Regulation of unconventional gas production: effective permitting system by Ukrainian Energy

Regulation of unconventional gas production | Еffective permitting system

REGULATION OF UNCONVENTIONAL GAS PRODUCTION. ЕFFECTIVE PERMITTING SYSTEM

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Regulation of unconventional gas production | Еffective permitting system

Regulation of unconventional gas. An effective licensing system

DiXi Group is a Ukrainian think-tank which is carrying out research and consultation on issues of information policy, energy, security and investment. Today, its members are working as experts in numerous political and energy projects in conjunction with government agencies, donor organizations and foreign investors. DiXi Group activity has several directions, including organization of events and information campaigns, promotion of transparency, and advocacy for energy efficiency and renewable energy sources. “Ukrainian Energy” (www.ua-energy.org) is a unique platform created by the analytical centre DiXi Group. DiXi Group holds no political opinion; accordingly, any and all views expressed in this publication are exclusively those of the authors.

For copies of this study and additional information, please contact: P.O. Box 68, 24 Sribnokilska St., 02095, Kyiv, author@dixigroup.org

Contents

Permitting system in Ukraine: where time is lost and commodity price increased..............2 International experience: user-friendly permitting system for Ukraine.................................4

Lead Agency concept ......................................................................................................4

One-stop shop concept....................................................................................................8

Umbrella Concept...........................................................................................................14

Conclusions.................................................................................................................................17 Reasoning...................................................................................................................................18 Solution.......................................................................................................................................18

Regulation of unconventional gas production | Еffective permitting system

Permitting system in Ukraine: where time is lost and commodity price increased Permitting system is one of the obstacles that investors have to overcome before starting exploration and drilling activities. Often, overcoming this obstacle takes months and years, at times. As a result, not all of investors make it to the end or are there with delays. Regardless of the legislation provisions, it takes investor a year or more to obtain all required permits, which reflects on company’s budget and cost of works. To obtain required set of permits, investor must pass seven main stages that reflect stages of operations.

Huge and complex structure of documentation required for permitting and Sixthly, a set of documents excessive number of inmust be prepared and submitted stitutions that investors must deal to MECI Oil and Gas field Develop- with makes an impression of unment and Underground Storage friendly business environment Operation Commission before em- with an attitude to businesses barking on full field development: as to “problems”, not “opportuniapproved field development plan, ties” that could help region develfield development design, invest- opment. ment project etc. – which may take up to about six months to prepare. MECI Commission is also in accountable for pilot field development approval. formed and reserves proven by DKZ (State Reserves Commission).

Seventhly, well abandonment may take up to six months. This does not correspond to Ukrainian legislation, namely Law on PermitFirstly, obtain subsoil use li- ting System in Economic Activity, cense (awarded at auction and according to which any permitting without auction under special pro- documents should be issued within 10 business days. cedure). Secondly, a right to use land plot must be obtained, which can also last as long as six months. Thirdly, certain documents are required for well construction – construction projects expertise, as well as developed and approved project documentation. Fourthly, it might about a year to obtain environmental protection permitting documentation: state ecological expertise conclusion on harmful emissions, special water use and waste management permit. Fifthly, upon exploration, field reserves estimation must be per-

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And time is not the only issue. Apart from numerous documents, investors are also required to submit these to a big number of ministries and agencies. Ecology Ministry, State Labor Protection Commission, Home Affairs Ministry State Firefighting Department, local councils and administrations to name just a few in the long list of institutions that should approve required documents. While some of these institutions are based in Kyiv, others are located in the regions. In addition, such a confusing procedure creates a lot of problems and inconveniences for investors and implies corruption risks.

Regulation of unconventional gas production | Еffective permitting system

Permitting system in Ukraine 1 to 2 months

• based on the auction results or without the auction in cases defined by the law (incl. the PSA implementation); • receiving agreement from the regional councils, the Ministry of Ecology, the State Labor

Protection Commission in cases defined by the law; • subsoil use contract is an integral part of the license

Obtaining subsoil use license

3 to 6 months

Registration of the right to use land plot for the needs of subsoil use, based on the state land act or land lease (servitude) contract

Acquiring the right to use land plot

2 to 4 months

• developing project design based on available data; • expertise of the construction projects by expert organizations (in cases defined by the law);

• approval of the project design by the customer

Project design on well construction and/or fracking

2 to 12 months

• conclusion of state environmental expertise; • permit on air emissions by conventional sources; • permit on special water use;

• p ermit for operations in waste management

Obtaining environmental protection permitting documents

1 to 2 months

Geological and economic assessment of the field (deposit) reserves after exploration, approved in due order

Assessment of the field reserves

• approved technological project • a pproved investment project (blueprint) of the field produc- (program); tion; • p ermit for conversion • act for mining lease for field into commercial development development; • approved complex project for field completion;

Conversion into commercial development

• creating the commission for well abandonment; • preparing a plan for abandonment activity and supporting documents; • running abandonment works;

Well abandonment

2 to 6 months

• c ompleting performance certificates and reclamation works

Source: Tomlyak, K. Regulatory Procedures Improvement In terms of Unconventional Hydrocarbons Exploration and Production and Environmental Protection, Unconventional Gas Production Regulatory Workshop, 4.12.2014 Page 5 | 18

Regulation of unconventional gas production | Еffective permitting system

International experience: user-friendly permitting system for Ukraine Ukraine still attracts foreign investors’ interest, specifically to both unconventional and conventional hydrocarbon production projects. A number of PSA’s have been or are planned to be signed (given Government’s new strive to convert JAA’s to PSA’s in 2015). However, for such important infrastructure projects, there must be clear and effective mechanism of their administration. Below are several examples taken from other countries’ experience.

LEAD AGENCY CONCEPT To produce gas in Australia, a company must obtain permit of a respective State or territory government institution. This permit covers certain area and is valid for 5-6 years. The permit allows the company to conduct test drilling to study the field. Also, most permits imply extension or conversion to full-field development. In 2009, Lead Agency Concept was adopted, which is a one-stop-shop that is to assist in or coordinate proposals approval. Lead Agency Concept relates to all resource, infrastructure, transport and major land and housing proposals and projects. Lead Agency must: • provide applicants with information on legislative and legal requirements; • support and coordinate proposal approval applications; • assist applicants in identifying proposal consequences on infrastructure, environment and local communities issues, as well as social consequences. On their part, applicants must provide high-quality data. This increases one’s chances of completing approval procedure on time. Lead agencies should assist applicants to comply with approval requirements. In this context, agencies have developed instructions

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and check lists, which describe compulsory requirements. Lead agency deals with transport, land and oil and gas production issues. State Development Department has some of Lead Agency’s functions, namely admitting proposals for big investments or investments that have special significance for the state or when project is related to State Agreement and is subject to ratification by the State Parliament Law. These are typically mining, oil and gas production and associated transportation and hydrocarbon processing projects, as well as associated infrastructure investments.

Regulation of unconventional gas production | Đ&#x2022;ffective permitting system

Issuing production licenses in Australia COVERS CERTAIN AREA

VALID FOR 5-6 YEARS

TEST DRILLING AND STUDYING OF THE FIELD

Fields of competence in Australia STATE TERRITORY

Regulation of gas exploration and production Document on development amd planning

Regulation of offshore fields development

GOVERMENT Federal tax and environmental laws

LAND OWNERS

Not eligible for gas resources Receive compensation of extractive activities

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Regulation of unconventional gas production | Еffective permitting system

Also, proposals, coming from Lead Agency, are divided into several tiers. If a proposal is relatively small and it can be solved via existing ecological, social and economic evaluation procedure, it is a Tier One proposal, which means that agency coordinator passes documents to other agencies, leads negotiations with the applicant etc. Such proposals are being monitored via quarterly reports. Medium to big-scale proposals requiring significant capital investments, human resources and time are Tier Two proposals, to which project coordinators are assigned, who should assist applicants with proposal analysis and ensure inter-agency coordination. For such project, lead agency would monitor government approval process and would assist in solving issues that may be in the way of approval. Both lead agency and applicant must provide regular progress report. Very big-scale or integrated proposals that can create many jobs are Tier Three proposals. Such proposals can sometimes be passed on for consideration by the Government marked as State-level significance. For such proposals, senior project coordinator or project team are assigned who should provide support with key normative approvals, agency schedule review and negotiations in the State’s interests. Lead agency should create Internet web-sites dedicated to such proposals, sharing progress reports for different approval process stages and posting links to key documentation. Applicants are to provide monthly updated information. When being reviewed, the documents must be approved by other agencies. Project approving agencies should also provide support, namely: • Meeting with applicants at the approval scope analysis stage to determine issues that should be considered, data that is required from applicant and agree on approval procedure schedules; • Providing recommendations or taking decisions in accordance with agreed schedule. Schedule can be agreed based on project significance and complexity, as well as agreed level of support; • Supporting respective working groups and standing commissions.

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For the purposes of coordination between themselves, Lead Agency and approving agency develop internal procedures that are agreed between all parties engaged on behalf of the Government. There various approval mechanisms: project tracking systems (common platform accessible by both the Government and applicants to track all applications approval progress in the Government), Coordinators Working Groups (meet to monitor proposal consideration progress and to agree proposal approval schedule), Memorandums of Understanding (help clearly differentiate roles and responsibility, as well as lead agency and approval agencies resources), working groups (solving problems and providing recommendations)

Regulation of unconventional gas production | Еffective permitting system

Lead Agency operation principles

SMALL PROPOSAL EXISTING PROCEDURES FOR ENVIRONMENTAL, SOCIAL AND ECONOMIC ASSESSMENT COORDINATOR SENDS DOCUMENTS TO OTHER AGENCIES, NEGOTIATES WITH THE APPLICANT MONITORING QUARTERLY REPORTS

AVERAGE/LARGE PROPOSAL REQUIRES CONSIDERABLE INVESTMENTS, HUMAN RESOURCES AND TIME COORDINATOR ASSISTS WITH THE ANALYSIS OF PROPOSALS, PROVIDES INTERAGENCY COORDINATION MONITORING-LA MONITORS GOVERNMENTAL PROCEDURES AND HELPS WITH SOLVING ISSUES REGULAR REPORTS ON THE STATE OF AFFAIRS FROM LA AND THE CUSTOMER

LARGE AND COMPLEX PROJECTS, CREATING A LOT OF JOBS CAN BE SUBMITTED TO THE OFFICE WITH A «VALUE FOR THE STATE» SENIOR COORDINATOR OR TEAM - ASSISTANCE FOR KEY REGULATIONS, AGENCY SCHEDULE, NEGOTIATIONS IN THE INTERESTS OF STATE CREATION OF A WEBSITE ON PROPOSALS WITH INFORMATION ABOUT PROPOSALS AND STATE OF THEIR IMPLEMENTATION AT VARIOUS LEVELS OF APPROVAL. APPLICANTS SUBMIT MONTHLY INFORMATION

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Regulation of unconventional gas production | Еffective permitting system

ONE-STOP SHOP CONCEPT In British Columbia (Canada) there is BC Oil and Gas Commission, established by Oil and Gas Activity Act, to work with investors. The Commission is a regulator, working on one-stop-shop principle dealing with oil and gas exploration and production issues, as well as pipeline transportation. Main task of the Commission is to accept and evaluate production activities applications, consultations with first nations, check companies and their activities’ compliance with legislation and partnership with other accountable institutions1. Community’s interests are ensured via population security protection, environmental protection and proving just access to oil and gas resources. According to Oil and Gas Activity Act, Commission’s objectives are as follows: • support oil and gas activities by promoting healthy environment, healthy economy and social wellbeing; • ensure oil and gas resources preservation; • ensure that safe and effective techniques are applied in oil and gas industry; • help oil and gas resources owners to fairly participate in common play development; • provide for effective and efficient license application consideration process and ensure that approved applications meet community interests and take ecological, economical and social consequences into account; • encourage indigenous peoples and local population to participate in the processes that affect their lives; • participate in planning; 1

http://www.bcogc.ca/node/11169/download

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• implement educational and communication programs to enhance oil and gas production operations safety and effectiveness.

Regulation of unconventional gas production | Еffective permitting system

Commission’s structure

REVIEWING AND ASSESSING APPLICATIONS FOR INDUSTRY ACTIVITIES

CONSULTING WITH FIRST NATIONS, ENSURING INDUSTRY COMPLIES WITH PROVINCIAL LEGISLATION PARTNERING WITH OTHER RESPONSIBLE AGENCIES

OFFICE OF THE COMMISSIONER Statutory decision-making authority, but can delegate decision-making authority to >>>

OPERATIONS

ENGINEERING

CORPORATE SERVICES Financial management, information technology services, human resource management

http://www.bcogc.ca/node/11169/download

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Regulation of unconventional gas production | Еffective permitting system

Commission’s structure is as follows: There are four divisions: Commissioner’s Office, Operational Office, Technical Office and Corporate Service Office. Commissioner is in charge of making Commission’s decisions; at the same time, they can delegate certain decisions to be made by Operational and Technical Offices. There also work legislation specialists, who are responsible for ensuring documentation compliance with legislation. Corporate Service Office provides financial management, information technologies and human resources management services. Also, Commission plays a support role in Science and Community Environmental Knowledge (SCEK) Fund, which studies practical ecological and social issues relating to oil and gas production. Commission is also responsible for Well-site Restoration Fund, established in 2006 and funded by production tax. The fund is used to pay for restoration costs of the ill-kept well-sites, testing wells and pipelines, where it is impossible to determine accountable operator. Well-sites, abandoned on private lands, are preferred, to reduce land-owners to return land plot to use2. Energy regulator in Alberta operates under similar one-stop shop principle. Previously, energy resources policy was regulated by Energy Conservation Resources Board and Ministry of Environment and Sustainable Resource Development. However, in 2012, The Responsible Energy Development Act was adopted, under which new regulator that was supposed to start working on one-stop-shop principle was established. Today, Energy Regulator of Alberta is a body that deals with all issues, from application by companies planning to produce to land reclamation. Among Alberta Energy Regulator’s responsibilities are the following: • consider and resolve on energy industry development issues; • control all aspects of activity in energy industry in compliance with the government imposed rules; • inspect and check activities in energy industry regarding compliance with set requirements; • penalize companies that do not operate under Regulator’s rules; 2

http://www.bcogc.ca/node/11169/download

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• conduct hearings on energy industry development issues. Regulator created Private Agreements Register for land-owners and introduced new hearing rules that would allow making energy industry policy more public. Despite being integrated body for energy industry development, the Regulator is still part of wider system of Alberta authorities cooperation. Such system includes Alberta Provincial Government, which sets the policy; Ecological Monitoring, Evaluation and Reporting Agency, which provides data and information; Policy Management Bureau, which serves as a link between the Government and the regulator; and Aboriginal Consultations Office, which is responsible for consultations and communications with the First Nations on behalf of the Government. Regulator’ management structure separates corporate, operational and administrative responsibilities from adjudicative functions (application hearing). Regulator is headed by the Chairman, who is also Head of the Board of Directors; none of them is engaged in regulator’s day-to-day activities. Board of Directors sets general areas of regulator’s work and is responsible for changes in regulator’s activities and achievement of results in its work. In this regard, Board of Directors works as regular corporate sector “board”. Regulator’s General Director reports to the Head of the Board and is responsible for day-to-day activity, which covers admitting and making decisions on applications; monitoring and evaluating energy resources activities compliance; production activities completion, including reclamation and disposal. Hearing commissioners are responsible for all discussions on pieces of legislation and activities in energy industry. They report to Chief Hearing Commissioner and are independent adjudicators; their decisions are subject to revision by Appeal Court of Alberta only. Also, Regulator established Stakeholder and Government Relations Division to clearly understand main participants’ needs and interests, as well as policy changing proposals. The division should interact with market participants to explain them new rules and conditions of interaction with the Regulator and take their comments on Regulator’s work improvement into account.

Regulation of unconventional gas production | Еffective permitting system

Areas of BC Oil and Gas Commission’s responsibility

Source: James O’Hanley, The BC Oil & Gas Commission. Proactively Participating in Project Decision Making Processes // http://fnlngstrategy.ca/wp-content/ uploads/2014/03/T8-LNG-Summit-Feb-19.pptx

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Regulation of unconventional gas production | Еffective permitting system

Apart from Regulator, there has been created a system of Integrated Resource management, which includes overwhelming ecological monitoring system (air, soil, water and bio-diversity); long-term land use plans; and Ownership Protection Office work that protects land-owners and oil and gas producing entrepreneurs and companies’ interests3.

field development, when profound situation analysis and risk-assessment must be performed to minimize negative impact on the environment. Under such scheme, operator company’s proposal is just a first step; them there must be a cooperation with regulator and other governmental institutions to achieve maximum desired effect.

Also, Alberta Responsible Energy Policy System, which unites policies, regulations and legislation under which Regulator and energy development government institutions operate, was established in 2013. Regulator exercises play based regulation policy that is aimed at planning, together with regulator, activities for each individual area to minimize field development impact. Such regulating principle is based on two principles: risk-based regulation, when level of regulation should correspond to the level of risks involved under certain investment project; and playbased regulation, when regulation that is taking local peculiarities – subsoil resources, landscape, air, water, flora and fauna – into account to achieve goals in social, economic and environmental protection spheres4. Such play-based regulation is related to responsible ttp://www.oilsands.alberta.ca/FactSheets/Integrated_Resource_Management. h pdf 4 Play-Based Regulation Pilot Application Guide. Alberta Energy Regulator. December 4, 2014 3

Alberta Energy Regulator’s Accountabilities AER staff work to provide Information, respond to questions and concerns, onsuro Industry compliance, and report on our performance

Engagement / Compliance / Performance

FULL LIFE-CYCLE REGULATION Assessment

Reclamation Exploration Development Operations Closure & Abandonment

Roviowing data and Information to determine the resource and obtain surfaco access

Drilling exploration wells, tostlng, taking samples, and Installing temporary cqulpmont

Constructing wolls, well pads, facilities, and pipelines & planning for water management, environmental protection, and omorgoncy response

Carrying out long-term operations. Including maintenance and monitoring

Cloanlng up and abandoning the sito at the end of production or operations

Remediating and reclaiming the site to restore It as elose to Its original state as posslblo

Source: Tim Church and Bob Willard, Alberta Energy Regulator, Regulatory Procedures Improvement In terms of Unconventional Hydrocarbons Exploration and Production and Environmental Protection, Unconventional Gas Production Regulatory Workshop, 4.12.2014 Page 14 | 18

Regulation of unconventional gas production | Еffective permitting system

Single application & Approval Procedure under Play-Based Regulation

PERFORMANCE MEASUREMENT AND COMPLIANCE

SINGLE APPROVAL

OIL AND GAS CONSERVATION ACT PIPELINE ACT PUBLIC LANDS ACT ENVIRONMENTAL PROTECTION AND ENHANCEMENT ACT WATER ACT

APPLICATION REVIEW AND DECISION

PROJECT INFORMATION

SINGLE APPLICATION

STAKEHOLDER ENGAGEMENT PLAN RISK MANAGEMENT PLAN(S) REPORTING PLAN

Source: Play-Based Regulation Pilot Application Guide. Alberta Energy Regulator. December 4, 2014

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Regulation of unconventional gas production | Еffective permitting system

UMBRELLA CONCEPT

(NSIP). Such regime could serve as “umbrella” structure for shale gas production projects and it is In the UK, permitting system is considered to be supported by production companies. one of the most reliable, as it, on the one hand, ensures Nationally Significant Infrastructure Projects recompliance with all environmental requirements, and, on the other hand, does not hamper entrepreneurship gime is defined by the 2008 Planning Act and provides for project approval by Planning Inspectorate. Planning development, investments etc. Inspectorate considers application and produces its Permitting system involves just one major approv- recommendations for consideration by respective Secal that must be obtained before starting operations. A retary of State, who make decisions on development company should also apply for nine separate permits project extension or cancellation. to Environmental Agency and health and safety agencies. It is also expected that even more simplified system will be created for shale gas development projects, the so-called Nationally Significant Infrastructure Projects regime

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Regulation of unconventional gas production | Еffective permitting system

UK Regulatory Procedures

DECC awards exclusive Licence after open competition Statutory consultee

EA/SEPA/NRW • Abstraction licences • Environmental permits HSE • Scrutiny before operations • Well design & construction • Independent verification • Safety of drilling operations

COUNTY COUNCIL Planning permission (public consultation)

Traffic, noise, visual intrusion, nature conservation...

DECC checks for HSE, environmental and planning consents, issues well consent

Exploration well

Source: Syma Cullasy-Aldridge, policy manager, UK DECC Office of Unconventional Oil & Gas, Regulatory Procedures Improvement In terms of Unconventional Hydrocarbons Exploration and Production and Environmental Protection, Unconventional Gas Production Regulatory Workshop, 4.12.2014

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Regulation of unconventional gas production | Еffective permitting system

The application process. The six steps

Look out for information in local media and in public places near the location of the proposed project, such as your library. The developer will be developing their proposals and will consult widely.

Pre-application

The Inspectorate, on behalf of the Secretary of State, has 28 days to decide whether the application meets the required standards to proceed to examination including whether the developer’s consultation has been adequate.

Acceptance

You can now register as an interested party; you will be kept informed of progress and opportunities to put your case. Inspectors will hold a Preliminary Meeting and set the timetable for examination.

Pre-examination

You can send in your comments in writing. You can request to speak at a public hearing. The Inspectorate has 6 months to carry out the examination

Examination

A recommendation to the relevant Secretary of State will be issued by the Inspectorate within 3 months. The Secretary of State then has a further 3 months to issue a decision on the proposal

Decision

There is the opportunity for legal challenge.

Post-decision

4 5 6

Джерело: The application process. The six steps. National Infrastructure Planning. http://infrastructure.planningportal.gov.uk/application-process/the-process

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Regulation of unconventional gas production | Еffective permitting system

Conclusions Successful implementation of acting and future PSA projects in Ukraine requires central and local executive authorities (CMU, ministries, state agencies, services and offices) and legislative (Parliament and local councils) authorities’ daily activity coordination. Current practice of appointing one ministry (today it is MECI) as a State Approval Authority (SAA) for PSA implementation proved its ineffectiveness, as one ministry does not have enough power and means to ensure timely decision-making on such major projects as PSA by other state authorities. Consequently, often investors under PSA are left one-on-one with solving their issues with certain state authorities without interest or experience in PSA implementation. Investors are forced to waste their time and resources to solve PSA issues related to state authorities without due support by the government.

SAA can borrow Western Australia’s experience in most effective way of major infrastructure facility management, namely their Lead Agency concept under which SAA shall prioritize projects based on national economy significance and shall assign high official responsible for project implementation. In Ukraine, one of the Vice Prime Ministers could be such high official who would coordinate inter-agency cooperation regarding PSA implementation.

CMU has to initiate PSA Execution & Implementation Inter-agency Commission transformation into inter-agency state authority that is able to organize implementation of the already signed PSA during entire period of project implementation. CMU should also grant commission and its resolutions higher status by leveling protocols/resolutions approved by the commission with CMU orders signed by the Prime Minister. SAA must be key authority accountable for project implementation, as well as implementation by state authorities of acting legislation and effective work of inter-agency commission. To validate the above functions, respective amendments must be introduced to CMU Regulation #644 dated 1.09.2013 on Establishing PSA Execution and Implementation Inter-Agency Commission.

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Regulation of unconventional gas production | Еffective permitting system

REASONING • SAA, acting as single ministry/agency, cannot effectively ensure due PSA implementation with its limited power, personnel, experience, resources etc.; • Approved SAA resolutions must be equal to CMU acts to ensure their implementation by reporting structures and other ministries; • SAA, conducting inter-agency authority dayto-day management with the help of a viceprime-minister, will have more resources, power and expertise to provide for duly and timely PSA project implementation.

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SOLUTION Pass required amendments to CMU Regulation #644 dated 1.09.2013 on Establishing PSA Execution and Implementation Inter-Agency Commission.

Regulation of unconventional gas production | Đ&#x2022;ffective permitting system

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