If the Ministry of Environmental Protection of Ukraine hadn’t recently canceled the special permission (or simply license) for the development of natural resources given to Vanco Prykerchenska Ltd., then it is most likely that we would never have found out who was in the front lines of the investment pool created for the realization of the project on the development of the Prykerch oil-and-gas bearing deposit in the continental shelf of the Black Sea. Thus, on May 15^th, it turned out that instead of J.N.R., financial partners of Vanco Energy Company are three other companies: Donbass Fuel-and-energy Company (DFEC, Donetsk), Shadowlight Investments Limited – an investment company created specially for this project by Russian businessman Yevgeniy Novitskiy, and a little known Austrian Integrum Technologies Limited representing the interests of private investors.

Initially, the main financial partner of the Prykerch project was J.N.R., a company of the Rothschild’s fund. It was this fund that gave its financial guarantees during submission of application by Vanco for participation in the tender on geological examination and development of almost 13 thousand square kilometers of the oil-and-gas-containing territory in the Black Seas shelf. However, the fund changed its mind afterwards due to unknown reasons. This fact didn’t stop the Ukrainian government from signing a production sharing agreement (PSA) in 2007 and the Ministry of Environmental Protection of Ukraine from issuing special permission for the development of natural resources. The permission was not for the Huston Vanco Energy Company and not even for its 100% subsidiary Vanco International Ltd. (registered at Bermudas) but to Vanco Prykerchenska Ltd. registered in the British Virgin Islands and created exclusively for the PSA project on the development of the Ukrainian part of the Black Sea continental shelf.

Yet, that is not all. Prime Minister Yulia Tymoshenko recently announced that she is aware of the fact that Russian Gazprom is now negotiating buying shares in the company that has the right to develop the Prykerch oil-and-gas bearing deposit. Nevertheless, after the press-conference held on May 15^th, during which the participants of the investment pool were named, many concluded that the main problem was not about Gazprom or about Vanco Prykerchenska Ltd. losing its license but rather about Rinat Akhmetov’s Donbass Fuel-and-energy Company becoming one of the partners. According to Maksim Tymchenko (Chief Executive Official of DFEC), his company had received a proposal to participate in this investment pool from Deutchebank in Huston in May 2006. Considering this information, many concluded that Y. Tymoshenko was doing nothing but trying to break the business of her political partner. However, they’ve forgotten that the conflicts with Vanco started as early as 2005. Let’s start from the beginning.

Vanco and other companies

Total initial reserves of hydrocarbon resources in the Black Sea and the Sea of Azov are estimated to be around 1.53 billion ton of reference fuel. Development of the Black Sea shelf is one of the few ways to strengthen the energy security of Ukraine. However, Ukraine is the only state in the Black Sea basin that doesn’t produce natural resources in its part of the deep-water shelf. Ukraine has been trying to attract foreign investments for this purpose for several years now. In 1997, Shell received special permission to develop the shelf near Shtormovaya lead, but they didn’t find any resources there. Next time was in 1999 when an English company JP Kenny received a license to develop the Black Sea shelf. And they didn’t succeed either.

The first real steps to develop the deep-water shelf by Ukrainian companies were made in 2005 when the SJSC Chernomorneftegaz received a license to develop the medium-water oil-and-gas bearing structure Subbotino located at the depth of 50 to 100 meters. Chernomorneftegaz in its turn concluded an agreement with an American corporation Hunt Overseas Oil Inc. on exploration and development of prospective fields with total area of around 12 thousand square kilometers at the Southern part of the Kerch Strait. However, this project also failed due to the absence of a production sharing agreement.

I would like to note that by the moment when Vanco entered the Ukrainian market, Ukrainian policymakers had already passed a law on production sharing agreements. A Production sharing agreement is a document defining the conditions, under which the revenues from production are divided between the host state (the Cabinet of Ministers) and international investors, their bids, terms of exploration and production as well as the sizes of financing. Such contracts are a standard practice used by many countries in the world with only one difference: civilized countries usually stand up for the maximum bid of the state in such deals.

The next attempt to develop the Black Sea shelf was made in December 2005. Then, a first tender on the geological exploration and extraction of hydrocarbons in the Prykerch part of the Ukrainian Black Sea shelf was announced.

There were 15 companies initially interested in this tender, among which were both well-known tycoons and beginners. The news about RosUkrEnergo A.G. that expressed its interest in the tender was quite surprising since this company didn’t have any experience in the development of the deep-water shelf then or now.

Nevertheless, only five companies submitted their applications for participation in the tender: Hunt Oil Company of Ukraine (Poland), Vanco Interna­tional Ltd. (USA), Ukrainian OJSC Ukrneft, and a joint application of Shell, Exxon Mobile (USA), Turkiye Petrolleri A.O. (Turkey) and Alphex One Ltd. (Great Britain).

Interestingly, Shell and Exxon –big competitors in the world energy market – rarely join their efforts . Last time when there was such a precedent was several years ago when these companies joined to receive a control over the German gas market. Most experts forecasted that it would be Shell with Exxon that would win the tender. However they were not right, maybe because Shell (as well as Vanco) is connected with Rothschild’s fund. That’s why it is possible to suppose that Shell was playing in favor of Vanco.

It took the interdepartmental commission 25 days to choose the winner. And none of the 19 members of the commission was confused about the fact that the application for participating in the tender was submitted by one company – Vanco International Ltd. (Bermudas) when the commission assessed the experience and financial guarantees of an absolutely different company – Vanco Energy Company (USA). Later, the commission's conclusions were examined by the government, which, in its turn, announced Vanco International Ltd. a winner.

Some participants of the tender were surprised and upset with such a decision. It is possible to understand them when looking at Vanco’s history. During the period from 1973 to 1996 Vanco worked in the Northern Sea and discovered several oil and gas fields in the Netherlands shelf. This is one of Vanco’s pluses. However, after the world hydrocarbon market changed (increased demand was followed by a quick rise in the price of hydrocarbon resources) the company was forced out that favorable region by more known competitors. After this, Vanco started to explore the deep-waters of the shelf in Western Africa.

Most experts consider Africa to be a “backyard” of the world’s oil and gas production due to a high risk of terrorist acts and corruption. The world’s leading energy companies are not eager to work there. Nevertheless, even without competition, Vanco didn’t achieve any positive results there.

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 ZN 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 of this company’s positions in the Ukraine energy market. The same happened with the information of Special Services on the consequences of signing the PSA with Vanco.

Matreshka, or RosUkrEnergo-2?

The problems with Vanco Company started immediately after the tender was finished. In their first draft of PSA they proposed fantastic figures: they wanted to have 80% of production during the development phase of the project and 60% of production during the production phase. After the negotiations they agreed on the following: 65% to Ukraine and 35% to Vanco International Ltd. (USA). According to world practice, this is quite normal. However, Ukrainian specialists state absolutely different figures: during the first phase of the project (eight years) the investor will receive 70%. And then, if the field is discovered, the bid of the state might increase. Yet, for the next decade Ukraine will receive a maximum of 15% of production including taxes.

Additionally, Vanco tried to fix in the PSA their right to make decisions on production programs and define the commercial value of the fields independently without approving its actions with the state. Second, Vanco intended to prolong the exploration period for an uncertain term. Third, they tried to include a delay in transmitting property rights to the state in the PSA. Fourth, the leadership of Vanco wanted to cheat by drilling the first exploration well in the North-Eastern part of Prykerch lead (i.e. at 70-200 meters depth, where the leads had been already discovered by Ukrainian geophysics with the help of seismic tests) when it was clearly defined that they should drill the first wells in much deeper waters (specifically – in Tetiayevska and Sudakska leads) since the development of deep-water part of the Black Sea shelf was declared as the main aim of the Prykerch project.

In March, 2008, the Minister of Environmental Protection, Heorhiy Philipchuk, said that it was necessary to involve international arbiters to evaluate the work of Vanco in Ukraine.

Yulia Tymoshenko supported his initiative. In her speech during the “Government time” in the Verkhovna Rada, she said: “All these riches were given to one company. When we investigated the situation, it turned out that this company was registered to four students in the age of 20 to 22 years in off shores”. The Prime Minister referred to the State’s financial monitoring as the source of this information and offered the parliament to listen to the government’s reports on this matter to “make further decisions”. In her opinion, the allotment of this big plot to that company at the same time when other countries “allot shelves to investors by square centimeters” is a “global crime”.

What Vanco Company actually is?

A notable detail. In order to receive the special permission for development of the natural resources in the Prykerch oil-and-gas structure with area about 13 thousand square kilometers, Vanco Prykerchenska Ltd. presented to the Ministry of Environmental Protection and other state bodies its documents and the statue, in which it was stated that the stock of this company consisted of bearer shares. Hence, it turns out that the right to use the natural resource in the 13 thousand-square-kilometers continental shelf of the Black Sea could receive … any holder (bearer) of the stock of Vanco Prykerchenska Ltd.!!! It is a bearer shelf!

Heorhiy Philipchuk approached the Embassy of the USA for explanations. U.S. Ambassador to Ukraine, H.E. William Taylor, gave the Ukrainian interdepartmental commission information checked by the special services of the USA.

Thus: Vanco Energy Company is actually registered in Huston (Texas, USA). It is an affiliated company of Vanco International Ltd., which, in its turn, is the founder of a company called Vanco Black Sea in Bermudas; and this Vanco Black Sea is the founder of Vanco Ukraine, registered in the British Virgin Islands. Vanco Ukraine is a 100% subsidiary of some investment pool unknown to the special services of the USA. However, Vanco Ukraine is a 100% founder of Vanco Prykerchenska Ltd.

Why did Vanco Prykerchenska Ltd. receive special permission for the development of natural resources when the official PSA was signed with the winner of the tender Vanco International Ltd?

Allegedly, there is a formal reason for this. It was stipulated in point 2 of Article 37 of the PSA concluded between the Cabinet of Ministers of Ukraine and the winner of the tender, Vanco International Ltd, signed by Vice Prime Minister Andriy Kliuyev in the presence of president Viktor Yushchenko on October 19, 2007.

ZN asked the head of the Ministry of Environmental Protection, Heorhiy Philipchuck, several questions:

— What were the main reasons for canceling the special permission for development of natural resources given to Vanco Prykerchenska Ltd.?

— First of all, the procedure of transmitting the rights of the tender’s winner doesn’t presume automatic transmission of the right to receive special permission for the development of natural resources. Besides, Vanco Prykerchenska Ltd. doesn’t qualify according to the terms of the tender. It was created just days before the PSA was signed and doesn’t have enough experience in deep-water work to provide a feasibility study.

— After the special permission was canceled, representatives of Vanco sent the Ukrainian government a note about institution of arbitration as well as provided the names of participant companies- in the investment pool. Was it news for you?

— It is good that at least the canceling of the special permission forced the participants of the so-called investment pool to disclose their names.

Concerning the arbitration procedure, they simply saved us from the necessity of initiating it. The Ministry of Environmental Protection has already commissioned an independent analysis of the PSA with Vanco International Ltd. using a leading British company specializing in international-juridical issues in the energy sphere, Barlow Lyde & Gilbert LLP and the international legal group “Astapov Lawyers”. The preliminary results show that we are right.

— Do you know who the owners of the Austrian investment fund Intergrum Technologies Ltd. are? Are there any names like Petro Yushchenko or Kliuyev among its founders?

— We don’t have any official information about this fund and it is not the function of the Ministry of Environmental Protection to ask for this type of information.

— Will there be any further actions of the government and the Ministry of Environmental Protection concerning PSA and Vanco?

— Our Ministry and the Ministry of Economy have jointly proposed to amend the existing Law of Ukraine on Production Sharing Agreements. We are insisting on increasing the state’s bid in PSAs to 70% (it is not more than 11% today). We would also like to limit the size of the plots in the tenders: 500 square kilometers on land and 1000 square kilometers in the shelf.

And the most important thing: we are ready to cooperate with investors, but we want to play according to equal and transparent rules.

* * *

The fact that there won’t be any actual arbitration has been confirmed during the press-conference by the participants of the investment pool (Vanco International Ltd., DFEC, Shadowlight Investments Limited, Integrum Technologies Limited).

The identity of the founders of the Austrian company representing the interests of private investors is not known. The only known representative of this company, Gerhard Akert, said that the government should make an official inquiry in order to receive information about private shareholders of the fund.

I think that the government should ask the participants of the pool about this. Moreover, they say that their shares are equal. Their investments are also almost equal. The concrete figure was specified by Gerhard Akert only: the investment of Integrum Technologies Limited into the Prykerch project is USD 330 million. This could be a coincidence, but this sum is equal to the sum that Rothschild’s fund was going to guarantee at the very beginning.

The Cabinet of Ministers, certainly, may ask additional information about the founders and owners of the companies participating in the pool. However, the result might be quite predictable – the same as with RosUkrEnergo – just general phrases about some unknown holdings.