UkrainianEnergyForumKiev,28February- 2March2017

LicenseManagement:anenablertoforeigninvestment

GuidoMichelottiCEO,CadoganPetroleumplc

Disclaimer

Thispresentationmaterialdoesnotconstituteorformpartofanyofferforsaleorsubscriptionoranysolicitationforanyoffertobuyorsubscribeforanysecuritiesnorshalltheyoranypartofthemformthebasisoforberelieduponinconnectionwithanycontractorcommitmentwhatsoever.Noresponsibilityorliabilitywhatsoeverisacceptedbyanypersonforanylosshowsoeverarisingfromanyuseof,orinconnectionwith,thesepresentationmaterialsortheircontentsorotherwisearisinginconnectiontherewith.Theopinionsexpressedinthispresentationreflectthespeaker’sviewwhichisbasedonhisexperienceinthee&p domain.

Ukraine:ananomaly intheeuropean oil &gassector

1 Source:WorldOil&GasReview2016 2 Shalegasexcluded 3 ArawakandCadogan

q 2ndlargestcountrybyreserves,but…

q noactivemajor2 …...q onlytwo3 “truly”foreign

companiesactiveintheconventionalupstream

0

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Norway

Ukraine

Netherlands UK

Romania

Denmark

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Rankingbyoilequiv.reserves(MBoe)

Whyis foreign investment down to a trickle ?

q Politicalandeconomicdifficultiesarenottheprimaryreasonwhich

limitsdirectforeigninvestmentintheoil&gasindustry

q Industryspecificissuesaremoreimportant.DoesUkraineoffer?

§ Unrestrictedaccesstoinformationonresourcepotential

§ Transparencyintheawardmechanisms

§ Taxationofprofitsratherthanofrevenues(orproduction)

§ Regulatoryandeconomicstability(PSA)

§ Clearandpredictablelicencemanagementprocesses

The players in the “as is” system to award and manage licences

MinistryofEnergyandCoalIndustry

MinistryofEcology&NaturalResources

LocalCouncils

StateGeologicalServices(SGS)

StateCommissiononMineralReserves(SCR)

CentralCommissionforthedevelopment

offields

GeologicalExplorationInstitute(DGRI)

WellControlAuthorities

q Normalnumberofplayersq PotentialoverlapbetweentwoMinistries

The ”as is” award process

q Straightforwardonpaperwithaclearlydefinedtimelineq Localauthorities’endorsement,butlimitedbenefitsforthem

SCR’sapproval

Conversionofexplorationintoproductionlicence

Seekapprovalofregionalcouncil

SeekapprovalofMENR

90days 30days 45days

SGS’sapproval

Filingofapplication

<6monthsApplicant

SGS

Feeassessment(DGRI)

Feepayment

Licenceaward

Submitreserves

assessment

The real “as is” award process: a snake and ladder game

AcasehistoryConversionofZagoryanska fromexplorationtoproductionlicense

Backtosquare4:didn’tfollowthe“right”process🤔

The “as is” process: a snake and ladder game

AcasehistoryConversionofZagoryanska fromexplorationtoproductionlicense

Backtosquare7:CMUorder#615redistributesapprovalpowersbetweenauthorities😢

The “as is” process: a snake and ladder game

AcasehistoryConversionofZagoryanska fromexplorationtoproductionlicense

Backtosquare9:royaltiesdistributionarebeingagreed😭

The “as is” process: a snake and ladder game

q Nearly$80millionspentinexplorationq 30Mm3 ofgasand7Mton ofcondensateproduced,and…...q …stillnoproductionlicence3yearsafterfilingtheapplication

Backtosquare1:Resubmitreservesastheir3yearsvalidityhasnowexpired😡😡

AcasehistoryConversionofZagoryanska fromexplorationtoproductionlicense

Cadoganisnotanexception:nolicencesawardedinPoltavacouncilsinceJanuary2016

The“tobe”awardprocess

Firstandforemostmustresolvethecurrentstand-offandthenwill:

q Be stable(CMUOrder615alreadyamended3timessinceitwasdeclaredinDecember2015)

q ContainamechanismtoresolvedisputesbetweenCentralandLocalAuthoritiesinagiventimeframe

q AssigntoapplicantsratherthanSGStheonusofsecuringapprovals(asitwasuntilDecember2015)

q Treatapprovalofreserves(SCRProtocol)asakeyawardelementratherthanastheentryticketintotheprocess.

q Re-instateinCMU615therighttobeawardedproductionlicencesforapplicantsowingtheinfrastructure(rightremovedinJanuary2016)

ReplacinglicenseregimewithPSAwilladdressmanyoftheissues

Otherdesirableimprovementstolicensemanagement

Licensetransfer

q Resumeandsimplifylicencetransfermechanismq Allowmultipleownershipoflicences(asforPSA)

Auditandinspection

q Redesigntheauditsystemaroundprotectionofcountry’sinterestandpeople’swellbeing

q Fromprescriptiveandpunitivetoproactiveandimprovementoriented§ Geo-monitoringremovedbySGSin2015aslicenceobligation,but….

.......itslacktreatedasabreachofworkprogrambyinspectors in2016.§ 30daystoremedyallegedbreachesareanunreasonabletime

Summary

q Ukrainehasmadestepsinthedirectionofmodernizingitse&plegislativeframework§ PSAintroduction§ Reductionofsubsoilrate§ Increaseduseofauctions§ Partofsubsoilrenttransferredtolocalauthorities(from2018)

q Improvementsstillneededinlicensemanagement§ Predictableoutcomeandtimingofapprovalprocess§ Licensetransferandmultipleownership§ Scopeanddueprocessofauditandinspections

q Amodernandtransparentsystemwillattractmuchneededforeigninvestmentswithaboosttotheeconomyandenergyindependence

q Initiativestowardsunbundlingandsetupoftradingplatformshaveprovedthebenefitsofincreasedtransparencyandmodernization

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Ukraine

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RankingbyReserves/ProducEonraEo)

1 Presenter`selaborationofdatafromWorldOil&GasReview20162 Atcurrentprices

Potentialrewardishigh.ShouldreassuredforeigninvestorsbringenoughcapitaltotakeR/PdownatleasttothelevelofthesecondinEuropethen

Conclusions

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Rankingbyoilequiv.reserves(MBoe)

Ø Annualgasproductionwouldbe40Bm3higherthanwhatitistodayØ Andthiswouldgenerateupto10B$ofadditionalannualrevenues2

Thankyou

Yourquestions,please