Welcome to the U.S.-Ukraine Business Council

By Oleksiy Doroshenko, for EPravda
Translated to English by Anna Ivanchenko
Ukrayinska Pravda (UP), Kyiv, Ukraine, Fri, Nov 2, 2007

The saga with concluding the first in the history of independent Ukraine
agreement on distribution of oil products extracted in Black Sea shelf
achieved its climax.

The process lasted for more than a year and a half. During this time all
terms envisaged by legislation expired, the government changed but the
American company using political factors among others managed to
achieve its goal.

In particular, on Friday in Kyiv the Cabinet of Ministers and Vanco
International Ltd., the subsidiary of Vanco Energy Company (Houston, USA)
signed the long-awaited agreement on distribution of products the extraction
of which will be carried out on the territory of Transkerch oil and gas
bearing field of the Ukrainian part of the shelf.

EP decided to recall how everything started and to analyze which negative
and positive results Ukraine will obtain from this agreement.
For the time being Ukraine stays the only country of the Black Sea basin
which does not extract minerals on its part of deep shelf. In particular, in
the 90s Romania obtained a British corporation Ramco and an Austrian
corporation OMV for exploration of its deep sea fields Swan and Rhapsody.

In 2004 Turkey together with British company ?P Inc. completed 3D
exploration of fields on the depth of more than 1 km near Georgian border
while in 2003 Georgia launched the project of joint 3D exploration of its
part of the shelf with an American company Anadarco.

Ukraine made its first real steps of exploration of deep sea shelf only in
spring 2005 when it gave an exploration license for middle-depth oil and gas
bearing structure Subbotino situated on the depths from 50 to 100 m, to
state joint-stock company "Chornomornaftogaz".

In its turn, Chornomornaftogas concluded an agreement on joint activities
with an American corporation Hunt Overseas Oil Inc. on additional
exploration and research and industrial maintenance of promising fields with
an area of 12 thousand sq. km to the south of Kerch strait. Until now all
projects on shelf exploration failed as there was no distribution agreement.

The last license for developing Black Sea shelf was given in 1999 to an
English company JP Kenny. In 1997 the license for shelf development in the
area of Shtormova structure was obtained by Shell. However, this project
ended in fiasco, as the minerals were not found in the end.

In December 2005 Ukraine announced the first bidding for the right of
carbohydrates extraction in Transkerch area of the Ukrainian part of the
Black Sea shelf.
During the primary stage of the bidding process 15 companies expressed
their interest to participate. Among them one could find both commonly
acknowledged "old hands" of extraction and novices.

The news of RosUkrEnergo A.G. purchasing introductory documentation
became a surprise as it has no experience in deep sea shelf exploration.

Only 5 candidates submitted their bids on time and created rather unexpected
unions. Separate bids were submitted by Hunt Oil Company of Ukraine
(Poland), Vanco International Ltd (USA) and Ukrainian JSC Ukrnafta, joined
bids by Shell, Exxon Mobile (USA), Turkiye Petrolleri A. O. (Turkey) and
Alphex One Ltd (United Kingdom).

It is interesting to note that Shell and Exxon competing on the global
market of energy carriers very rarely join their efforts. The last precedent
occurred several years ago when these companies joined to obtain control
over gas market in Germany. Most experts believed that this union would
win. But they were wrong.

In particular, 25 days were enough to define the winner of the bidding
process. The commission submitted its conclusions based on the analysis of
participants' offers for governmental review, and the government in its turn
announced Vanco International Limited the winner. Many participants were
surprised and disappointed with the decision, to say the least.

However, all of them refused to supply any official comments except SJSC
Chornomornaftogaz general manager of the time Oleksandr Horoshkevych.

"If we compare this company with other participants of the bidding process
such as Shell, ExxonMobil, Hunt Oil Company, it is undoubtedly less known
in the world, we don't know any special activities of this company in the
field of oil and gas extraction. In our opinion, the commission's decision
looks strange but we don't want to comment on it," he said.

The surprise of well-known companies can be understood by only looking at
the history of Vanco development. In particular, from 1973 till 1996 the
company worked in the Northern Sea and discovered several oil and gas
bearing fields on the Netherlands shelf. Of course, this can undoubtedly be
considered one of its achievements.

However, with the change of conditions on global carbohydrates market (sharp
increase of demand and an adequate leap of resource prices as a consequence)
the company was removed from this favorable region by its more well-known
competitors. After that it started working in a new direction, which is deep
sea exploration of underexplored regions in Western Africa.

Many specialists call Africa the outskirts of global oil extraction, and
famous companies are reluctant to work there - first of all, because of
terrorists, and secondly because of corruption in African countries.

However, even without competitors Vanco didn't manage to achieve notable
results. That is why Ukrainian and foreign experts were surprised with the
governmental choice.
Let us finally pass to the agreement itself. Ukraine expects more than 15
billion US dollars of investments during thirty years and also more than 200
million tons of extracted carbohydrates. Project realization is planned to
provide more than 200 billion UAH for the state budget.

The numbers do impress but for the time being none of the sides has been
able to announce the most intimate part of the agreement, so to say - and
that is the proportion of production distribution.

According to the head and founder of Vanco Jean Van Dyke, the
announcement of these data is the priority of Ukrainian government. At the
same time, approximate distribution needs to be carried out in the following

way: 65 per cent to the Ukrainian government and 35 per cent to Vanco.

"65 to 35 is an approximate calculation. First of all, in the beginning we
plan to recover the costs. During this stage one proportion is going to
work. During the second stage, directly during extraction, the other
proportion will be valid. Besides, one shouldn't forget that we also pay a
revenue tax. And if we add up everything, the final result will show an
average distribution of 65 to 35," said the head of Vanco.

If we turn to global practice we can assume that during the first stage when
costs are being recovered the American side will obtain the major part of
products and during the second stage it will be Ukraine.

Then it becomes understandable why the government doesn't hurry in
disclosing the information because even in the abovementioned Africa the
distribution in favor of the state amounts to much more than the average 65
per cent.

Besides, it is necessary to keep in mind that already in three years after
the work on shelf the American investor can leave Ukraine. In particular,
the first stage of field development amounts to eight years in total: three,
three and two years.

During the first three years of work in Transkerch field the company intends
to invest 100 million US dollars, to carry out 3D seismics on the territory
of 3 thousand sq. km and to drill two wells. "By the end of the first three
years we must provide 25 per cent of licensed area in Ukraine's disposal.

In fact, in three years we can refuse from the license if the wells turn out
to be dry," stressed Jean Van Dyke. During the next three years the company
intends to invest 130 million US dollars, to carry out 3D seismics of
additional territories and to drill two more wells. "In eight years we must
surrender the whole area to Ukraine except the fields we leave to
ourselves," said the head of Vanco.