Structure

THE OIL AND GAS COMPLEX OF UKRAINE

In the years since independence, Ukraine has created a system of predominantly state
management of the fuel and energy sector in general and the oil and gas complex in particular. The
system of governance has defined the basic functions and powers of state organisations operating
within the sector and how such organisations should interact. In line with Ukraine’s transition from a
centrally planned economic system to a free market economic management system the fuel and
energy complex is going through a process of virtually constant transformation. This is manifested
by structural changes, functional changes and attempts to make state regulation more effective. The
result is a highly complex picture which foreign investor companies must understand prior to
integrating themselves within it. The current situation in the oil and gas sector is summarised in the
above chart and the following sections describe the main elements of the system, their functions
and powers, and their interactions. In the chart, the bi-directional arrows indicate interactions and the
uni-directional arrows indicate reporting relationships or direct inputs.

The President

The Presidential office monitors the energy sector, establishes, reorganizes and liquidates executive
bodies and defines their functions, and issues decrees and directives on the operation and
development of the fuel and energy complex. An example of this is shown in Appendix 1 for the
establishment and regulation of the State Committee for Natural Resources. One of the principal
activities of this new body will be the issuing of licenses for the exploration and production of oil and
gas in Ukraine. The President appoints and dismisses, on the recommendation of the Prime
Minister, the heads of the Ministries, State Committees and other central executive bodies
responsible for the fuel and energy complex in general and the oil and gas sector in particular.
These include the Fuel and Energy Minister, the Minister for Economy and European Integration, the
Head of the State Committee for Natural Resources and the Heads of the two State-owned
companies operating in the oil and gas sector: NAK Naftogaz Ukrainiy and NAK Nadra Ukrainiy. The
President also appoints and dismisses, subject to the consent of Parliament, the Head of the State
Property Fund. This latter is the body charged with the custody and deployment of the state’s
shareholdings and properties in industrial and commercial organisations and plays a key role in the
state’s privatization programmes.

The Parliament

The Verkhovna Rada (Parliament) of Ukraine is the supreme legislative body in Ukraine. Parliament
drafts, considers and approves laws and regulations controlling all aspects of the energy sector and
is the only body under the Constitution that can introduce taxes, change the rates of taxation and
impose import or export duties. Notable examples of legislation include production sharing
legislation and recent amendments, the Oil and Gas Law and recent amendments, and a new (draft)
law on the Natural Gas Market. Parliament also approves the annual state budget which includes
provisions and requirements in the fuel and energy complex, approves the list of state-owned
properties not subject to privatization, and approves inter-government agreements (such as the
series of agreements between Ukraine and Russia concerning natural gas transportation and
storage). State policy applied to all aspects of the Fuel and Energy sector is prepared and reviewed
by the Parliamentary Fuel and Energy Committee which most recently has been involved in drafting
Ukraine’s new Energy Strategy to 2030.

The Government

The Cabinet of Ministers of Ukraine is headed by the Prime Minister and provides for Ukraine’s
economic independence, pursues domestic and foreign policy, ensures observance of the
Constitution of Ukraine, the laws of Ukraine and Presidential decrees in the fuel and energy sector,
and ensures the pursuance of financial, pricing, investment and tax policies in the fields of natural
resources, energy conservation, environmental safety etc. The Government also drafts and
implements national programmes of economic, scientific and technical development, drafts the
state budget and ensures its implementation in general and with regard to the operation of the fuel
and energy complex in particular.

The Ministry of Fuel and Energy

This Ministry is the main body within the system of central executive bodies responsible for the
implementation of state policy in the fuel and energy complex. The main tasks of the ministry are:
state management of the fuel and energy complex, support for the implementation of state policy in
the fuel and energy complex, ensuring the energy security of the state, drafting proposals aimed at
encouraging the development of the fuel and energy complex, and participation in the formation,
regulation and development of the market for fuel and energy resources.

The ministry performs management of the branches of the fuel and energy complex and state-
owned facilities falling under the sphere of its competence through a number of State Departments
such as the Department for the Oil, Gas and Refining Industry. The main organisational forms of
state-owned facilities in the fuel and energy/oil and gas complex are joint stock companies and state-
owned enterprises, the most important ones being the National Joint Stock Company NAK Naftogaz
Ukrainiy and National Joint Stock Company NAK Nadra Ukrainiy.

National Joint Stock Company NAK Naftogaz Ukrainiy

The chairman of the board of NAK Naftogaz Ukrainiy is also First Deputy Minster of Fuel and Energy.
The company was established to ensure the effective operation and development of the oil and gas
complex, to enhance national energy security, to satisfy the needs of industrial and household
consumers regarding fuel and energy resources, and to make profits from its business activities. As
shown in Figure 2, NAK Naftogaz Ukrainiy consists of a number of operating departments with
responsibility for exploration and production of natural gas (Ukrgazvydobuvannya), exploration and
production of oil (Ukrnafta – which is now partly privatised), offshore oil and gas exploration and
production from the Black and Azov Seas (Chornomornaftogaz), gas transportation and distribution
(Ukrtransgaz), oil transportation (Ukrtransnafta) and gas marketing and sales (Gaz Ukrainiy). NAK
Naftogaz Ukrainiy is responsible for the strategic development of the company and its subsidiaries,
implementation of international projects in the oil and gas sector, relationships with equivalent
companies abroad e.g. Gazprom, and the distribution of gas for domestic consumption. Also a key
responsibility is the implementation of the current energy strategy of the state particularly as this
applies to the enhancement of domestic oil and gas production and the diversification of oil and gas
supplies to Ukraine.

National Joint Stock Company NAK Nadra Ukrainiy

Nadra Ukrainiy was established to improve the effectiveness of the management of enterprises
working in the field of geological exploration and the enhancement of Ukraine’s domestic resources
of oil and gas. Nadra Ukrainiy’s main tasks include exploration for new resources of oil and gas in
Ukraine, some production of oil and gas resources, encouragement of investment into exploration
projects in Ukraine and contributions to the energy strategy of Ukraine as it applies to geological
exploration. Subsidiary companies of Nadra Ukrainiy include organisations such as
Poltavanaftogazgeologia, Chernigivnaftogazgeologia and Zahidukrgeologia (West Ukraine Geology)
which formerly reported to the now defunct State Committee for Geology. These regionally based
geological enterprises are allowed to hold exploration licenses and to enter into joint activity
agreements with private investor companies whether foreign or domestic.

State Committee for Natural Resources

This state body was established as recently as February 2004 by order of the President of Ukraine
and reports to the Cabinet of Ministers of Ukraine (i.e. the Government). The main tasks of the State
Committee include the fulfillment of state policy in the field of geological surveying and the rational
use of the subsoil, topographical and geodesic map-making, organisation of geological,
geophysical geochemical etc examinations of the subsoil, monitoring of the geological environment,
and carrying out geological research. However to private investor companies, the key role of this
Committee is the custody of the process and procedure for the issuance of exploration and
production licenses, and on behalf of the state to monitor the progress of mandatory works to be
carried out as part of license-holders’ responsibilities. Under current Ukrainian legislation,
exploration licenses may only be issued by the State Committee as a consequence of an open
competitive tender. It is a responsibility of the State Committee to organize the license tendering
process, identify the winners of each tender and then to issue the legally binding license to the
winning bidder. The State Committee will also be involved on the process of extending or renewing
existing licenses.

National Electricity Regulatory Commission (NERC)

This is a central executive body that reports to the Cabinet of Ministers. Although originally
established to provide a regulatory function for the electricity industry, the powers of the Commission
have been extended to include regulation of the oil and gas complex. The main duties of NERC
include: participation in the formulation and implementation of state policy on the development and
operation of the wholesale electricity market, and the oil and gas and petroleum products markets,
state regulation of natural monopoly activities and encouraging competition, implementation of price
and tariff policy in the electricity and the oil and gas complex, ensuring effective operation of
commodity markets, issuance of operating licenses in the electricity and oil and gas sectors and
monitoring the observance of license provisions. Basically this Commission has a key role in
setting and controlling domestic prices for electricity, oil and gas within the territory of Ukraine.

Back to top ...