated December 19, 2019.
Among the main legislative conflicts, “non-working” norms, and unadopted bylaws to implement the requirements of the laws, the business draws attention to the following provisions.
Regarding the provisions of Law of Ukraine No. 402-IX:
Lack of practical implementation of the provisions of Article 18-1 of the Code on the reservation of land plots for subsoil use, in particular, access to subsoil plots under forest plantations
The Procedure for Cutting Down Trees and Shrubs and Using the Wood Obtained in the Event of Changing the Purpose of Land Forest Plots or Establishing an Easement to use Them for Purposes Other Than Forestry and Transferring Land Forest Plots to Non-forest Land, approved by Resolution of the Cabinet of Ministers of Ukraine No. 105 of February 4, 2023 (hereinafter – Procedure No. 105), does not provide for conditions for cutting down trees and shrubs to use them for purposes other than forestry. Accordingly, subsoil users using land plots located within forest plantations do not have legal grounds to cut down trees and shrubs under the Agreement, which effectively prevents their access to mineral resources.
Regarding the provisions of Law of Ukraine No. 2805-IX:
State Examination and Evaluation of Materials of Geological and Economic Assessment of Deposits of Specific Types of Minerals
Clause 10 of the Regulation on the Procedure for Conducting State Expert Examination and Evaluation of Mineral Reserves, approved by CMU Resolution No. 865 of December 22, 1994, provides that “the content, design, and procedure for submitting materials of geological and economic assessment of deposits of specific types of minerals for state examination and evaluation are determined by the Ministry of Environment.” As of January 8, 2024, the relevant order of the Ministry of Environment has not been adopted.
Extension of the timeframe for works in connection with the introduction of martial law
Part 5 of Article 15 of the Code provides that “Special permits for the use of subsoil, which expired during the period of martial law, and the terms of work on the subsoil site, established by the relevant agreements on the terms of subsoil use, for the period of martial law and within six months after its termination or cancellation, shall be considered extended automatically without a decision of the central executive body implementing the state policy in the field of geological exploration and rational use of subsoil.”
According to the EBA experts, the deadlines for the execution of the works specified in the List of objects of work and research on the geological exploration of subsoil by Form No. 3-gr (Annex to Order No. 263) are subject to automatic extension for the period of martial law and for six months after its termination or cancellation, however, the relevant legislative provision has not been approved.
Absence of an approved list of subsoil areas (mineral deposits) of strategic importance for the sustainable development of the economy and defense capability of the state, which will be provided for use through auctions for the sale of permits
The EBA member companies point out that due to the lack of a list of subsoil sites (mineral deposits) approved by the CMU, it is currently impossible to exercise the right to obtain a special permit for subsoil use granted by the Code. This significantly slows down the attraction of investments in subsoil use in Ukraine, leads to the loss of budget revenues from the sale of such special permits, and limits the opportunities for the development of both the extractive industry and the technological industries and the independence of industries critical to national security from imported raw materials.
Concerning the special permit for such type of subsoil use as “creation of geological territories and objects of important scientific, cultural, sanitary and health significance (scientific testing grounds, geological reserves, nature reserves, natural monuments, medical and health facilities, etc.),” we propose to establish in law a clear and fair mechanism for transforming special permits for subsoil use for “creation of geological territories and other objects” into production sharing agreements.
Sanctions policy
The EBA experts propose to change the approach to the state’s sanctions policy towards extractive companies.
According to Law #1644-VII, founders/members/shareholders/ultimate beneficial owners of a legal entity, including Russian citizens, may be subject to sanctions in the form of blocking assets or seizure of assets/corporate rights of a legal entity, thus limiting the right of Russian citizens to dispose of the legal entity’s assets.
Representatives of the business community believe that restrictions on obtaining new special permits for subsoil use or extending the validity of existing permits by such legal entities seem to be somewhat excessive and economically inexpedient.
In addition, the suspension of special permits for subsoil use (in the absence of sanctions directly against subsoil users) actually leads to the following:
- the suspended special permit is out of the economic life of the state for the entire period of suspension (it cannot be sold at auction, and a new subsoil user cannot be attracted)
- the accrual and payment of rent for subsoil use ceases, and other tax revenues to the state and local budgets decrease;
- production of scarce energy resources and construction materials is reduced, etc;
- rational use of subsoil, including with reserves prepared for extraction, is impossible;
- loss of mineral reserves due to geological processes (especially in oil and gas fields);
- environmental risks and threats to the protection and preservation of subsoil are created;
- jobs are lost due to the suspension of economic activities of subsoil users, which may create social tensions and additional state expenditures for social support for the families of unemployed workers.
The purpose of sanctions is to prevent the use of subsoil to the detriment of the state’s interests. According to the EBA experts, this goal can be achieved without suspending special permits or using other restrictions, including sanctions.
Impossibility to extend the validity of the special permit
An integral part of a special permit for subsoil use is an agreement on the terms of use of a subsoil site concluded between the State Service of Geology and Subsoil and the subsoil user. It consists of a work program and special conditions for subsoil use, including the types, scope, and timing of work on the subsoil site. According to the CMU Resolution No. 615, the absence of violation of the subsoil use conditions stipulated in the subsoil use agreement allows for the termination of the special subsoil use permit.
At the same time, Law No. 2805-IX introduced new grounds for refusing to extend the validity of a special subsoil use permit, in particular, if less than 1% of the balance sheet reserves have been extracted.
Thus, there is a conflict when the Work Program provides for production only during the last quarter of the special permit period, and this will obviously be less than 1% of the reserves, but according to Law No. 2805-IX, this ground is the basis for refusing to extend the special permit. The business understands that this is one of the methods of combating “dormant licenses”. At the same time, this approach should not interfere with the work of other companies that carry out a full range of activities by the terms of the special permit.
A detailed list of problems with the implementation of legislative changes in the field of subsoil use, the justification of the importance of their solution, and proposals can be found in the EBA position paper.
We sincerely thank the Committee of the Verkhovna Rada of Ukraine on Environmental Policy and Nature Management for joining the discussion and providing expertise, as well as possible consideration of the business community’s position!
