Vanquishing vanco
27 May 2008
Published in
Inform
issue #72
See the full issue here.
The Ukrainian government has unilaterally terminated its Production Sharing Agreement with Vanco Energy, in a move that goes beyond its earlier decision to cancel the Texan oil company’s hydrocarbon exploration/extraction license. Yet the prosecutor general’s insistence that the license be restored has turned the commercial spat into a major bone of contention between the government and a combative President Viktor Yushchenko. As claim and counter-claim are bandied between the two-sides, what are the facts behind the government’s decision?
The Black Sea and the Sea of Azov around the Crimea are believed to be rich in oil and gas, with estimated resources of 635 million tonnes of crude oil and 1.67 billion cubic metres of natural gas. Ukraine is the only state bordering the Black Sea that is not tapping the natural resources in its deep-water shelf. Since the mid-1990s, a string of licenses were granted to companies to extract resources but the explorers met with little to no success.
See the full issue here.
The Ukrainian government has unilaterally terminated its Production Sharing Agreement with Vanco Energy, in a move that goes beyond its earlier decision to cancel the Texan oil company’s hydrocarbon exploration/extraction license. Yet the prosecutor general’s insistence that the license be restored has turned the commercial spat into a major bone of contention between the government and a combative President Viktor Yushchenko. As claim and counter-claim are bandied between the two-sides, what are the facts behind the government’s decision?
The Black Sea and the Sea of Azov around the Crimea are believed to be rich in oil and gas, with estimated resources of 635 million tonnes of crude oil and 1.67 billion cubic metres of natural gas. Ukraine is the only state bordering the Black Sea that is not tapping the natural resources in its deep-water shelf. Since the mid-1990s, a string of licenses were granted to companies to extract resources but the explorers met with little to no success.
In 2005, a first tender for the exploration and
extraction of hydrocarbons in the Prykerchenska part
of the Ukrainian Black Sea shelf was announced. Up
for grabs were exploration and extraction rights over
an area around 12,900 square kilometres (5,000 square
miles), located southeast of the Crimea Peninsula.
Out of 19 interested companies 5 submitted tenders. An outsider, Vanco International, surprisingly won the tender, beating a joint bid by heavyweights Shell and Exxon Mobil. Its reward would be a license to drill for hydrocarbons and to enter into a Production Sharing Agreement (PSA) with the government – whereby revenues from production would be divided between the state and the company on agreed terms.
According to Alla Yeremenko writing in Zerkalo Nedeli: “Incidentally, many experts think that the reason a little known company could win such a serious tender was due only to its close relations with separate ministers of Yuriy Yekhanurov's cabinet, for instance, with the then Minister of Environment. As well as due to Viktor Yushchenko’s patronage, who said in autumn 2007 in his interview to Zerkalo Nedeli that the PSA signed with Vanco was a considerable achievement and substantial step ahead in the way of developing hydrocarbon fields in the Black Sea shelf. The president, certainly, shouldn’t go deeply into the content of the PSA. However, what about information prepared by Special Services for him?
“Analytical information prepared by the Security Service of Ukraine on oil-and-gas matters is traditionally ignored by our president. This happened with RosUkrEnergo, when the president ignored 19 analytical reports on the consequences of strengthening this company’s position in Ukraine’s energy market. The same happened with the information from Special Services on the consequences of signing the PSA with Vanco.”
Prolonged and Difficult Negotiations
Negotiations on the PSA did not run smoothly and took 18 months to conclude. In the first draft Vanco demanded 80 percent of the production from the development phase and 60 percent thereafter. This first phase was negotiated down to 35 percent to Ukraine and 65 percent to Vanco. Then the company tried to ensure that it, and not the state, could define the commercial value of the fields. Efforts by Vanco to prolong the exploration period to an unspecified term and delay the transmission of property rights to the state also proved major sticking points. The company then sought to drill in more shallow waters, outside the area agreed, at a place where Ukrainian geologists had indicated hydrocarbon deposits.
Transfer of Rights?
The PSA was eventually signed in 2007. Yet curiously, the government of the then Prime Minister Viktor Yanukovych issued the license to Vanco Prykerchenska, not the legal entity that won the tender. According to Prime Minister Yulia Tymoshenko, Vanco Prykerchenska, registered in the British Virgin Islands, belonged to four Ukrainian students with only token assets.
“All these riches were given to one company. When we investigated the situation, it turned out that this company was registered to four students aged 20 to 22 years,” said Ms Tymoshenko.
Also, the premier made it clear in March that she considered the terms of the 30-year PSA unfair and asked for Vanco to renegotiate a deal, which it refused to do so.
In order to exploit the offshore shelf region, Vanco Prykerchenska presented to the Ministry of Environmental Protection its statutes. It soon became apparent that Vanco Prykerchenska’s ownership was far from straight forward.
Following an investigation, the Minister of Environmental Protection, Heorhiy Philipchuk, on 25 April, revoked Vanco’s license. He cited that the tender conditions did not allow it to pass the right to develop the resources to Vanco Prykerchenska, which did not exist when Vanco won the tender.
Partners Disclosed
The plot thickened on 15 May when Vanco Energy’s Senior Vice President, Jeffrey Mitchell, revealed that Vanco Energy had three partners in Vanco Prykerchenska: the Donetsk Fuel and Energy Company (DTEK), linked to billionaire and Party of Regions backer, Rinat Akhmetov; Shadowlight Investments Ltd, linked to Russian businessman Yevgeny Novitsky; and Integrum Technologies (Austria), whose owners are unknown. Some have alleged this latter vehicle could be a cover for Gazprom – Russia’s state-owned gas company.
Gene Van Dyke, Chairman and CEO of Vanco Energy has strenuously denied that Vanco Prykerchenska was owned by four students and refuted claims that the company was preparing to sell its stake to Gazprom. However, his colleague, Mr Mitchell, when asked about the beneficial owners of Integrum Technologies, said, “I plead ignorance.”
On 19 May the president signed a decree, at a session of the National Security Defence Council, to resume Vanco’s license. This gave rise to accusations that he had been openly lobbying in favour of the Texan company.
Olesksandr Turchynov, First Deputy Prime Minister, went as far as saying “the president’s decree openly indicates corruption of higher officials.” Mr Turchynov went on to call upon American officials to launch an investigation into the scheme.
The affair now pitted the Cabinet of Ministers against the President’s Office, causing it to assume significance far beyond a commercial dispute.
After much deliberation, on 21 May, the government announced its decision to terminate the PSA and return the shelves to state control. This evoked a barrage of responses from all sides.
US Ambassador William Taylor expressed that he was “very disappointed” by the government’s decision and said for the government to attract investors, which is vital for its energy security, “it needs to make clear that it respects the sanctity of contracts and the rule of law.” Mr Taylor then requested the government “to reconsider its decision and return to a policy of dialogue.”
Ironically, the government is in full agreement with Mr Taylor on the need to attract investors and have respect for the sanctity of contracts and the rule of law. The Block of Yulia Tymoshenko made these points the cornerstones of its “Contract with Investors” launched last September.
The fact remains that Vanco should not have breached its agreement by transferring its rights to Vanco Prykerchenska, the beneficial ownership of which is far from clear. Furthermore, its behaviour during the 18 months of PSA negotiations undermined the faith of the very ministries it was designed to work hand-in-glove with. Subsequent probes into the company by the Ukrainian authorities gave further cause for alarm, adding to the government’s worries over the company’s probity and intentions.
The importance of the deep-water shelf to Ukraine’s future energy security makes it a strategic asset and, as such, it is vital that those charged with its development act in a totally transparent and accountable way. Despite all the political bluster, the issue of transparency lies at the heart of this affair. It should not be compromised and, together with accountability and the rule of law, must be the basis for determining Ukraine’s energy security.
Out of 19 interested companies 5 submitted tenders. An outsider, Vanco International, surprisingly won the tender, beating a joint bid by heavyweights Shell and Exxon Mobil. Its reward would be a license to drill for hydrocarbons and to enter into a Production Sharing Agreement (PSA) with the government – whereby revenues from production would be divided between the state and the company on agreed terms.
According to Alla Yeremenko writing in Zerkalo Nedeli: “Incidentally, many experts think that the reason a little known company could win such a serious tender was due only to its close relations with separate ministers of Yuriy Yekhanurov's cabinet, for instance, with the then Minister of Environment. As well as due to Viktor Yushchenko’s patronage, who said in autumn 2007 in his interview to Zerkalo Nedeli that the PSA signed with Vanco was a considerable achievement and substantial step ahead in the way of developing hydrocarbon fields in the Black Sea shelf. The president, certainly, shouldn’t go deeply into the content of the PSA. However, what about information prepared by Special Services for him?
“Analytical information prepared by the Security Service of Ukraine on oil-and-gas matters is traditionally ignored by our president. This happened with RosUkrEnergo, when the president ignored 19 analytical reports on the consequences of strengthening this company’s position in Ukraine’s energy market. The same happened with the information from Special Services on the consequences of signing the PSA with Vanco.”
Prolonged and Difficult Negotiations
Negotiations on the PSA did not run smoothly and took 18 months to conclude. In the first draft Vanco demanded 80 percent of the production from the development phase and 60 percent thereafter. This first phase was negotiated down to 35 percent to Ukraine and 65 percent to Vanco. Then the company tried to ensure that it, and not the state, could define the commercial value of the fields. Efforts by Vanco to prolong the exploration period to an unspecified term and delay the transmission of property rights to the state also proved major sticking points. The company then sought to drill in more shallow waters, outside the area agreed, at a place where Ukrainian geologists had indicated hydrocarbon deposits.
Transfer of Rights?
The PSA was eventually signed in 2007. Yet curiously, the government of the then Prime Minister Viktor Yanukovych issued the license to Vanco Prykerchenska, not the legal entity that won the tender. According to Prime Minister Yulia Tymoshenko, Vanco Prykerchenska, registered in the British Virgin Islands, belonged to four Ukrainian students with only token assets.
“All these riches were given to one company. When we investigated the situation, it turned out that this company was registered to four students aged 20 to 22 years,” said Ms Tymoshenko.
Also, the premier made it clear in March that she considered the terms of the 30-year PSA unfair and asked for Vanco to renegotiate a deal, which it refused to do so.
In order to exploit the offshore shelf region, Vanco Prykerchenska presented to the Ministry of Environmental Protection its statutes. It soon became apparent that Vanco Prykerchenska’s ownership was far from straight forward.
Following an investigation, the Minister of Environmental Protection, Heorhiy Philipchuk, on 25 April, revoked Vanco’s license. He cited that the tender conditions did not allow it to pass the right to develop the resources to Vanco Prykerchenska, which did not exist when Vanco won the tender.
Partners Disclosed
The plot thickened on 15 May when Vanco Energy’s Senior Vice President, Jeffrey Mitchell, revealed that Vanco Energy had three partners in Vanco Prykerchenska: the Donetsk Fuel and Energy Company (DTEK), linked to billionaire and Party of Regions backer, Rinat Akhmetov; Shadowlight Investments Ltd, linked to Russian businessman Yevgeny Novitsky; and Integrum Technologies (Austria), whose owners are unknown. Some have alleged this latter vehicle could be a cover for Gazprom – Russia’s state-owned gas company.
Gene Van Dyke, Chairman and CEO of Vanco Energy has strenuously denied that Vanco Prykerchenska was owned by four students and refuted claims that the company was preparing to sell its stake to Gazprom. However, his colleague, Mr Mitchell, when asked about the beneficial owners of Integrum Technologies, said, “I plead ignorance.”
On 19 May the president signed a decree, at a session of the National Security Defence Council, to resume Vanco’s license. This gave rise to accusations that he had been openly lobbying in favour of the Texan company.
Olesksandr Turchynov, First Deputy Prime Minister, went as far as saying “the president’s decree openly indicates corruption of higher officials.” Mr Turchynov went on to call upon American officials to launch an investigation into the scheme.
The affair now pitted the Cabinet of Ministers against the President’s Office, causing it to assume significance far beyond a commercial dispute.
After much deliberation, on 21 May, the government announced its decision to terminate the PSA and return the shelves to state control. This evoked a barrage of responses from all sides.
US Ambassador William Taylor expressed that he was “very disappointed” by the government’s decision and said for the government to attract investors, which is vital for its energy security, “it needs to make clear that it respects the sanctity of contracts and the rule of law.” Mr Taylor then requested the government “to reconsider its decision and return to a policy of dialogue.”
Ironically, the government is in full agreement with Mr Taylor on the need to attract investors and have respect for the sanctity of contracts and the rule of law. The Block of Yulia Tymoshenko made these points the cornerstones of its “Contract with Investors” launched last September.
The fact remains that Vanco should not have breached its agreement by transferring its rights to Vanco Prykerchenska, the beneficial ownership of which is far from clear. Furthermore, its behaviour during the 18 months of PSA negotiations undermined the faith of the very ministries it was designed to work hand-in-glove with. Subsequent probes into the company by the Ukrainian authorities gave further cause for alarm, adding to the government’s worries over the company’s probity and intentions.
The importance of the deep-water shelf to Ukraine’s future energy security makes it a strategic asset and, as such, it is vital that those charged with its development act in a totally transparent and accountable way. Despite all the political bluster, the issue of transparency lies at the heart of this affair. It should not be compromised and, together with accountability and the rule of law, must be the basis for determining Ukraine’s energy security.